No Brexit

Financial Mirror (Cyprus) - - FRONT PAGE -

Among the mul­ti­ple ex­is­ten­tial chal­lenges fac­ing the Euro­pean Union this year – refugees, pop­ulist pol­i­tics, Ger­man-in­spired aus­ter­ity, govern­ment bank­ruptcy in Greece and per­haps Por­tu­gal – one cri­sis is well on its way to res­o­lu­tion. Bri­tain will not vote to leave the EU.

This con­fi­dent pre­dic­tion may seem to be con­tra­dicted by polls show­ing roughly 50% sup­port for “Brexit” in the June ref­er­en­dum. And Bri­tish pub­lic opin­ion may move even fur­ther in the “Out” di­rec­tion for a while longer, as euroskep­tics ridicule the “new deal” for Bri­tain agreed at the EU sum­mit on Fe­bru­ary 19.

None­the­less, it is prob­a­bly time for the world to stop wor­ry­ing. The pol­i­tics and eco­nom­ics of the ques­tion vir­tu­ally guar­an­tee that Bri­tish vot­ers will back EU mem­ber­ship, even though this may not be­come ap­par­ent in pub­lic opin­ion polls un­til a few weeks, or even days, be­fore the vote.

To un­der­stand the dy­nam­ics that strongly favour an “In” vote, start with the pol­i­tics. Un­til last month’s deal, Bri­tain’s lead­ers were not se­ri­ously mak­ing the case against Brexit. Af­ter all, Prime Min­is­ter David Cameron and his govern­ment had to pre­tend that they would con­tem­plate a breakup if the EU re­jected their de­mands.

Un­der th­ese cir­cum­stances, it was im­pos­si­ble for ei­ther Labour politi­cians or busi­ness lead­ers to ad­vo­cate an EU deal that Cameron him­self was not yet ready to pro­mote. The Out lobby there­fore en­joyed a vir­tual mo­nop­oly of pub­lic at­ten­tion. This sit­u­a­tion may briefly per­sist, even though the EU deal has now been agreed, be­cause Cameron has no wish to an­tag­o­nise his party’s im­pla­ca­ble euroskep­tics un­til it is ab­so­lutely nec­es­sary; but as the ref­er­en­dum ap­proaches, this political i mbal­ance will abruptly re­verse.

One rea­son is Cameron’s de­ci­sion to re­lease his min­is­ters from party dis­ci­pline dur­ing the ref­er­en­dum cam­paign. Ini­tially viewed as a sign of weak­ness, Cameron’s move has turned out to be a mas­ter­stroke. Hav­ing been of­fered the free­dom to “vote your con­science” on the EU deal, most sig­nif­i­cant Con­ser­va­tive politi­cians – with the no­table ex­cep­tions of Boris John­son and Michael Gove – have come around to sup­port­ing Cameron.

As a re­sult, the Out cam­paign has been left ef­fec­tively lead­er­less and has al­ready split into two ri­val fac­tions – one driven mainly by anti-im­mi­grant and pro­tec­tion­ist sen­ti­ment, the other de­ter­mined to con­cen­trate on ne­olib­eral eco­nom­ics and free trade.

It can be con­fi­dently pre­dicted that as the political tide turns, the Bri­tish me­dia and busi­ness opin­ion will fol­low, mainly be­cause of di­rect fi­nan­cial in­ter­ests. For ex­am­ple, Rupert Mur­doch, whose out­lets dom­i­nate the me­dia land­scape, needs mem­ber­ship in the EU sin­gle mar­ket to con­sol­i­date his satel­lite TV busi­nesses in Bri­tain, Ger­many and Italy. An­other pow­er­ful mo­ti­va­tor for Mur­doch, as well as for other me­dia pro­pri­etors and busi­ness lead­ers, is to be on the win­ning side and to main­tain good re­la­tions with Cameron, un­less they see over­whelm­ing ev­i­dence that he will lose.

That brings us to the main rea­son for ig­nor­ing cur­rent opin­ion polls: Only when Bri­tain starts se­ri­ously de­bat­ing the costs and ben­e­fits of leav­ing the EU – and this may not hap­pen un­til a few weeks be­fore the ref­er­en­dum – will vot­ers re­alise that Brexit would mean huge eco­nomic costs for Bri­tain and no political ben­e­fits what­so­ever.

The eco­nomic chal­lenges of a Brexit would be over­whelm­ing. The Out cam­paign’s main eco­nomic ar­gu­ment – that Bri­tain’s huge trade deficit is a se­cret weapon, be­cause the EU would have more to lose than Bri­tain from a break­down in trade re­la­tions – is flatly wrong. Bri­tain would need to ne­go­ti­ate ac­cess to the Euro­pean sin­gle mar­ket for its ser­vice in­dus­tries, whereas EU man­u­fac­tur­ers would au­to­mat­i­cally en­joy vir­tu­ally un­lim­ited rights to sell what­ever they wanted in Bri­tain un­der global World Trade Or­gan­i­sa­tion rules.

Mar­garet Thatcher was the first to re­alise that Bri­tain’s spe­cial­i­sa­tion in ser­vices – not only fi­nance, but also law, ac­coun­tancy, me­dia, ar­chi­tec­ture, phar­ma­ceu­ti­cal re­search and so on – makes mem­ber­ship in the EU sin­gle mar­ket crit­i­cal. It makes lit­tle eco­nomic dif­fer­ence to Ger­many, France or Italy whether Bri­tain is an EU mem­ber or sim­ply in the WTO.

Bri­tain would there­fore need an EU as­so­ci­a­tion agree­ment, sim­i­lar to those ne­go­ti­ated with Switzer­land or Nor­way, the only two sig­nif­i­cant Euro­pean economies out­side the EU. From the EU’s per­spec­tive, the terms of any Bri­tish deal would have to be at least as strin­gent as those in the ex­ist­ing as­so­ci­a­tion agree­ments. To grant eas­ier terms would im­me­di­ately force match­ing con­ces­sions to Switzer­land and Nor­way. Worse still, any spe­cial favours for Bri­tain would set a prece­dent and tempt other luke­warm EU mem­bers to make exit threats and de­mand rene­go­ti­a­tion.

Among the con­di­tions ac­cepted by Nor­way and Switzer­land that the EU would surely re­gard as non-ne­go­tiable are four that com­pletely negate the political ob­jec­tives of Brexit. Nor­way and Switzer­land must abide by all EU sin­gle mar­ket stan­dards and reg­u­la­tions, with­out any say in their for­mu­la­tion. They agree to trans­late all rel­e­vant EU laws into their do­mes­tic leg­is­la­tion with­out con­sult­ing do­mes­tic vot­ers. They con­trib­ute sub­stan­tially to the EU bud­get. And they must ac­cept un­lim­ited EU im­mi­gra­tion, re­sult­ing in a higher share of EU im­mi­grants in the Swiss and Nor­we­gian pop­u­la­tions than in the UK.

If Bri­tain re­jected th­ese en­croach­ments on na­tional sovereignty, its ser­vice in­dus­tries would be locked out of the sin­gle mar­ket. The French, Ger­man, and Ir­ish gov­ern­ments would be par­tic­u­larly de­lighted to see UKbased banks and hedge funds shack­led by EU reg­u­la­tions, and UK-based busi­nesses in­volved in as­set man­age­ment, in­sur­ance, ac­coun­tancy, law, and me­dia forced to trans­fer their jobs, head of­fices, and tax pay­ments to Paris, Frank­furt, or Dublin.

When con­fronted with this ex­o­dus of high-value ser­vice jobs and busi­nesses, Bri­tain would surely balk and ac­cept the in­tru­sive reg­u­la­tions en­tailed by Swiss and Nor­we­gian-style EU as­so­ci­a­tion agree­ments. Ul­ti­mately, Brexit would not only force a dis­rup­tive rene­go­ti­a­tion of eco­nomic re­la­tions; it would also lead to a loss of political sovereignty for Bri­tain.

Or maybe just for Eng­land, given that Scot­land would prob­a­bly leave the UK and re­join the EU, tak­ing many of Lon­don’s ser­vice jobs to Ed­in­burgh in the process. Once Bri­tain’s political, busi­ness, and me­dia lead­ers start draw­ing at­ten­tion to th­ese hard facts of life af­ter Brexit, we can be con­fi­dent that vot­ers will de­cide to stay in the EU.

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