Oct 25th 2016

The Brexit Paradox

by Ana Palacio

Ana Palacio, a former Spanish foreign minister and former Senior Vice President of the World Bank, is a member of the Spanish Council of State and a visiting lecturer at Georgetown University.

MADRID – The French mathematician Blaise Pascal famously said, “It is not certain that everything is uncertain.” Had he been around for Brexit, he might not be so sure. While a moderate outcome remains likely, uncertainty and animosity have been on the rise in recent weeks. This is the Brexit paradox: the longer it takes for pragmatism to re-enter the debate, the higher the chance that the chilling effect of the unknown will cause permanent damage to both the United Kingdom and the European Union.

This was supposed to be the month when the world would gain more clarity on what is in store for the UK and the EU, as the UK prepares to withdraw. But the October European Council did not formally address the Brexit negotiations at all, reinforcing the lack of direction of September’s informal Council meeting in Bratislava, which resulted in only vague promises for unity.

For its part, the UK is in the throes of a bitter row between Prime Minister Theresa May and Parliament over the latter’s role in the negotiations. Rifts have also developed within May’s Cabinet. And questions about Scotland’s future status vis-à-vis the UK and the EU are intensifying.

But the problem extends beyond confusion, with the various sides, playing to their domestic audiences, adopting increasingly polarized, even antagonistic positions. May fired the first major shot at the Conservative Party conference. After declaring that she would invoke Article 50 no later than March 2017, she adopted a decidedly hard negotiating stance, declaring that halting immigration would take precedence over retaining access to the single market.

EU leaders have responded in kind. German Chancellor Angela Merkel, who initially advocated a pragmatic approach, delivered a blistering speech to German business leaders, insisting that access to the EU’s single market could not be divorced from acceptance of the EU’s four freedoms – including freedom of movement. Soon after, French President François Hollande declared that Britain must pay “a price” for Brexit.

European Council President Donald Tusk was the bluntest of all, stating that “the only real alternative to a hard Brexit is no Brexit.” May’s cool reception at the October European Council underlined this message. The Brexit negotiations have not even begun, and a standoff already appears inevitable: Tusk’s salt and vinegar versus British Foreign Secretary Boris Johnson’s cake.

If May sticks to her declared timeline – and, with European parliamentary elections in 2019, she cannot do otherwise – this dynamic is likely to worsen. The first months of official negotiations will coincide with national elections in the Netherlands, France, and Germany, meaning that the European side will be unable to afford anything but a tough position.

Despite all of this, a “hard Brexit” scenario in which the UK severs all ties with the single market remains highly unlikely. The consequences would be too severe to consider.

But designing a new relationship will not be easy. In fact, the one thing on which everyone seems to agree is that it will take much longer than the two years mandated under the EU Treaty. And neither Europe nor Britain can afford years of harsh rhetoric, posturing, and uncertainty.

The hardline approach is already taking its toll on business – and not just in the City of London. Last month, Renault-Nissan became the first major company to announce that it would review its planned investment activities in the UK, owing to the lack of clarity on the post-Brexit trade and legal regime. It surely will not be the last. Indeed, there are rumblings that banks are planning to pull out of the UK as early as the first month of 2017 on account of the ever-worsening rhetoric surrounding the Brexit negotiations.

EU firms in the UK – which account for roughly half of all foreign-direct investment there – are also highly exposed. Moreover, the looming regulatory shifts are hampering progress in important areas, such as capital-markets integration, which is needed to unlock greater productivity and investment on the continent.

A sensible way forward is needed, and fast. One option that has lately been gaining momentum is a durable transitional agreement, similar to the EU’s arrangement with Norway. Such an agreement could be defined relatively quickly, easing the pressure to rush into decisions on thorny issues relating to the EU budget, the jurisdiction of European courts, and migration, while putting in place a broader framework for cooperation. It would also give the EU time to undertake its own internal assessment, including a review of the contours of the freedom-of-movement requirement. But, in order to get there, leaders on both sides of the Channel must take a step back from the brink and infuse some sobriety into the discussion.

Politicians need to take steps to minimize uncertainty now. No one in the UK or the EU – not businesses, investors, or consumers – can afford to live in a purgatory of invective and electioneering.




Copyright: Project Syndicate, 2016.
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