Ripples around the world: Brexit’s implications for Europe and beyond
The UK referendum vote to leave the EU will have consequences far beyond the Continent. Six months after the historic poll, Matt Ross considers its implications for governments both in and outside the EU
By the end of March 2017, British prime minister Theresa May has promised, the UK will give the EU notice of its intention to quit – firing the starting pistol on a two-year period of negotiations. And at the end of these ‘Article 50’ talks – which will cover housekeeping issues such as dividing EU assets and budgetary liabilities, and the status of EU and UK citizens living overseas – the UK will fall out of the union, whether or not those negotiations have produced an agreement.
Nobody can predict the outcome of Article 50 talks, nor the future trading relationship between Britain and the Continent. But it is possible to identify some of the pressures that will influence the negotiations; to highlight ways in which the UK’s exit may shape the EU’s future; and to outline Brexit’s significance for governments outside the troubled union.
Who wants what?
On the British side, the government’s negotiating position will reflect tensions with the governing Tory party. But the factors shaping the EU’s stance are even more numerous and complex: the union’s actions will be decided by the interplay not only between its remaining 27 member states, but also between the European Parliament and Commission. And the Continental debate about Brexit – like that within the UK – is distorted both by a desire to adopt tough negotiating positions, and by the anger that attends any organisational separation.
Nonetheless, all the EU’s players seem agreed on a few key principles. That membership of the Single Market demands free movement of people as well as capital, goods and services. That nobody will talk to the UK about Brexit issues in advance of the triggering of Article 50. That trade talks must await the end of Article 50 talks in March 2019. And that the UK must not be seen to benefit from leaving the EU – lest its example tempt others to follow.
Within that framework, however, there are plenty of perspectives across the EU. Its members’ economic interests are diverse, including Eastern European nations keen to retain access to UK labour markets, big manufacturers concerned to minimise goods trade barriers, and European financial centres eager to tempt businesses away from the City of London.
There’s also a political split between the European Commission’s federalist hawks, such as president Jean-Claude Juncker – who want to make life uncomfortable for Britain, ‘pour encourager les autres’ – and the more pragmatic political leaders such as Germany’s Angela Merkel. “There’s an interesting row between Merkel and Juncker,” comments Sir Paul Jenkins, the former chief legal adviser to the UK government and a member at law firm Matrix Chambers. “She knows how unpopular it is to talk about an EU super-state; she can see the way the tide of history is going in a way that Juncker can’t.”
Professor John Louth, director for defence, industries and society at security think tank RUSI, comments that “you can almost see EU officials saying: ‘We’ll make this difficult for the Brits, to discourage any other state from taking this path’. That’s really big brother stuff – and a profoundly different story from: ‘The benefits of the EU are…’.” So one outcome of Brexit may be a shift in how EU members view the union: in effect, they’re being told they can only leave in a coffin.
This message is aimed particularly at the French, who hold presidential elections in May – and might just elect the Front National’s Marine le Pen, who’s vowed to follow the UK’s lead. Germany’s autumn election looks safer; and if moderates win both polls, the two countries’ leaders will have the time, the mandate and the influence to shepherd other EU members towards an agreement. “The UK’s going to have to engage with all 27 members, but there will be a more in-depth, testing process with two or three core countries,” says Bjorn Conway, the former Government and Public Sector lead at professional services firm EY. “France and Germany will get a rough deal hewn out, then other countries will have the option to block it. Otherwise it’s an almost impossible task.”
How will the EU develop post-Brexit?
Over time, the UK’s exit will shift the forces shaping the EU’s development. If le Pen loses the French election, there probably won’t be a rush to follow Britain out of the door – but Iain Rennie, New Zealand’s former state services commissioner, notes that “in the longer term, some EU countries will look at how the UK fares outside the EU, and that may influence the debate about the EU’s future form or about other countries leaving.”
What’s more, Britain’s absence will allow other voices to come to the fore. The UK has always pushed for the EU to develop as a loose, free trade-based union rather than a centralised political power – so its departure may permit renewed progress towards integration. Indeed, in September Juncker called for the appointment of an EU minister of foreign affairs, and for members to “pool their defence capabilities in the form of a permanent, structured cooperation”.
“The former Soviet Bloc nations are miserable about us leaving because they saw us as opposed to ever closer union, which they don’t want,” comments Jenkins. “But the core six or eight remain wedded to ever closer union and the single European state; and they’ve lost an enemy.” Iain Rennie notes that “the UK has been one of the voices pushing for more liberal trade regimes, better quality regulatory systems”; so the UK’s exit may strengthen the EU’s leanings towards protectionism and heavy regulation.
However, the EU can’t substantially change its rules and structures without winning consensus among the member states – and political divides haven’t been greater since the Iron Curtain split the Continent. The gulfs between, say, Greece’s Syriza leftists, Merkel’s centrist Christian Democratic Union, and Poland’s right-wing Law and Justice party will make it difficult to shift decisively in any direction.
The centripetal forces
As political leaders play hardball on the terms of Britain’s exit, key industries will work to minimise the damage – and to retain partnerships, supply chains and shared activities that bring benefits on both sides of the English Channel. These interests reach well beyond the manufacturing businesses which have most to lose from import tariffs: and Sir David Bell, vice chancellor of Reading University and a former Department for Education permanent secretary, sounds confident that UK and EU universities will stick together. “Academic activity has always been international, and even when government to government relationships are very poor, academics still work together very closely,” he says. “I’ve already received letters from EU universities saying they still want to collaborate with us.”
Similarly, says John Louth, security professionals on both sides of the Channel will maintain essential partnerships. “Practitioners are absolutely clear that they have to share intelligence, share services, keep communications open,” he says, adding that politicians have hard political reasons for safeguarding the current arrangements: “There aren’t many people who’d want their name associated with a worsening security situation.”
Nonetheless, Louth does worry that souring political relationships could weaken security cooperation. “Long term, those practitioner relationships are dependent on political will,” he says. “If the political discourse becomes torturous, it will impact on what people feel permitted to do.”
Amidst all these risks and threats, EU nations see opportunities in the UK’s departure. For Britain has long sucked in European skills and global investment – and if it introduces immigration controls, loses access to EU structural funds and leaves the Single Market, both people and capital may head for the Continent instead.
The economic calculations shaping talks
“British universities campaigned on the Remain side, because freedom of movement of labour has been incredibly important to them,” comments Bell. “One of the biggest threats to the UK is that the great scientists we’ve attracted decide to go somewhere else.” And Dr Hannah White, a programme director at think tank the Institute for Government, highlights concerns about inward investment: “For businesses that want to invest in an EU-wide market, the UK is a less attractive option than it was prior to the referendum,” she says, adding that decisions over UK investment “mega-deals are on hold right now.”
“The obvious threat is destabilising economic certainty for investors, exporters,” says Michael Wernick, Canada’s secretary to the Cabinet and clerk of the Privy Council. “Private sector people, especially those working with large sums and big investment location decisions, probably were very uncertain and upset in June… Until the timing and the nature [of the Brexit settlement] is a lot clearer, I think that anxiety is going to be there.”
These calculations will feed into the EU’s negotiation strategy, points out Jenkins: if EU states want to lure, say, HSBC from London to Frankfurt, they may prefer to impose tariffs and end Britain’s ‘passporting’ rights – which permit finance businesses to sell services in Europe – than to make concessions on freedom of movement. Trade with the UK would take a hit, he adds, but the Germans “can afford two years of disruption; they’ve got the rest of the EU to sell to, and the German economy is doing fine. Why would the Germans want to give us passporting rights? I can’t see it!”
In the face of these hard political and economic realities, the UK’s Brexiteers have rowed back – with international trade secretary Liam Fox suggesting that the UK may remain inside parts of the Customs Union, and Brexit secretary David Davis refusing to rule out the possibility of continued payments into EU funds. But May’s promise not to leave the UK subject to the rulings of the European Court of Justice – which settles disputes within the European bloc – and to regain control over immigration dramatically reduce her freedom of manoeuvre.
Lesssons from the referendum
Both inside and outside the EU, political leaders are drawing lessons from the UK’s Brexit vote – not least on the use of direct democracy. “Referendums need to be on simple questions, and this was a really complex one,” says Dr Hannah White, director of research at think tank the Institute for Government. Former PM David Cameron “was quite confident that he’d get his outcome, and he turned out to be wrong. That’s got to affect the willingness with which politicians use a referendum as a political tool to solve a short-term domestic issue.”
Observers will also note the political salience of immigration. “There clearly is a concern about the movement of people across borders,” says Iain Rennie, adding that public disquiet “highlights the importance of helping countries that are struggling with governance, economic development” and internal conflict – thus addressing the causes of migration.
What’s more, says Rennie, the referendum revealed “concerns that many people don’t feel they’re getting ahead; that their educational and job opportunities are more constrained”. Scottish Government permanent secretary Leslie Evans says her biggest challenge is to foster “equality and opportunity across the piece, so everybody enjoys the benefits of a vibrant economy.” And former UK cabinet secretary Lord O’Donnell has also warned of the dangers of inequitable economic growth, telling Global Government Forum that “our recovery from the [financial] crisis hasn’t got through to many people”, and noting that “those areas that have high inequality in wellbeing were much more likely to vote Leave.”
Brexit beyond the EU
As the UK’s international allies lose their champion within the EU, they’ll work to forge stronger links among the remaining 27 EU nations. “The UK and New Zealand are good friends, and that’s been helpful in helping to influence EU issues of concern to New Zealand”, says Rennie; the new challenge for countries like his is to “maintain a strong relationship with the UK, and also to build and extend our friendships with countries in the EU.”
Some non-EU nations, though, may see opportunities to forge closer links with the UK – particularly in defence. “I suspect we’ll see Japan, Australia, maybe the Canadians thinking more about what they could do with the UK,” says RUSI’s Louth. “We’re spending £180bn on our ten-year equipment programme, and I think people will want to see what the UK – no longer tied to a larger trading bloc – can offer in a bilateral world.”
This will be particularly important given the message that Brexit sends to Russia. “Anything that suggests worsening relationships within the western powers, Moscow thinks is a good thing,” says Louth. “They’ll celebrate anything that undermines western cohesion.”
Paul Jenkins adds that the UK’s departure “sends a signal that we’re withdrawing a bit from the alliances that we’re in to stop people like Putin and ISIS.” The timing, he believes, is not good: “Putin is listening to Donald Trump saying he’s not sure about NATO; he’s listening to [UK Labour Party leader] Jeremy Corbyn saying that we wouldn’t support a NATO member attacked by Russia. He knows that there are serious political players in the West who won’t stand up to him.”
Waiting for a windfall
Like EU members, however, non-EU countries may also find a silver lining in Brexit. During the referendum campaign, Brexiteers argued that big trading nations would be eager to sign low-tariff deals with the UK – and now they’re under pressure to prove they were right. The prospect of a transitional UK/EU deal – retaining existing trade relationships until a new agreement can be negotiated – means that it may be years before the UK is able to begin trade talks with non-EU states. But as White points out, if Britain crashes out of the EU without a transitional deal in 2019 then countries “could probably get some quite good deals, because the priority will be to show that we’ve got some free trade agreements and done it quickly. So our negotiating position will be pretty weak.”
What’s more, she notes, Britain is only now scrambling to assemble a trade negotiation team – rebuilding a capability lost when the UK joined the then-European Community in 1973. “We’re keen to get deals and we’re not very good at negotiating,” says White. “That’s probably an opportunity.”
Typically, Paul Jenkins is blunter still. “We’re going to be desperate for trade deals,” he says. “Every trading power in the world can see that they’ve got us over a barrel.”
If the UK does sign disadvantageous trade deals, of course, there will eventually be a political as well as an economic cost. But that price will be paid by future generations, and meanwhile Theresa May will be focusing on her own priorities: to unify and strengthen the Tory party; and to build new international relationships out of the wreckage left by David Cameron’s failed referendum gamble. So far, she’s played her cards shrewdly, whilst revealing almost nothing about her hand. As the UK begins exit negotiations, we’ll find out what her game is – and whether the EU is willing to play.
This is an edited version of an article that first appeared in EY’s magazine Citizen Today
For up to date government news and international best practice follow us on Twitter @globegov