What the EU really wants from Brexit

With Mrs May’s speech last Friday, the UK government has completed its series of statements and overtures to the EU aimed at setting the tone for the second phase of the Brexit negotiations.

The UK press was on the whole positive about May’s speech – it was seen as realistic, thoughtful, and with elements of compromise towards the EU’s position where these were necessary without totally surrendering the red lines which Mrs May herself had established in her earlier set piece speeches.  And without doubt it was a considerable improvement on the vacuous contributions in recent weeks from the Foreign Secretary, Boris Johnson.  Indeed, one paper even called the speech statesmanlike, not an accolade Mrs May has received very often in recent months.  She has not had such favourable headlines for some time, not in fact since her last big speech in Florence last September.

But as was the case with that speech, the UK press is not the audience that matters.  Of course Mrs May prefers to have good headlines in the press rather than carping criticism, but the real audience for her speech was in Brussels and Berlin.  And the sad truth for Mrs May is that the EU, although it listened politely and even found some moderately encouraging words to say in response, has largely moved beyond being interested in what the UK says or thinks.

This was not always the case.  In the immediate aftermath of the referendum, the EU-27 were genuinely interested to hear what the British wanted, what they would propose as the basis of the new relationship between the UK and the EU.  Although the UK’s decision to leave was not what the rest of the EU expected or hoped for, not everyone in Brussels saw it as necessarily negative, and there were serious hopes that, once the UK was free of its uncomfortable position of reluctant member and the EU was free of the incessant criticisms and special pleading from London, both parties could develop a more positive attitude to the other.

So the EU got its own position in order, and beyond setting out three distinct and, in Brussels’ eyes, quite limited and legitimate concerns – that their budget would not suffer unduly, that their citizens in the UK would not suffer unduly, and that Ireland would not suffer unduly – they offered very little by way of initiatives or ideas.  Instead they waited for London to put forward its proposals.

And waited.  And waited.  It is said that Mrs Merkel, the German Chancellor, repeatedly asked Mrs May throughout 2017 what the UK wanted, only to be rebuffed every time with the reply “Make me an offer”.  But the EU did not see it as their place to “make the UK an offer” – it was the UK which had decided to leave, and Brussels saw it as both entirely fair, and indeed respectful and polite, to allow the UK to state its case and its desires first.  But to their surprise, and increasingly their dismay, no sensible proposals came.

We understand that the tipping point, when attitudes in the EU changed completely, was the last quarter of 2017, when some sort of rough outline of what Mrs May and her negotiators might seek finally started to emerge.  Having seen them, there was little confidence in the EU either that what was suggested would actually work or that the UK government could deliver it through the House of Commons[1].   And the EU decided then that in order to avoid a complete breakdown of the negotiations and resulting chaos in March 2019, it would have to take a much more pro-active role.

This has given some in the EU the chance to ask from first principles not “How do we solve Brexit?” but “How do we use Brexit and what can we achieve in doing so?”  In short, the EU increasingly sees Brexit not as a problem but as an opportunity.  And the opportunity it most offers is a chance to radically reshape the EU’s trade relationships with third countries.

The EU has a number of third country trade deals, from the relationship with the EEA countries (Norway, Iceland and Liechtenstein), to its raft of bespoke agreements with Switzerland, its customs union with Turkey, its special relationship with the Ukraine and a number of orthodox free trade agreements with the likes of South Korea and Canada.  None of them are, to the EU, entirely satisfactory;  in particular the Swiss agreements contain many special provisions and create a level of administrative bureaucracy out of proportion to EU-Swiss trade.  Nearly 60 years after the first one was agreed, they are still actively being discussed, amended and fought over.

What all these deals – even the latest one, with Canada – have in common in EU eyes is that they are imperfect, and contain concessions which the EU was reluctant to make and now regrets.  Such of course is the way of negotiations, as Mrs May herself pointed out in her speech.  But every concession the EU makes weakens the EU’s long-cherished ambition to be the Global Regulator, the Rule-giver to the World.  True rule-makers do not easily tolerate exceptions to their rules.

The EU has long chafed at America’s extra-territorial reach with its laws and regulations, and has long sought to supplant the USA and impose its own standards on the global economy.  These efforts have shown some successes;  in the food sector, for example, EU food hygiene laws underpin a significant part of global trade, and in finance, the UCITS regime for collective investment funds is very widely followed in Asia.  And Asian car manufacturers have long used EU safety and emission standards as their benchmark.

But what Brexit offers is a chance to establish a new and comprehensive “gold standard” for trade in multiple sectors.  Negotiations with the UK offer the EU an unusual combination of a major trading partner (so that what is agreed is of real significance) who is in a very weak position (so that the EU really can seek to create the perfect deal with no untidy concessions).  Indeed many in Brussels think that the EU is unlikely ever again to be in such a position of strength in negotiations with such an important economic partner.

And the prize for the EU is significant:  if they can agree a very favourable deal with the UK, they will aim to use it as the template for all subsequent deals, and their dream of one trade regime for all third countries and an end to long trade negotiations and the awkwardness of bespoke deals and concessions comes closer to reality.  In particular, and as the Swiss are painfully aware, they might be able to impose it on Switzerland, and draw a line under the endless sector-by-sector, line-by-line negotiations with Berne.

As one person in the European Commission put it to us, “We will use the trade deal with the UK as a blacksmith uses an anvil, to hammer out all subsequent deals on.  But for that the anvil has to be rock-solid”.

That might remain too ambitious even for the EU.  But it adds real steel to their approach to the coming trade negotiations with the UK and a real desire to avoid any exceptions, any concessions.  For Barnier and his team will not have trade with 65 million Britons uppermost in their minds as they negotiate with their British opposite numbers;  they will be thinking of what it means for future trade deals with 6.5 billion people in the rest of the world.

 

[1]              Apparently the last straw was the UK position on the Irish border, which no-one in the EU-27 thinks coherent or workable.  The EU decided to cease waiting for sense from London and got ready to impose its own desired solution, which is and always has been a customs union between Northern Ireland and the Republic.  This was introduced as a “fall-back position” in the December 2017 agreement;  it is a fall-back in name only as the EU fully expects the other proposals to fail, at which point the fall-back becomes the preferred, indeed only, solution.  What it implies for trade between Northern Ireland and the rest of the UK , or even the unity of the UK, is not the EU’s concern.