The result of the Referendum on leaving the European Union, which took place on 23 June 2016, came as a surprise. The UK political class was and, mostly, remains adamantly in favour of remaining. The policy of all the major electoral parties – Conservatives, Labour, Liberal-Democrats and Scottish Nationalists – supported the institutions of the European Union, albeit some with reservations. On the eve of the referendum on 23 June, 74 per cent of members of the UK Parliament supported remaining in the European Union and, if a second ‘free vote’ referendum were offered, many estimate that a similar number would be in still be favour. The British academic and economic elites also fell into the Remain camp. Those who voted to remain were in the younger age groups and were excessively drawn from voters with higher education and higher incomes. Those who chose to leave were disproportionately located in the lower and older social groups.
The political and economic elites predicted disaster subsequent on a successful ‘Leave’ vote. The Confederation of British Industries Director-General, Carolyn Fairbairn, warned that leaving the EU would not only be a serious shock but would potentially cost the UK economy £100 billion and 950,000 jobs by 2020. Mark Carney, the Governor of the Bank of England, predicted a financial downfall if the UK left. The Most Revd Archbishop Justin Welby, the spiritual leader of the Church of England, foretold calamity if exit were to triumph.
Voices of alarm were also heard beyond Dover and Heathrow. If ever there was an attempt by foreigners to influence the outcome of an election, it is to be found in the UK election over membership of the EU. A host of foreign celebrities and foreign statesmen made clear their support for continuing UK membership. President Obama, on a visit to the UK, opined that Britain is ‘best when it’s helping to lead a strong European Union’. Christine Lagarde, the head of the IMF, predicted economic decline if Britain left and the discussions over the referendum led the IMF to reduce the UK’s predicted growth rates by 0.3 per cent. Opposition to exit was voiced by all members of the board of the IMF. Others in the financial sector, such as such as international financier and speculator, George Soros, confidently foresaw financial disaster. Declarations of support for Britain’s continued membership were made by the Prime Ministers of Japan, New Zealand and India.
Following the vote for exit, reluctantly accepted by the leaders of the major political parties, opponents have fought a rearguard action. Initially, the binding nature of the referendum on the government was called into question and, following a legal challenge, the UK Supreme Court of Justice ruled that the government had to refer the matter to a parliamentary vote. This ploy to reverse the referendum result failed when the two Houses of Parliament backed the government with substantial support. Notably the Labour Party, under the leadership of Jeremy Corbyn, endorsed the decision to leave.
A Second Referendum?
Attention then turned to the conditions of future relations with the EU. The same bellicose voices are heard. The Scottish Nationalists, legitimated by a majority vote in Scotland to ‘remain’, and the Liberal Democrats have campaigned for a second referendum. Leading members of the political elite, notably former Prime Ministers Tony Blair, John Major, and many prominent politicians pontificate on the BBC and call for a referendum to ratify or to reject any alternative to the EU’s customs’ union. Their objective is to reverse exit.
The campaign to ‘keep Britain in’ the EU is a live issue. As the chief executive (Eloise Todd) of ‘Best for Britain’ is reported to have said: ‘The UK’s future with the EU is not a done deal, there is still a vote to come and people across the country deserve to know the truth about the options on the table, one of which is staying and leading in the EU’. ‘Best for Britain’, founded by Mark Malloch-Brown a former UK government minister and former deputy UN secretary-general and Gina Miller (who brought the original legal case against the UK government) received in February 2018 over 400,000 Euros from George Soros’s Open Society Foundation. He has also given over 300,000 Euros to other anti-Brexit Groups, such as the European Movement UK and Scientists for EU. Cross party working groups in Parliament have been formed to reverse Brexit and to influence the course of negotiations. The former UK permanent secretary of international trade, Martin Donnelly, has forcefully condemned what he considers to be the folly of leaving the EU’s single market and customs’ union. He declared in a BBC interview that leaving the customs’ union and single market would be like ‘rejecting a three-course meal in favour of the promise of a packet of crisps later’.
The EU’s Response
The EU leadership was politically surprised and psychologically devastated by the totally unexpected and unprecedented vote to leave. The EU had pursued a relentless policy of expansion to the east to ensure a wider market within the customs’ union. The New Member States were bound to the Union by comprehensive rules and requirements embodied in the acquis communautaire. The loss of the UK is a psychological, strategic, political and economic disaster for the Commission of the EU.
The EU has a lot to lose. Not only in terms of the balance of powers in the EU, but also the hard fact that the EU is a large net exporter to the UK (currently the UK has a 100 billion Euro trade deficit with the EU); the EU is a major beneficiary of a net 10 to 15 billion Euros per annum from the UK’s financial contribution.
In February 2018 EU President, Donald Tusk, declared that Britain still had time to ‘change its mind’ and stop Brexit. He opined that the EU’s ‘hearts are still open’ to ‘their British friends’. Donald Tusk however cannot speak for the member states of the EU or on the legality of stopping the withdrawal process. There are some obstacles to the EU accepting the reversal of Article 50. The member states would have to be convinced of the enduring political commitment of the UK. The UK has always been a somewhat reluctant member of the Union: it has neither been part of the Euro zone nor of the Schengen visa-free area. It rather considers itself as a major participant in the Atlantic Alliance and cherishes strong cultural and social ties with the English speaking world. It had much stronger trade and commercial links outside the Union than other EU member states. Moreover, for the EU to move forward to a more unitary state, along lines favoured by President Macron of France, Britain would exert an unwelcome brake on movements which are gaining ascendancy in the European Union.
A second referendum is unlikely. Domestically, it would be a defeat for parliamentary democracy. Remember: an overwhelming majority (544 to 53 votes) of Members of Parliament endorsed the motion to call a referendum in the first place: ‘A referendum is to be held on whether the United Kingdom should remain a member of the European Union’. Only the Scottish Nationalists voted en bloc against. A second referendum would undermine pledges given by the leaders of the major political parties (Labour and Conservative) that the UK will leave the EU. Calls for a second referendum, by the Scottish Nationalists and the Liberal-Democrats (who lost credibility following defeats at the last parliamentary election), and political grandees (such as Ken Clarke, Tony Blair and John Major) are likely to go unheeded. Moreover, the EU would also have its say. In the event of a victory for ‘remain’ in a second referendum, ironically, it would be up to the European Court of Justice to decide whether the UK could revoke Article 50 after the process had been started.
What kind of UK-EU relationship? The real political argument is over the terms of negotiation and their possible outcomes. There are possibilities for maintaining many of the EU linkages. For those opposing Brexit, the most practical political course is to accept a place outside the EU while preserving existing agreements. Advocates of keeping the UK in the existing EU Customs Union or the single market, if successful, would negate the objectives of Brexit. This option is supported by a powerful group of cross party members of Parliament. The UK would remain subject to the European courts; it would have to contribute to EU funds; membership of the single market would require conforming to EU’s rules on the unrestricted movement of labour and capital. Crucially, membership of the Customs’ Union would preclude an independent trade policy. This kind of settlement is precisely what is proposed – a defeat for Brexit.
Labour Party policy, as adumbrated by Jeremy Corbyn in his Coventry speech of 24 February 2018, envisages leaving the EU but negotiating ‘a’ customs’ union. As Corbyn put it: ‘Labour would seek a final deal that gives full access to European markets and maintains the benefits of the single market and the customs union’.The intention is to maintain existing trade relationships but to eliminate some neo-liberal EU policies (such as limiting state involvement when it infringes market rights). Labour’s objectives for the UK would be to further regional development, promote public procurement and adopt public ownership. In Corbyn’s words: ‘… [T]he option of a new UK customs’ union with the EU would need to ensure the UK has a say in future trade deals…[W]e would also seek to negotiate protections, clarifications or exemptions where necessary in relation to privatisation and public service competition directives, state aid and procurement rules and the posted workers’ directive’. Such proposals, if accepted, would ensure a seamless border with the EU thus defusing friction over the border between Northern Ireland and the Irish Republic.
Corbyn’s proposals have been welcomed by the ‘Remain’ camp including the Financial Times and the Guardian newspapers. The question must be addressed as to whether such concessions would be forthcoming from the EU. The proposals would weaken remaining Member States’ commitment to the Union. They undermine fundamental elements of its policy and, even if agreed by the Commission, the treaty would require endorsement from all the twenty-seven member states. From the UK’s side, an alternative policy of a separate free trade agreement or no negotiated deal, hinges the consequences of leaving. The Costs and Benefits of Exit Theresa May reiterated in her speech of 2 March 2018, that ‘no deal for Britain is better than a bad deal for Britain’. The arguments in favour of continuing membership of the EU have largely been put in the context of expected economic losses if the UK were reliant on World Trade Organisation Rules. ‘Expert opinion’ has been pessimistic about the consequences of Brexit. During the negotiation discussions, economists have taken the lead in predicting dire effects even in the first year of transition – in anticipation of worse things to come.
However, detailed analysis of the short term predictions of eight influential economic forecasts of the effects of the declaration to leave has found that they are all seriously faulted. All the predictions were much more negative than warranted by the actual consequences. The authors conclude that ‘much of this work contains flaws of analysis and a treatment of evidence that leads to exaggerated costs of Brexit’. onsider just one example from their study: the British government’s Treasury estimates. ‘Writing more than eighteen months after the referendum result, only one of the Treasury’s expectations has been clearly realized. This is the fall in the value of sterling, and the consequential rise in inflation. .. No recession materialised over the 12 months following the referendum. Nor has unemployment risen. In autumn 2017, fifteen months after the referendum, unemployment has fallen to its lowest level for 33 years, and shows little sign of rising. The UK Treasury expectation that equity risk premia would rise, leading to lower equity prices, has thus proved wrong. The sterling depreciation instead led to higher UK equity prices as corporate earnings from abroad became worth more in sterling’ (K. Coutts et al).
A common fault in current economic theorising is that the supposed link between free trade in the European Union and economic growth is overstated. The often cited statement by the former permanent secretary of the international trade department (quoted above) is another example of elitist thinking. People like Sir Martin Donnelly may have enjoyed ‘three course’ meals under the EU. What is ignored is that under EU rules the UK (as well as many other EU countries) lost its manufacturing base as a consequence of free competition and the movement of labour, goods, services, capital and establishment. Reliance on the principles of free trade led to British companies, either moving production abroad or going out of business. As noted in the graph below, not only has the UK had fluctuations in growth but the country has suffered a long term decline in its growth of goods’ exports.
One might rephrase Sir Martin’s comment by saying that some have had regular three course Michelin star meals during the UK’s membership of the EU, others have had to manage on packets of crisps. We do not know what the future will bring.
The single market has indeed reduced paper transaction costs. Jeremy Corbyn, in his Coventry speech, justifies retaining aspects of the single market with the following example of current motor manufacture. ‘A Mini will cross the Channel three times in a 2,000-mile journey before the finished car rolls off the production line. Starting in Oxford it will be shipped to France to be fitted for key components before being brought back to BMW’s Hams Hall plant in Warwickshire where it is drilled and milled into shape. Once this process is complete the mini will be sent to Munich to be fitted with its engine, before ending its journey back at the mini plant in Oxford for final assembly’.
What is missing here is any mention of the fact that the Mini is manufactured by a German company, BMW. The transport transaction costs are incurred because UK can no longer produce ‘key components’ caused by the destruction of the century old small tools manufacturing industry in the West Midlands. Policy outside the EU should encourage more local manufacturing. To achieve this goal, there would have to be curbs on the ‘rights to establishment’ guaranteed in the single market.
The assumed disadvantages of a decline in economic growth to levels greater than they would have been had the UK stayed in the customs’ union ignore the distribution of income and the incidence of taxation and tariffs. Economists’ arguments are too narrow and predicated on disputable theories of the advantages of the neo-liberal version of free trade. Even a decline in economic growth could be offset by other benefits, such as a full employment economy and a shift from financial services to manufacturing. In other words: the country might suffer a reduction in gross national product, but individual incomes, consequent on higher employment and positive redistribution policies, could be higher.
The advantages of UK economic sovereignty – such as greater state investment in infrastructure, a more effective policy of regional development, government procurement of British produced goods and services, and enterprise promoting domestic full employment – are important objectives which could be achieved by a UK government unimpeded by EU requirements.
The question is: what kind of alternative economic and social policy? Here greater state regulation and less reliance on free market mechanisms is the policy alternative necessary to reverse the UK’s industrial and commercial decline.