Wednesday 4 July 2018

Reaping what has been sown

It is being widely reported that at this Friday’s cabinet ‘away day’ at Chequers, the Prime Minister will seek to face down the Brexit Ultras and propose a substantial softening of Britain’s red lines. If this is so, then the first thing to say is that Theresa May is reaping what she sowed when she – reportedly without any cabinet discussion – established those red lines in her Lancaster House speech in January 2017.

The practical consequences of insisting on no single market membership, no form of customs union, and no role for the ECJ were abundantly obvious then, had she chosen to apprise herself of the facts. She could, for example, have listened to Sir Ivan Rogers who was forced out of office just a few days before that speech. And, of course, at that time she still had a parliamentary majority and the authority that she lost in the ill-fated election a few months later, so would have been better-placed to deal with the Ultras had she wished.

Now, it is not a case of ‘better late than never’ but of ‘too little, too late’. Because what appears to be in prospect – even assuming she gets her way with her warring ministers – is some kind of ‘hybrid’ Brexit in which Britain stays in the single market ‘for goods’ (with, it would seem, some role for the ECJ but without freedom of movement of people), and also creates an amalgam of the customs ‘partnership’ and ‘maximum facilitation’ models. These latter were the models the cabinet could not decide between but which in any case have already been rejected by the EU (what the amalgam will look like is unclear).

It remains to be seen whether this ‘hybrid’ Brexit plan is what will actually emerge from this meeting and, if so, what the EU will make of it. My own view is that it is entirely fantastical that such an arrangement could be workable or that the EU would agree to it. And that is principally because it betrays the way that – even at this very late juncture – Britain, or at least Brexiters, fail to understand what the single market is, and why the four freedoms (for goods, services, capital, and people) are indivisible. This is not because of theological dogmatism on the part of the EU, but to do with the very definition of what a single market is.

What is a single market?

A single market, in principle, entails the unification of all of the things that go to make up the production, consumption and distribution of the outputs of economic activity (meaning both goods and services); and this in turn entails a unified regulatory framework and enforcement mechanism. It is true that as a matter of political expediency some parts of this unification are waived (although, most often, where the direction of travel is towards unification). For example, temporarily, accession countries may not participate in freedom of movement of people (FoM). Or, as in the case of the Ukraine Association Agreement, there is neither FoM nor much services provision. Or, in the EU as a whole, by no means all services are yet within the single market. Or, in relation to Brexit, the NI backstop proposal would not entail FoM.

But in all of these cases, what results is something other than the ‘ideal type’* of a single market as an economic and business construct. We can readily see what this ideal type looks like: it is pretty close to the common form that national markets take. We don’t have different product standards in, say, Norfolk and Suffolk, nor do we restrict the movement of people between such counties. Any such differentiation is, by definition, an erosion of unification. Small amounts of differentiation may, for various political or historical reasons, be necessary but at some point if the quantity of differentiation gets too great then a qualitative change emerges: a unified or single market no longer exists.

What quantity of differentiation becomes a qualitative shift is not something to which there is a precise answer: but if an economy the size of Britain’s were to be tagged on to the EU in terms substantially differentiated from the European single market it would surely be well over the dividing line. For this reason, the idea that the EU could accept such a situation is delusional: it would mark the de facto end of the single market. And Britain, a prime architect of the single market, would be the first to say so if it were, say, Germany that was seeking to leave. That would not be political intransigence; it would be a recognition of the fundamental meaning of a single market – whether the European single market or any other. It is for this reason that, in debates about Scottish independence, unionists repeatedly point out that such independence would mean Scotland leaving the British ‘single market’.

All this can be expressed in far less abstract ways simply by considering what a single market means for businesses. In order to operate, they need to mobilise both capital and labour and hence benefit from free movement of these. Moreover, very often (and, increasingly) businesses produce things that do not fall neatly into the category of ‘goods’ and ‘services’. That might be because of things like maintenance contracts associated with goods, or intellectual property embedded in software embedded in goods. Again, to understand how this works at the level of the European single market just imagine how the British economy and British businesses could (not easily) operate if, at county level, there were only a single market in goods but not services; or if capital and labour could not move freely across county borders. Something as simple as a paper round would become far more difficult to organize (it's a good and a service and it might well require FoM across counties).

Is it a matter of political will?

Might it, even so, be the case that with sufficient political will the kind of model that May is apparently going to float at Chequers could be agreed with the EU? In other words, might a very radical departure from the ‘ideal type’ of a single market be entertained in order to get a deal done? I think that is unlikely, for the reasons given above. It would entail sacrificing – or at least very substantially compromising – the central part of the European economic project. It would also open the possibility of future, further sacrifices as other member states sought to exit this or that aspect of the single market for domestic reasons. So it would really risk the fundamental integrity of that market by, for the first time, shifting the overall direction of travel away from unification and towards (open-ended) diversification. It doesn’t make sense to do so, especially simply to accommodate a departing member state.

I certainly think that it is unlikely that the EU-27 will be very sympathetic to May’s reported “pleas” (£) for them to do so in recognition of the political pressures she faces from the Ultras (and perhaps especially the Brexit press, as per Simon Wren-Lewis’s recent blog**). The first thing to be said about these pleas is how different they are to the pre-Referendum promises that Britain would quickly and easily get a superb exit deal (see an earlier post on this blog for more detail on this point). More to the point, the EU has for decades been asked, and has very often agreed, to do special deals for Britain in recognition of the problem of domestic Euroscepticism. That in itself has left a legacy of resentment.

In any case, whilst it is one thing to do that for a member state, it is quite another to do so for a departing member. Britain’s domestic problems are, I suspect, seen as its own to deal with. The more so as those causing the problems are also those to blame for creating this whole, unwelcome mess for the EU-27. And, moreover, the EU have long ago twigged, even if Mrs May is only just learning, that the Ultras are unappeasable anyway. Once again, we are reaping what has been sown.

None of this is to deny that the Prime Minister is correct if she thinks that, if this latest ‘out and yet in’ Brexit fudge is proposed and rejected by the EU, the Ultras will then say that a ‘reasonable compromise’ had been tried and its failure mandates a no deal Brexit. They will indeed do so, and no doubt they will be delighted if that is what comes about. My point is that this is a genuine and very real problem but it is a problem for our country, which would suffer accordingly, rather than being something that the EU-27 can be expected to care about. If Brexiters think that proves the EU is ‘nasty’, all that can be said is: welcome to the real world of international relations. Again, imagine that it were another country leaving, and Britain that were remaining. Would Britain be minded to care much about the internal political difficulties of the departing member? Hardly.

Beyond all of this there is something else, which is in danger of getting forgotten in the debate about whether a) the cabinet and b) the EU will agree on the emerging ‘hybrid’ Brexit model. It is that even were such agreements forthcoming, this would be a lousy, highly damaging outcome for Britain. Admittedly it would not be as bad as no deal at all. But the idea that a service-based economy, with a large services trade surplus with the EU-27, would seek a deal that excluded services would be seen as crazy in any world other than the topsy-turvy one of Brexit. As would the idea of creating at enormous expense, in unknown timescales and with unknown efficacy a customs system to replicate something that already exists and works. There is no conceivable economic upside to this (certainly not in terms of the supposed benefit of an independent trade policy).


So, in short: having rejected a soft Brexit that might have brought together most remainers and most leavers, and which would have been acceptable to the EU, the government proposed a hard Brexit. It is now seeking to soften this position to something disliked by most remainers and most leavers, and which is unlikely to be acceptable to the EU. This is the latest of the endless contortions which reflect the fundamental structural paradox of Brexit: that it must be done and yet it must not be done. As such, they will not end with the meeting at Chequers, but will continue until one or other side of that paradox is disowned, whether by force of politics or simply by the elapse of time as the Article 50 clock – started by Britain - winds inexorably down to zero. In these things, too, the government is reaping what it has sown. 

*In social science, ‘ideal type’ is used to mean the pure, full, consistent form of a particular entity (concept, institution etc.). It doesn’t, in itself, imply that the thing itself is ‘desirable’, or even that it actually exists in practice. It just defines the ‘perfect’ or ‘ideal’ characteristics that the thing in question would have.
**Well worth a read for its wider arguments, not just this particular point about the Brexit press.

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