Will Britain ever manage to leave “Hotel California”?Sep 27, 2018·Alasdair Macleod
The Eagles lyric from the 1970s is nearly as old as the United Kingdom’s membership of the EU, but it is an apt description for her predicament. There are so many twists and turns in the EU’s corridors, that it is proving difficult for Britain to “find the passage back to where it was before”. Britain has checked out but cannot seem to leave.
The EU has firmly rejected Mrs May’s Chequers customs proposals, which is not surprising to those paying attention. Their chief negotiator, Michel Barnier, had already made his position clear. Last week, Mrs May sought to take her case to his superiors, effectively asking them to overrule him. It was a tactical error that backfired badly.
Fortunately for her PR machine, the blunt rejection by the EU, particularly the comments of President Macron, deflected the immediate blame of Mrs May’s failure to the EU leaders’ intransigence. Consequently, early signs of electoral opinion have firmed in favour of a no-deal Brexit. Merci, President Macron, for clarifying that point for the British electorate.
It is now just six months before Britain formally leaves the EU. This article details the economic and political issues, followed by a commentary on the tactics being deployed by all sides.
The economic case for Brexit
The economic case for Brexit centres on the law of comparative advantage. This law explains that rather than waste your time making or doing something someone else does better, you should buy it from him instead than wasting time trying to compete. It also explains that even though you might be very skilled at something but can add greater value to society by doing something else, you and the community as a whole are better off if you do that something else.
For example, Winston Churchill built a garden wall at his country home. He turned out to be an excellent brick layer, as visitors to Chartwell can confirm. But there were other competent bricklayers on the Chartwell Estate. Besides building walls as a hobby, it will be clear to everyone that Churchill added considerably greater value to society as a politician and an author and was paid more than he ever would be as a bricklayer.[ii]
What was true for the great man is also true for all of us. It allows us to maximise the potential for a community of producers by buying each other’s output in accordance with the law of comparative advantage. And what holds for a community scales up to nation states. If China can supply us with goods cheaper and better than we can ourselves, we should buy them from China, and not waste our time and resources doing it less effectively. Scarce capital resources, including labour, must be released for more profitable activities.
If China offers steel at a lower price than it can be made in Britain, British manufacturers who incorporate steel in their products would be stupid not to benefit. Meanwhile, British steel manufacturers should get out of the mild steel business, and perhaps produce high quality speciality steels to regain their commercial edge. This is what British Steel has done. The common European response is to protect their industries with import tariffs, and by the end of 2016 there were 12,651 known EU tariffs in force.[iii]
Only free markets, more specifically the consumer and also buyers of intermediate production, can decide where the comparative advantage lies. In free markets, the consumer is king, and the businessman who fails to respond to his customers’ demands should amend his offering.
Businesses try to avoid this truth by lobbying politicians to yield a monopolistic advantage. Business leaders present themselves to the political class as expert representatives for their industries, and they warn politicians of the supposed horrors of free competition. An established business would rather be regulated than face competition, because the regulator will help guarantee profit margins, and licence monopolistic behaviour.
This is crony capitalism, which is not free markets. It is everywhere, but more in some places than others. It is particularly virulent in Brussels, where big business effectively sets product standards to disadvantage smaller competitors. The law of comparative advantage is trampled underfoot.
Lobbying by special interests is not confined to Brussels, being a feature of Westminster life as well. The Cronies target Brussels where the Europe-wide power resides, as well as national governments in coordinated campaigns. The result is an institutionalised crony-based system bound together by a political class that has been bought by special interests.
To a businessman, a good politician is one who once bought, stays bought. On the one side of the Brexit tussle you have protectionism, which has become thoroughly institutionalised, and on the other you have free marketeers. Interestingly, the UK’s Conservatives are meant to be the party of free markets and individualism, yet even their ranks include ardent statists, their true colours exposed by the Brexit debate.
The political case for Brexit
The political case is simply one of democratic accountability. In the UK, parliament has always been sovereign, that is to say the elected members of the lower house form governments and make the laws. There has to be a general election at least every five years, to give the electorate a vote on the government’s competence. Furthermore, if during a government’s term it loses the confidence of a simple majority of MPs, it must call a general election. By these means, the British public exercises its democratic rights.
There is no such accountability in Brussels. Only the unelected executive can propose directives and regulations, and the parliament has an equal say in passing them. In practice, the EU parliament is packed with establishment MEPs and nothing initiated by the executive is rejected. Democratic accountability is a fig-leaf and never gets in the way of the unelected executive.
Very rarely, the electorate is asked for its view on a simple matter of principle by referendum. Referendums are technically advisory, but in practice a parliament that goes against the public’s wishes expressed in a referendum is denying the electorate its democratic mandate. Having called a referendum, if a government then fails to respect the result, what was the point in calling it in the first place?
The first referendum in Britain was held on 5th June 1975, where the question asked was, “Do you think that the United Kingdom should stay in the European Community (the Common Market)?” It was held two years after Britain had actually joined, but it was clearly on a simple matter of principle. There was another nationwide referendum on proportional voting, which was rejected. The 2016 Brexit national referendum was only the third ever held. They are not frequent events, though the device has been used regionally as well (i.e. the Scottish referendum).
At the time of the 1975 referendum, the EC was little more than a trading bloc, whose members traded freely with each other without tariffs, while significant tariffs were imposed on imported goods from non-member states. Communications were such that proximate markets were easier to service than distant ones. These were the important economic arguments for Britain joining at that time.
But since then, the EU has taken democratic accountability away from national parliaments principally through the Maastricht and Lisbon treaties and is on its way to becoming a fully-fledged super-state. Meanwhile, WTO tariffs have gradually declined to single figures, and the internet has made distances between suppliers and consumers far less of a hurdle to trade. With the importance of being in a trading bloc now a growing obstacle to global free trade, there is no valid reason to justify the loss of democracy.
This is the crux of the Brexit debate: the economic benefits have gone along with democracy. The Remainers deliberately avoid the democratic issue and instead deflect the debate into economic unknowns. The statist establishment both outside and inside the UK persists in threatening that Brexit will lead to a large fall in GDP, rise in unemployment, disrupt trade with the EU, threaten medicinal supplies, prevent planes landing, and so on. The list of these supposed negatives is extensive, but it is increasingly clear Remainers are only making up scare stories to avoid debating the democracy issue.
The EU’s position
The establishment in Brussels is rock-solid in its determination to continue on its course of devolving power from national governments to itself. Furthermore, the EU parliament has imposed its red lines as inviolable, the principal ones being:
- Any transitional deal will be enforced and overseen by the EU’s Court of Justice (ECJ).
- UK Citizens in the EU and EU citizens in Britain should be guaranteed reciprocal treatment.
- The UK must adhere to EU environment and anti-tax evasion rules.
- The UK should pay the EU costs that “arise directly from its withdrawal”.[iv]
As well as these red lines, there are the “four freedoms”, that are also sacrosanct: the free movement of goods, services, capital and persons. In order to satisfy these freedoms, the UK would have to remain in the customs union, or be out of the EU completely. It is that simple.
To ensure that Britain complies with the four freedoms in any half-way house, it would have to accept the jurisdiction of the ECJ, instead of the British courts. The European parliament’s position is less important than the four freedoms, because the parliament is little more than a rubber-stamp applied to pre-agreed policy.
Since the EU parliament’s resolution was passed, there appears to be behind the scenes attempts to persuade the British electorate to reconsider. The first strategy was to simply block all British attempts at achieving a negotiated settlement. This led to the British government offering an alternative compromise, the Chequers plan, which resulted in the resignations of the Brexit ministers, David Davis and Steve Baker, as well as the Foreign Secretary, Boris Johnson. The second strategy has been running concurrently with the first, and that is to undermine the Brexit case, in the hope a second referendum would reverse, or at least neutralise the Brexit referendum.
To this end, Brussels has covertly supported Remainers’ campaigns, a tactic that has worked before in referendums in other EU states when a first referendum rejected treaty proposals.[v] This brings us up to last week, when at an EU leaders’ dinner at Salzburg, Mrs May saw her Chequers plan firmly rejected in bluntly undiplomatic terms.
It seems after all that the EU is now prepared to negotiate a Canada Plus deal, as advocated by dissenting Conservative MPs. As a matter of fact, that has been more or less the EU’s position all along, believing it is far less attractive to the UK than staying in the EU. It was the free market alternative that was rejected by Mrs May in favour of her Chequers plan.
[The Canada trade agreement removes nearly all tariffs on goods but accepts some regulatory barriers to trade. There are limitations imposed on services. It gives the UK total control over immigration, it would be outside the customs union, have its own regulations, being not bound by a common rulebook. A joint committee between the UK and EU would resolve trade issues. This is roughly the agreed position with Canada and South Korea. A Canada plus deal would be an improved one based on this.]
There is probably more to the EU’s offer to discuss a Canada plus deal than meets the eye. It is always helpful to look at a problem from the EU’s point of view, so we can deduce what the thinking in Brussels might be. It is probably as follows. Mrs May wants to have the advantages of a being a member state without being in the customs union. She thinks the Chequers halfway house will appease the Remainers, many of which are her principal advisors. This is the only credible logic behind the Chequers proposal, which is a fudge to give the appearance of not being in the customs union. The Irish border question is a red herring, floated by the Irish Prime Minister and Mr Barnier. Mrs May has either fallen for it or is using it to justify her position to her cabinet.
Therefore, and of this Brussels appears to have convinced itself, the alternative of a WTO deal, or any deal close to it, such as Canada plus, is a bad outcome for Mrs May and her government. It is also undesirable for the EU, particularly Ireland, if Britain did leave the EU entirely. The reason it is important for Ireland is twofold: her main trading partner is the UK, and most of her non-UK European trade transits across the UK to the mainland by ferries and road. Those are the Irish issues that really matter.
The initial plan had been to stop Brexit. By proposing free trade negotiations, the EU might have originally reasoned it will never happen. Remember, the EU has had the international establishment (the IMF, central banks – visibly the Bank of England, big business and various back channels) working to overturn the referendum. The hope is a free trade agreement would not get through the UK parliament, and by assisting the Remainers in the UK who are pushing for a second referendum, it is thought the British public will change its mind. However, the EU’s thinking might have changed in recent weeks on the referendum issue, because it is almost certainly aware its plans are failing.
In conclusion, the EU is losing the battle for British hearts and minds in a second referendum. There can be no halfway house between being in or out of the customs union. If Brussels is to get its promised £39bn settlement, it will now have to embrace a free trade deal.
The British position
The Chequers plan was put together by Mrs May’s permanent staff, led by Olly Robbins. A charitable view is that Robbins’s plan was intended to achieve parliamentary support from a broad parish of Remainers and middle-of-the-roaders and neutralise ardent Brexiteers. She went over the heads of her own and the Brussels negotiating teams. Mrs May met a number of EU leaders on a one-to-one basis, including Angela Merkel, in the weeks before the Chequers plan was sprung on her cabinet, so it was widely assumed she had cleared it with them. Thinking she had a plan acceptable to her fellow EU leaders, she sprung it on her cabinet as a fait accompli. It was May’s way or the highway.
Instead, it has been a disaster because of the outright rejection by the EU leaders in Salzburg, who appear to have backtracked on their private meetings with her. This was hardly surprising, given Mrs May was arrogantly dealing over the EU chief negotiator’s head (Mr Barnier), who also attended the Salzburg dinner, and would have made his authority in the matter clear.
Despite this setback, at the time of writing, she is still clinging on to the Chequers plan. Her latest idea is to threaten the EU with the prospect of Britain lowering corporation tax to make Britain a corporate tax haven. This could be another tactical mistake, because Brussels is likely to read it as desperation to save a plan that is unacceptable.
Mrs May is now under increasing pressure to back down. And quickly, because she faces Conservative Party members at the annual conference next week. Salzburg was clearly a stitch-up that backfired, and she can only be clinging on to the assumption that her earlier more positive meetings with EU leaders are what really matters.
The evidence suggests this is a mistake, from which she must backtrack. It will never get the requisite support from Brexiteers, because it leaves the EU still controlling trade laws and regulations. This contravenes the democracy issue explained above. It is also likely to compromise Britain’s negotiating position with respect to free trade agreements with other countries.
Furthermore, a trade agreement which is far closer to free trade has already been proposed by both Brussels and the Brexiteers, based on the Canadian FTA. While the EU might have offered something that they thought would never be taken up, it is now in play.
That leaves the problem of how to get any trade agreement with the EU through Parliament. It is never certain that a no-deal or even a free trade agreement with the EU would find the necessary parliamentary support, given the strength of the Remainer lobby, and Labour’s insistence on staying in the customs union.
However, the Labour Party is badly divided on Brexit, and it is quite likely that if a vote was held on a Canada plus deal, the government would succeed in getting it passed.
Where to from here?
It is conference season, that time in the UK when the political parties invite their faithful members to come and listen to speeches from leading politicians. The Labour Party had theirs this week, and the Conservatives hold their’s in Birmingham next week. The problem for Mrs May is that apart from some vanishing sympathy over how she was treated by the EU leaders in Salzburg, her Chequers plan is deeply unpopular. If she thinks she can sell it at Conference, she is likely to be disappointed.
It is bound to be a topic in her closing speech next Wednesday. But Boris Johnson is due to speak in a fringe meeting, and he is immensely popular with the constituency members and a good orator to boot. He is also controversial with all shades of media opinion, which means he is box-office. The day of Mrs May’s speech is likely to be swamped with news headlines about Boris. If she is to avoid a PR disaster, she would be well advised to urgently ditch her Chequers plan and embrace the concept of Canada plus.
Whether she does we will find out next week. If she refuses to move, then I expect a leadership challenge by Christmas. Why? Because for the Brexiteers, the first option was to persuade Mrs May to drop Chequers and oversee negotiations on Canada plus. If that fails, then MPs face the next general election with the prospect of losing their seats. It won’t be the Labour Party’s socialist agenda that gets them unelected, but the Conservative’s failure to deliver Brexit.
The key to exiting Hotel California lies increasingly in the freest trade agreement possible, not in the Chequers plan. Mrs May must give up on the Chequers plan or she will be soon gone.
[i] Eagles, their album: Hotel California, 1976.
[ii] I must confess to cribbing this fine example of comparative advantage from Daniel Hannan, Conservative MEP for South-east England.
[iii] Unveiling the cost and extent of the 12,651 EU import tariffs – and why we should repeal them by Dan Lewis of the Economic Policy Centre.
[iv] Resolution passed by EU parliament sitting in Strasbourg, 5 April 2017 516 votes to 133, with 50 abstentions.
[v] An example of covert support for Remainers is reported here: https://www.express.co.uk/news/uk/905714/Brexit-news-Nigel-Farage-Michel-Barnier-EU-UK-European-Union-LBC
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