A new chapter?

As expected, the UK-EU Joint Committee overseeing the Withdrawal Agreement formally approved the Windsor Framework at its meeting last Friday. There is a palpable sense that this is a defining moment in the Brexit process and that, with caveats, a new chapter within it is about to start.

A chapter closes?

Procedurally, agreeing the Windsor Framework finally ends the Withdrawal Agreement negotiations. Of course, formally speaking, that occurred when the Withdrawal Agreement, including the Northern Ireland Protocol, was finalised in 2019 and signed in 2020. But, because of Boris Johnson’s dishonesty, negotiation of the Protocol effectively continued until now.

So that chapter, which brought shame to the UK and considerably damaged our international reputation, is now over, although the memory of it will no doubt linger in many foreign capitals. It leaves the issue of the Northern Ireland Assembly in "paralysis" (£), at least for now, but there is certainly no possibility left that the UK will see further changes to the Protocol to accommodate DUP objections. Thus the issues of the Assembly and the Protocol have now been decoupled. However, it can’t entirely be ruled out that, once the Windsor Framework provisions actually come into effect, there will not be new calls, not just from the DUP but from Brexit Ultras, for more changes. For neither group is reconciled to the basic principles of the Protocol.

Additionally, notwithstanding the existence of these irreconcilables, there is a sense that, as pro-Brexit Times columnist Iain Martin put it (£), “the Brexit wars are finally over”. In other words, the failure of the ERG and others to derail the Windsor Framework marks the end of the stranglehold of the Brexit Ultras and their ability since 2016 to keep pushing for harder versions of Brexit. In some ways that reflects how many Tory MPs, including many Brexiters, came to lose patience with the Ultras. It perhaps also reflects their realization that most of the public have done so, and indeed have lost interest in Brexit itself, as well as much of such enthusiasm as there was for it.

In this way, as I suggested in last week’s post, Britain’s ‘Brexit fever’ may have broken but, as I also suggested, that has to be caveated by the possibility of an ERG resurgence, perhaps after the next election, and by the way that ‘Brexitism’ has become embedded within a powerful segment of British political culture.

A new chapter opens?

If these issues mark the end of one chapter, that brings the sense of a new one opening. It would necessarily be a new chapter, not a new book, because it is inherent in Brexit that there is no end to it. That is, there will always be ongoing negotiations between the UK and the EU about their relationship in general, but also there are specific review mechanisms, most notably for the Trade and Cooperation Agreement, which will continue to refine, define, and re-define what Brexit means.

The possibility, at least, is that this new chapter will begin what Martin calls “an adult relationship” with the EU, or what I called one of “rapprochement” in a recent post. There are some positive signs of this in reports (£) that Rishi Sunak will seek to deepen trade, security, scientific and other ties with the EU, whilst at the same time rowing back on the wholesale sunsetting of most retained EU Law. Such an approach is certainly gestured towards in the text of the Windsor Framework, as I discussed at the time it was made public. King Charles’ visit to Germany and his postponed visit to France are being widely read as part of this new chapter.

From the EU side, the changed mood has already led to the Commission agreeing to revive the stalled agreement on banking and other financial services cooperation, as well as the more widely publicised offer to resume UK participation in the Horizon Europe research programme (now the subject of a financial dispute (£), so improving relations still has some way to go). It is also generally understood (£) that it was the completion of the Windsor Framework which enabled completion of accession to the CPTPP trade bloc, which was announced today, a lesson that the UK’s relationship with the EU directly impacts on its wider relationships.

The caveats here are to do with the consistency of Sunak’s follow-through, including the extent to which he will really pull back for the existing Retained EU Law Bill’s provisions. Similarly, to what extent will his political pledges to ‘stop the boats’ create a new schism with the EU and others over migration policy generally and human rights specifically? These and similar questions beg the over-arching one of the extent to which the UK has a coherent post-Brexit strategy at all. Earlier this month, after the Windsor Framework had been announced, I argued that it did not. Will the adoption of the framework change that?

It may be some time before the answer to that question is clear. But what it reflects is that, to the extent that we are now in a new chapter of Brexit, it is one in which the UK will be forced to address the question that should have been seriously asked and answered before even beginning the process: what is the point of Brexit? Having an “an adult relationship” with the EU, welcome though that would be, cannot be the answer to that question, and won’t provide an answer to it. Instead, what is necessary is for the UK to be adult with itself, meaning serious and honest political and public discussion about Brexit.

The waning influence of the Brexit Ultras may make that easier, but we are still some way off it. It certainly isn’t a matter, as a recent Telegraph leading article simpered (£), of Brexit needing “a new cheerleader” whose role would be “championing a project that to some degree is a leap of faith”. This kind of vacuous boosterism and the adolescent hero-worship it caters to is part of what got us into this mess. Similarly unrealistic is the article’s closing hope that “the revolution is only just getting started”. There isn’t going to be any Brexit revolution delivered by some visionary leader, there’s just a deeply unpopular mess to be dealt with, and doing so will require facts not faith.

The first steps to a new chapter

The first step in this will be facing the fact that, economically, Brexit has been, and will continue to be, deeply costly. The headline figure, re-iterated by the head of the Office for Budget Responsibility (OBR) last weekend, is of GDP being 4% lower than it would otherwise have been, a bigger impact than the Covid pandemic. It’s not a new figure or comparison: the OBR said the same thing in October 2021, and it continues to do so with 18 months' more data. Moreover, this figure is built in to the government’s own budget calculations.

We are now getting to the point when these are not just forecasts but are becoming established facts. Actually, despite what is often claimed, what we are seeing is not so very different to the Treasury’s pre-referendum long-term forecast. That estimated (p.7) the GDP loss over 15 years compared with remaining in the EU to be between -4.6% and -7.5% (assuming, as happened, a UK-EU Free Trade Agreement), but it is heading to be slightly better than the worst case scenario, given the latest OBR estimate of -4%, or within the estimated range, given the latest CER estimate of -5.5%. The Treasury also estimated total trade volumes would be -14% and -19% over 15 years compared with staying in the EU (p.128), and we are heading to be within that, with the latest OBR estimate being -15%. And the Treasury estimated productivity being -3% over 15 years compared with staying in the EU (p.131), but so far we are heading for it to be worse than that, with the latest OBR estimate being for -4%.

These and many other headline economic figures, such as those for investment and tax revenues, along with what might be called sub-headings relating to particular sectors, are now well-established. Perhaps they will change, but there’s no sign so far, and no reason to expect it. So accepting that, and also ceasing to hunt around for this or that snippet of data that supposedly disproves the general picture, is the first step towards a serious political and public debate.

The second step is to drop all the manifestly false claims about the benefits of Brexit. Of these, the two that are probably the most common, and certainly the most egregious, are that Brexit enabled a faster Covid vaccine roll out and that it enabled more pro-active support for Ukraine. Less egregious, but still misleading, are claims that independent trade deals, including CPTPP accession, are much of a Brexit benefit, or come without costs.

The third step is to drop the nonsense that Brexit was just about ‘regaining sovereignty’ in the abstract, irrespective of any tangible benefits or, indeed, costs. If that were so, then Brexiters wouldn’t make the false claims about vaccines, Ukraine and trade deals. By doing so, they tacitly admit that it was not so, and therefore it is legitimate to examine each and every aspect of Brexit in terms of its effects, without chasing the false hare of sovereignty.

The final step: ‘de-Brexitification’

Those three steps are, obviously, a challenge to Brexiters. If that challenge is met, which is by no means assured, the final step is a challenge to both Brexiters and erstwhile remainers or re-joiners. There are all kinds of policy changes that Brexit enables, including those which some, perhaps many, would regard as positive. The banning of live animal exports, currently being legislated for and something long campaigned for by the RSPCA and Compassion in World Farming, is a possible example. Where they exist Brexiters shouldn’t over-claim for them, but those opposed to Brexit needn’t deny them. EU regulations aren’t perfect in every respect, but that doesn’t constitute a case for Brexit; equally they don’t need to be defended as if they are perfect in order to make the case against Brexit.

This leads to a bigger point. For many erstwhile remainers, and certainly for re-joiners, the obvious solution to the damage of Brexit is to re-join the EU, or at least to re-join the Single Market and/or create a customs treaty with the EU. For them, any divergence from EU regulations is misguided in itself, and also an obstacle to future re-joining. For Brexiters, the converse applies: divergence is seen as a good thing in itself, simply for being divergence, and will make re-joining in the future more difficult.

I would suggest that both of these positions are misguided and, certainly, that they will need to change if we are indeed to enter a new chapter. We have left the EU, and for so long as that is the case there will be questions about specific regulatory alignments and divergences (if only as EU rules change). These need to be considered on their own merits, not in terms of the fact of them being alignments or divergences. In other words, they need to be decoupled from having left the EU. Equally, they should be decoupled from the possibility of re-joining the EU. If and when there is a strong and durable political consensus to re-join, that will entail a process during which there will be plenty of time for convergence (just as for any acceding country) or re-convergence. So long as that consensus exists, then divergence will not be the barrier re-joiners fear and Brexiters hope*.

In short, if this is to be a new chapter, post-Brexit policies will need to be ‘de-Brexitified’.

The illustrative case of Solvency II reform

This can be illustrated by one potentially very significant post-Brexit regulatory divergence, the reform of Solvency II regulations, something long pushed for by Brexiters and already being pursued by the government with increasing urgency (£). What this would mean in practice is that insurance companies and pension schemes would be allowed to hold fewer and more diverse reserves and use their funds to invest in, for example, infrastructure or new technology projects. As I explained in February 2022, when I first discussed this possibility on this blog, it is a highly complex and technical subject, and it divides opinion within the financial services industry (it also happens to be an area I have some, albeit dated, familiarity with, as 30 years ago I wrote my PhD on the regulation of the insurance industry).

The key point about this is that, as at a generic level is true of every single regulatory decision, there is a trade-off between reward and risk. In this case, crudely, the reward is freeing up massive funds for much-needed investment and generating proceeds that benefit policyholders or pension scheme members. However, there’s also an argument that it wouldn’t make much difference to these rewards in practice. The risk is that holding fewer reserves and/or more risky investments could lead to insurance companies or pension schemes collapsing, destabilizing the financial system and damaging policyholders or pension scheme members (and probably, ultimately, taxpayers). Again, there’s also an argument that it wouldn’t make much difference to these risks in practice.

There isn’t a ‘right’ answer here. Solvency II was in large part a response to the financial crisis and, as such, calibrated the regulatory calculation more towards lowering ‘risk’. Such calibrations are as much ‘political’, in the generic sense of political judgements about the prevailing economic climate, as ‘technical’. Arguably, that means that the present moment is not one to re-calibrate towards ‘reward’, given the pension fund vulnerabilities exposed by the Truss mini-budget (£) as well as the recent instability in the banking system following the collapse of Silicon Valley Bank (although Solvency II reform isn’t about banking regulation, the two are potentially related because insurers are exposed to banking risks). Against that, these might be judged as specific and unusual events with little wider implication, or that the risk is worth taking. That’s a judgement call, but it isn’t – or shouldn’t be – about Brexit.

It’s also not a UK versus EU question. On the one hand, Solvency II wasn’t some burdensome, inflexible EU Directive imposed against the UK’s wishes. It was unpopular with some UK insurance companies, but it was very heavily influenced by UK financial regulators at the time. In particular, it was an “evolutionary” development from the UK’s previous Individual Capital Adequacy Standards regime. On the other hand, there is a process underway within the EU to reform Solvency II for very much the same reasons as in the UK, namely unlocking funds for investment. It’s actually perfectly possible that both the UK and the EU will end up in similar places, and the EU might make changes more quickly than the UK (£), although this shouldn’t, as Brexiters like Rees-Mogg want (£), be seen as a ‘race’.

It would be quite absurd for Brexiters to support Solvency II reform simply because Brexit makes it possible, irrespective of its merits. Doing so won’t make Brexit more successful or secure. Conversely, it would be absurd for anti-Brexiters to oppose Solvency II reform, regardless of its merits, simply because it was made possible by Brexit. Doing so won’t make Brexit more of a failure or re-joining more likely. As to whether Solvency II reform turns out to be successful, that will depend on whether the assessment of the risk-reward balance turns out to be right or not, something which will probably take years to know and which will be down to things which are nothing to do with Brexit, and in itself will neither vindicate nor discredit Brexit.

Where might this new chapter end up?

The case of Solvency II illustrates the more general point that as time goes by there will be more regulatory divergence, whether as a result of decisions made in the UK or the EU. There are already several other examples of UK-initiated divergence in force or in train, including subsidy control,  data protection, artificial intelligence, and gene editing (for a full listing, see the UKICE regulatory divergence tracker).

There are other cases where the UK will decide to follow EU regulation, as has already effectively happened with restrictions on single-use plastic, and the logic of market size suggests there will be many more examples. These may well include the reversal of some of the planned but postponed divergences, such as conformity assessment marking (the long-delayed UKCA mark). Indeed, the tone of Sunak’s government is already markedly less bullish about divergence in general than its predecessor, and more concerned with limited divergence aimed at specific sectors.

The more the UK approaches each of these issues as discrete policy questions in their own right, rather than via support for or opposition to Brexit, the more politics will have been ‘de-Brexitified’. If we get to that point, then we will be at the end of the chapter which, arguably, we are now just starting with the adoption of the Windsor Framework. Brexit will be less toxic and simply less ‘present’, something also aided by the passing of time and, with that, of the leading Brexiters and many leave voters.

If all that comes to pass, then it will be the prelude to the next chapter in which it will be possible for a future government, and political culture generally, to take the logical next step and ask the question: why doesn’t the UK join the EU?

 

 

Note: CPTPP and re-joining the EU

*It has been claimed this week (£) by the Brexiters’ favourite trade guru, Shanker Singham, and others, that joining the CPTPP will mean “Britain can never rejoin the EU” (to be fair, that is the headline – the text says “EU customs union”). That is nonsense (and if it wasn’t it would be a strange outcome for Brexit ‘sovereignty’), for the obvious reason that, ultimately, Britain could simply leave the CPTPP. But, in any case, it’s far from clear that, if it came to that point, membership of both would be impossible. Indeed, there have even been suggestions that the EU itself might join the CPTPP.  See also commentaries from more ‘neutral’ trade experts Sam Lowe, David Henig and Dmitry Grozoubinski. More generally, the Brexit boosterism, not just economic but geo-political, that already looks set (£) to accompany CPTPP accession suggests that we are still not really in the ‘new chapter’ discussed in this post. That doesn’t mean that, overall, CPTPP accession is ‘a bad thing’ in itself, it just isn’t that much of a thing at all.

  

I will be taking a break from blogging over Easter, and expect the next post to be on Friday 21 April.