Brexit Hold’em

Written by Darius Booth

From Adam Smith to John Maynard Keynes, British economists have generally accepted the principle that free trade benefits both consumers and exporters – increasing the overall wealth of all parties involved. And so, with the 250^th anniversary of The Wealth of Nations approaching, how have the Brits chosen to celebrate?  By voting to exit the European Union (EU) and its Single Market free trade zone, which accounts for roughly half of its trade. A dangerous but fascinating experiment is about to begin as economic orthodoxy has fallen to a populist coup d’état, leaving the inevitability of globalization rudely interrupted. Boris Johnson and his Brexit evangelists have doubled down on the prospect of the EU acquiescing to a new, more flexible relationship. Their counterparts however, appear to think that the UK’s threat of walking away from any agreement that doesn’t fully meet its criteria is a huge bluff.    

Along with the UK, France and Germany are the largest cogs in the European economic and political machine. They have generally synced well together in the nearly fifty years since the UK joined what was then the European Economic Community (EEC). The UK’s free market instincts counterbalance France’s more socialistic ones, with Germany generally playing the role of broker in-between. Visions for Europe’s future landscape, however, have morphed over time. Both France and Germany have interpreted the success of the common market – something ostensibly designed by the British under Thatcher – as evidence of the benefits of continuing integration. 

The UK on the other hand, has always been suspicious of the European federalist movement. The European Commission for example – with its spiraling budget and lack of accountability – has always favored a more transactional relationship characterized by the discrete arrangements that govern areas such as trade and security. The creation of the EU through The Maastricht Treaty of 1992, heralding the “ever closer Union” was, in retrospect, the beginning of a long farewell for the UK, despite myriad concessions and opt-outs awarded to it at the time to get the deal over the line.

It is a matter of speculation as to why the UK has always been more reticent than its peers to endorse the transfer of power from its elected representatives at Westminster, to the appointed officials of Brussels. While some would trumpet the seemingly more libertarian culture espoused by the UK, others would argue that the lack of a land border with continental Europe creates a natural separation. One wouldn’t need to scratch hard at the surface, however, to recognize the visceral feeling in many that the nation’s sacrifice in the world wars of the 20^th century would be squandered by relinquishing sovereignty through a treaty, to the very Europeans that it helped liberate. That very same nationalistic sentiment, amplified in the industrial heartlands, had engendered growing hostility towards immigrants hailing from poorer countries in eastern Europe over the last decade, as their arrival had the effect of capping wage rates for everyone. A feeling of exploitation was fostered, where the villains were the EU, whose laws made it impossible to halt the movement of people between member states. These insecurities were ruthlessly exploited through the dog whistle politics of the Brexit agitators, firstly in securing a referendum on EU membership, and then by eventually winning it against all the odds. 

When the UK joined the EEC, its courts submitted to the primacy of the European Court of Justice (ECJ) in Luxembourg. Over time, and as the EU replaced the EEC, the ECJ became more comfortable producing its own new laws. Its critics argue that the resultant laws were often based on abstract principles, rather than precedent, creating space for the court to display a political personality (rhyming with a similar argument in the US, by critics of the Supreme Court). One of the effects was the growing number of cases referred to Luxembourg by EU member states’ own judicial systems, rendered increasingly unsure of themselves by judgements from the ECJ. Sceptics portrayed this as national sovereignty being stolen through the back door. UK laws made in parliament by elected representatives on the contrary, were painted as the cornerstone of democracy, and the Brexit battle cry of “Taking back control” was born. 

The Economic case for leaving the EU mostly focused on how the UK could better spend the roughly £10 billion it contributes to the EU budget. Where does the money go, it was asked? (simplified answer; Poland and Hungary). What does the UK receive for its contribution? (simplified answer; tariff free access to the EU Single Market). Why does the UK have to pay more than others? (simplified answer; its contribution is only sixth highest on a per person basis). Just imagine how many new schools and hospitals could be built with that amount of money, the country heard Messer’s Farage and Johnson telling them daily.  Moreover, the country would no longer be bound by the EU’s red tape and could strike out new trading relationships across the globe. Needless to say, the message resonated. To the average punter, £10billion sounds like a lot of money, right? What most may not have realized is that it’s actually less than 10% of the National Health Service’s annual budget, and less than half a percent of GDP. If the economy contracted by more than that amount as a result of Brexit, any benefit would disappear instantly, without the offsetting benefit of a free trade agreement with the EU. Nations’ economies aren’t nimble, but they can be volatile; the UK’s GDP shrunk by ~20% in the quarter post the national COVID lockdown. 

When the opinion polls became tricky for the Tory government, Prime Minister Cameron offered a referendum to the electorate to win back voters who had been flocking to Farrage’s UKIP party. It worked well and the Tories went from a minority to a majority government. They just needed to win the referendum. With characteristic overconfidence, the Prime Minister banked on EU leaders providing him with some concessions to take into the referendum campaign. He hoped to persuade them that a short-term migration handbrake would not just be in the interests of the UK, but other countries too (he meant France and Germany, naturally). He expected little from France, Britain’s historic nemesis, but hoped for something from Germany. Bupkis. The EU’s principles are sacrosanct; the UK needed to solve its own problem.

And so here we are. The UK government has a poor hand at the poker table, hoping that its trade deficit with EU countries might buy them some favors in negotiating a trade deal before their current arrangements end on 31^st December. COVID has made everyone’s economic situation precarious after all, and the Brits have always been hooked on French wine and German cars; you can almost hear them arguing. Maybe a deal will be struck, but the situation reflects the UK’s long misunderstanding of the strength of the joint venture between the French and Germans. Their history has taught them that they cannot afford to be divided. If the EU is the glue, then any threat to it must be repelled at all costs. This is not simply an economically rational negotiation. The UK never understood how the EU was always a political project, and how its sanctity would always be prioritized by its leaders at the expense of the short-term interests of their voters.