When Theresa May asked Parliament to trigger Article 50 she jumped Britain into an unknown economic future. Yet the strategic dilemma in play for May in attempting to negotiate a comprehensive free trade agreement with an accompanying customs accord for post-Brexit Britain is in good part familiar to that facing previous Prime Ministers. From the establishment of the Treaty of Rome through Cameron’s failed renegotiations in 2016, one enduring question for Britain has loomed: at what economic and political price can it enjoy free trade with the core of continental Europe?
Harold Macmillan had hoped in 1958 that the answer to the question was benign, insisting to his colleagues that if the European Economic Community (EEC) states did not agree a free trade deal, he would withdraw British troops from western Europe. But in the wake of the French President, Charles de Gaulle, terminating the trade talks, Macmillan’s judgement turned defeatist, especially when the Kennedy administration pushed him to pursue Community membership. Contemplating this turn, Macmillan ruminated whether Britain’s ‘grim choice’ was to ‘be caught between a hostile… America, and a boastful, powerful “Empire of Charlemagne” – now under French but later bound to come under German control?’
By the time in the mid-1980s Britain had been inside the European Community (EC) for a decade, the answer appeared more sanguine, leaving Margaret Thatcher to believe Britain could change the nature of the EC as a trading entity. The French push for monetary union, however, soon dashed her hopes. Whatever the advantages of the Single European Market (SEM), the prospect of abandoning national monetary sovereignty for European influence was not one Thatcher was willing to consider. After sterling’s humiliating exit from the Exchange Rate Mechanism in 1992 neither were most of the British political class.
Britain's renewed monetary exceptionalism after Black Wednesday represented an ultimately decisive complication to Britain’s ability to trade with its European neighbours inside the EU. Outside the euro any opportunity for leading the EU, or indeed being anything other than a permanent minority member, was over. Once the euro-zone crisis exposed the divisions between the British and euro-zone economies and increased the domestic political cost of EU membership via Britain’s position as an employer of last resort for the euro-zone, the question of whether Britain could enjoy the trade privileges of the SEM at a politically tolerable price re-emerged. More particularly, David Cameron was forced to confront the conflict between his government’s commitment to a sharp reduction in immigration and the fact that the SEM tied free trade to constitutional-guaranteed migration rights through EU citizenship.
In this respect Cameron’s renegotiations of the terms of EU membership in 2016 recreated in reverse Macmillan’s problem of making the first EEC application. Whilst Macmillan had to reflect after the failure of the free trade agreement talks whether his government could absorb the domestic political price of pursuing membership, Cameron was left to decide whether his government could absorb the domestic political price of ongoing membership if he could not secure reform of the SEM. The referendum result suggests that as he did want Britain to retain its existing trade relationship he should not have tried to find the answer. Put differently, in attempting to rewrite the SEM terms of trade, Cameron only demonstrated to the British electorate the hard limits of Britain's influence within the EU.
Confronted with the imperative for Brexit created by the referendum, May has returned to Macmillan’s objective of securing a free trade agreement for Britain as an independent nation-state outside the continental union. In a number of ways present circumstances are more propitious than those in 1958. Geo-politically, the stance of the US towards European integration is not what it was. Far from insisting, as Eisenhower had done, that for security reasons Britain would sooner or later have to surrender and join the EEC, Trump and his economic advisors appear to view the EU at best ambivalently and Britain’s departure from the EU in relatively positive terms. For Trump the EU is a means whereby Germany advances its power, not as it was for the first post-war American Presidents a means for checking any advancement of Germany. Macmillan's threat in the late 1950s to withdraw troops from West Germany was meaningless because no American President would have tolerated it and Britain’s own security was at issue. By contrast, the Trump administration is unlikely to tell the May government that it cannot link Britain’s security commitments and intelligence co-operation to its free trade objectives. It is also far from clear that Britain is as exposed to the withdrawal of its present limited military commitments in Poland and Estonia as it would have been to an exit in the 1950s from West Germany. Certainly Trump's political future, including what influence the President actually has within the foreign policy sphere, is undetermined. But on NATO Trump has been simply magnifying the rhetoric on the disillusionment expressed by successive American Presidents about attitudes displayed in several EU capitals.
Economically, the world is also fundamentally different than it was in 1958. Unlike in the 1950s, the world is now awash in debt, trade imbalances and competitive devaluations. In this world an EU burdened with a debt-ridden currency union, in which the monetary manoeuvrings by the ECB required to sustain that union leave the euro structurally undervalued and increase the German trade surplus, is a source of instability. So long, as maintaining the German trade surplus remains a raison d’état of German economic policy, Britain’s bargaining advantage in an increasingly conflictual exchange rate environment is precisely its long-standing economic weakness, namely its large current account deficit. Of course, the German government has objectives in the Article 50 negotiations that go beyond German export interests. But whereas in siding with de Gaulle Adenauer could quite easily choose to prioritise the unity of the Franco-German axis over German commercial interests, the strategic calculus now confronting any German Chancellor is much more complex, even leaving aside the fact that any French President is incapable of playing the role of de Gaulle, whatever Macron’s ambitions. Indeed, leaving recent rhetoric aside, it is far from clear where any load-bearing source of EU unity can now lie in a context in which the monetary, banking, and creditor-debtor dynamics of the euro-zone divide member states, not least Germany from France. The euro-zone can only be patched up with more dysfunctionality until the next of any number of possible crises hit. Here the fact that Britain has the world’s premier financial centre and most euro-zone borrowing takes place in London matters. The ECB has to facilitate borrowing for the periphery states, most consequentially Italy, at rates far below what the risk of default would entail in market terms. If the EU states refuse to reach a substantial agreement on financial services, they will be increasing the costs of accessing the volume and liquidity of London’s capital markets when small margins are acutely material to the euro-zone’s immediate future.
In terms of the sustainability of the euro-zone, it is one matter for the Commission to say that there has to be a price to pay for Brexit and another for the EU states collectively to be willing to extract it. In euro terms, it is irrational to regret the departure from the EU of the one state that would never have joined the single currency and alone of the non-euro-zone states is entirely outside the banking union. If the overriding aim of the EU is to hold itself together in the face of centrifugal pressures and the euro-zone is the most acute of those stresses, then Brexit is a necessary event. Punishing Britain for a secession that practically aids the EU makes only symbolic sense unless the EU states actually have little faith that the euro-zone can ultimately be saved. Yet if they are indeed gripped by fear, and there are good reasons why they should be, then they have also little reason to think that various euro-zone member states could take the economic hit that would ensure from refusing to reach a trade agreement.
The EU has also grown accustomed to Britain’s substantial budget contributions. If the EU does not agree to a trade deal on terms any British government could accept, it then risks both eschewing some ongoing payments conceded to secure a trade deal and the possibility that Britain walks away without meeting any of the money presently promised to the EU budget for 2019 and 2010 since there is no available legal or treaty mechanism by which previous financial vows can be enforced. Indeed, in principle the British government could also demand the return of £9B of capital from the European Investment Bank (EIB), the claim to which is probably legally binding. Certainly there were would be material advantages to May in negotiating ongoing membership of the EIB, given EIB lending funds British infrastructure projects. Nonetheless, if there is no serious trade agreement on offer in exchange for financial concessions, it is hard to see how the domestic politics of the various EU state could accommodate paying money to Britain to erect trade barriers.
These realities do not necessarily mean that May can succeed, especially given the seemingly endless opportunities for those within the EU and Britain who don’t want a viable deal to engage in grandstanding confrontational rhetoric. Trade agreements are much more complex than they were in the 1950s, and the array of issues at stake mean any chance of success will almost certainly depend on first securing a transition agreement. Moreover, seen in trade terms alone what May wants to achieve in ending participation in the existing customs union does risk costs to the EU in perceptions of the SEM. When other Europeans say that Britain cannot be better off inside the EU than out they are implicitly acknowledging that the existing suite of trading advantages and disadvantages to SEM membership is not the same for all member states. A scenario in which the May government did achieve a reasonably comprehensive agreement on goods and equivalences in financial services and left Britain free to pursue other free trade agreements would extricate Britain from the overriding trade disadvantage of EU membership for Britain, namely the absence of free trade inside the SEM on services and the concurrent weakness of services in the EU’s trade agreements. Without the complications of the euro-zone and the budget, this issue would certainly create a strong incentive for the EU to insist upon retention of the customs union as one price of a trade agreement. Here, if the EU states were collectively to decide that they can absorb the economic harm of ending the existing trading relations without even a transition agreement, they can run down the clock until March 2019 and make Britain pay in European trade if May were to decide to privilege trading freedom elsewhere.
British politics, meanwhile, is, quite simply, more fraught than it was in 1958, not least around the territorial formation of the British state. Although the general election demonstrated that Brexit almost certainly does not open up a renewed path to Scottish independence, the loss of the Conservative majority in June has created opportunities for those looking to encourage a blocking anti-Brexit bloc at Westminster. Perhaps most problematically, there is also the matter of the Irish border since the question of what kind of border will exist post-Brexit between Northern Ireland and Ireland is the exact same issue of what border there will between Britain and the EU. This reality places matters of political order in a part of the United Kingdom where violence is a still raw memory into the sphere of continental negotiations when the whole rationale for the parliamentary union with Ireland back in 1800 was to prevent the incursion of France into Irish affairs under the union of the crowns.
May’s position at Westminster in relation to her own party has also been far from secure. If it were, she would not have gambled on a general election that has now severely damaged her government and her reputation. Even after the vote to trigger Article 50 the political assumption in Parliament that the problem of securing domestic consent to policy outcomes should be sub-ordinated to an EU-oriented external strategy has remained strong. In accepting the outcome of the EU referendum as a point of no return, May has reversed six decades of British statecraft. In endeavouring to take Britain into the EEC, Macmillan and his successors started from the premise that domestic politics would have to accommodate membership whatever the constitutional or party political strain. May, by contrast, has started from a judgement about the limits imposed by domestic politics and is working from there to what can be achieved externally. Put in the alternative parlance of eighteenth century politics, May appeared determined that her government would act on behalf of the Country, and hoped that she could incapacitate the old Court faction at Westminster by asking voters to elect a new House of Commons that would have weakened the Scottish nationalists and those within the Conservative party who would like an outcome akin to membership of the European Economic Area and those who from Anglo-sphere ambitions would eschew a free trade agreement entirely. For a moment in time it seemed she would succeed. Yet in trying at the same time to move politically on social care she overreached.
Nonetheless, for all May’s difficulties time has bequeathed a clarity to her position that was not available to Macmillan. The experience of the past six decades has exhausted the assumption made by Macmillan and, bar Thatcher in her last months in office, his successors that the political costs of accepting domestic sacrifice to procure whatever terms Germany and France insist upon for participating in a European economic and political union were readily manageable. A British government has returned to Macmillan’s attempt to secure a free trade agreement with a union of which Britain will not now be part because the British presumption that it could lead or indeed shape the Community was a lethal delusion that the majority of the electorate chose to discard. Theresa May is reasserting self-governance for Britain because in her judgement after the referendum domestic politics can no longer accommodate membership and in particular the absence of sovereignty on immigration. The path that May wishes to walk will test to possible destruction Britain’s negotiating power about the terms on which it trades with its neighbours free from any presumption that the country’s democratic domestic politics can be subsumed in a continental political union. Undoubtedly, she could lose badly, such that Britain leaves the EU without even an interim agreement and severe economic disruption ensues. But there is a chance she will succeed in buying time with an interim agreement that would allow a comprehensive agreement after March 2019, not least because the euro-zone is now a Sisyphus-like burden for the EU that renders the cost of de Gaulle’s straight ‘No’ quite high. The sheer possibility of May succeeding is a measure of how far the world has changed since in order to trade freely with its largest continental neighbours a British government had reluctantly to apply to enter a supranational union at odds with the British constitutional tradition only for France to insist that Britain was not welcome to join the club.
State of the North 2024: Charting the course for a decade of renewalThe North’s communities are ambitious for a better future, but face systemic and pronounced inequalities. Gaps in power, wealth, opportunity, and health result in shorter, sicker, less fulfilling lives.
No home left behind: Funding a just transition to clean heat in ScotlandHow can we ensure that investment in clean heating in Scottish homes drives a just transition, sharing costs and benefits fairly?
The asylum backlog: Job done?This blog post sets out how the department must now grapple with a new set of backlog challenges.