UK-EU Negotiations should Start by Clearing the Fog

 

The tone of Teresa May’s letter to Donald Tusk, the president of the European Council, invoking the EU’s Article 50 to leave the EU is reminiscent of the old adage “Fog in the Channel. Continent isolated”. There is also a lot of fog around the debate in the UK especially as to what the EU’s Single Market actually means, despite the fact that the Single Market is largely a British invention. Mrs Thatcher wanted to spread her free market philosophy across the EU and to do so agreed with the then president of the European Commission, Jacques Delors, that a British expert, Lord Cockfield be appointed is Single Market commissioner to implement the Single European Act enacted by all member parliaments in 1986 which provided for majority voting to overcome resistance in countries like Germany and France where regulation of services, especially financial services, was devised in deference to the cartel power of big companies to keep out foreign companies.

 

Markets have to be regulated

It is often thought that a free market means a market unregulated by law. In fact a free market can only exist under the rule of law. A tragic example of not understanding this was the advice given to the Russian government by Western economists immediately after the break-up of the Soviet Union in 1991 to go for rapid privatization and deregulation. Deregulation in the UK and US had always been a misnomer, since under Mrs Thatcher more new legislation was passed than in any previous equivalent ten year period and the US has and remains one of the most legalistic countries in the world. But it was applied literally to Russia with the result that it became a kind of Wild East with massive new wealth and massive new poverty and unbridled corruption.

Adam Smith, the original protagonist of free economic markets, himself strongly believed in the rule of law to regulate its participants and ensure competition. He once said that rarely do men of commerce get together even for a purely social gathering than it ends up in a conspiracy against the public. So the point of the Single Market is that the rules that regulate commerce are the same throughout the participating countries so that one country’s laws cannot act as barriers to another country’s companies from trading there. Most of these rules are to those not involved in the particular sector technical and seemingly of relatively little consequence. But added together they can make the difference between an open market with a level playing field or one with a tilted playing field or sometimes even one with effective barriers to entry.

If the logic of this argument is accepted then it is should be clear that the objective of the minister for exiting the EU, David Davis, that the UK should end up with the same access to the Single Market as a participant in the Single Market can never be met however much all sides might want that. There is room for debate over much UK companies would be disadvantaged within the EU (and EU companies within the UK) but no possibility that they would not be disadvantaged at all. There is a possible approach the UK could take which would make something like an associate participant in the Single Market but that would mean Teresa May reversing her statement that the UK would not be part of any bits of the EU and would be completely untouched by EU law.  Norway is formally a participant in the Single Market but is technically not subject to decisions of the European Court of Justice but rather a special Court of Arbitration for the so called European Economic Area. However this still means it has to implement the decisions of the Court of Arbitration, decisions which themselves have to take account of the ECJ’s judgments.

 

A deep partnership cannot exist without participation in bits of the EU

Both the UK and EU-27 are taking over-rigid approaches which make any agreement keeping the UK and the EU close together in what Mrs May has envisaged as “a deep and special partnership” impossible, unless the two sides are willing to change. Mrs May said that the UK is leaving the EU completely without remaining parts of any “bits” of the EU but a real partnership should involve being part of “bits” of it. For example there is an overwhelming case from the UK’s point of view, to remain part of the research and innovation policies which give grants for joint research and innovation programmes in which institutions or companies from two or more different countries collaborate. The UK is host to more such activities than any other EU member state. Other non-EU countries are involved in these policies so UK participation without being a member of the EU should be possible.

The letter invoking Article 50 said that failure would hurt security cooperation which some saw as a threat not to collaborate informally. The government however said it related to existing EU policies on Justice and Home Affairs of which Mrs May when home secretary favoured “opting in” even though it had the choice then to opt in or opt out. If she does as implied intend to favour continuing to be part of such policies that amounts to being part of “bits” of the EU.

 

EU-27 claim that Internal Market is indivisible not backed up by precedent

The EU-27 has not clarified its stance on the UK playing a part on such EU policies perhaps because the British government has not made any formal requests so far. However on the matter of the Internal Market the EU-27 stance is that the market is indivisible so if the UK insists on controlling the movement of labour it cannot be part of the Market. Given that immigration, which is linked to but not the same as free movement, was the most important reason for the Leave vote in the UK referendum, it is politically essential for the UK government to win concessions on the issue. There are however precedents for the Market not being indivisible. Norway is in theory considered fully part of the Market but has its own policies for agriculture, fisheries and oil and gas extraction and production, all of which impact on the Market. Switzerland goes further by having sectoral agreements which effectively make it part of the Market in some areas, although not the key one of financial services. Even within the EU, provinces of Austria can limit investment in property, so that holiday resorts are not bought up by foreigners, provided such restrictions apply to people from other provinces in Austria. The UK can argue that it has taken, and is likely even outside the EU to continue to take more net immigration from EU countries, than most other EU member states do. It can also point out that migration where it becomes permanent has a deeper impact on a country’s society than the other three forms of movement. It could point out that Estonia now has a movement to reduce emigration.

As free movement of labour is indeed one of the four pillars of the Internal Market along with goods, services and capital, taking complete control of movement of labour would make it difficult to justify enjoying the advantages of the other three. However, it would not be reasonable in any fair partnership for the UK to insist on the right to select only those who are most desired which would imply having had the most spent on them by the other EU countries on education and training. Moreover it is evident that the UK needs immigrants for its health service, its care services, the hospitality and catering sector and research and technology. An agreement which effectively allows the UK to participate at least in parts of the EU Internal Market should therefore be possible.

UK government resistance to Court’s role must be modified if any progress is to be made

The UK government has however also made a big issue over the role of the EU’s Court of Justice (ECJ). This is a major issue for the minority of Conservative members of parliament who have always campaigned to leave the EU, but it is doubtful whether more that 2 or 3 per cent of the UK electorate could mention a single judgment of the Court which they do not like. It has also played an essential role in opening EU markets and it is not possible any international trade agreement including the World Trade Organisation without some form of arbitration. In addition to its role in the Internal Market, the ECJ also has a role in policies on cooperation on crime and security. The UK government will therefore need at least to modify its position on the ECJ if it really wants “a deep and special partnership”. It should look carefully at what issues it thinks that ECJ decisions have or could affect UK sovereignty in a way that actually matters to the electorate. It may as with Norway be possible to replace it in theory with another court but it would not be possible to pretend that such a new court would be ignore ECJ decisions.

Much has been made as to how long the negotiations will take and that they may overrun the two years envisaged in the EU Treaty’s Article 50 and the UK has argued that it wants talks on the future relationship to start before the thorny issue of settling financial accounts is complete. That is a reasonable request, but the UK will have to make a big change to the stance which it takes in some of its statements if the talks a to have a chance of achieving much more than a zero tariff agreement in non-agricultural goods. The EU-27 should also  be prepared to be more flexible than at present on participation in the Internal Market.