Like it or not, Britain is leaving the single market. But there is still plenty to play for, argues Simon Hix. With a deep and comprehensive free trade agreement, we could limit the economic damage. This probably means accepting some EU regulatory standards and devising a scheme to allow EU citizens to work in the UK (and vice versa) if they had certain qualifications or a job offer in a sector with skills shortages. The immediate priority, however, is to resolve the question of how much the UK should pay to the EU, both now and in the future

Hix, Simon

LSE Research Online

06/04/2017What would a pro-European hard Brexit look like?blogs.lse.ac.uk /brexit/2017/04/06/what-would-a-pro-european-hard-brexit-look-like/Like it or not, Britain is leaving the single market. But there is still plenty to play for, argues Simon Hix.With a deep and comprehensive free trade agreement, we could limit the economic damage.This probably means accepting some EU regulatory standards and devising a scheme toallow EU citizens to work in the UK (and vice versa) if they had certain qualifications or a joboffer in a sector with skills shortages. The immediate priority, however, is to resolve thequestion of how much the UK should pay to the EU, both now and in the future.A few days after the EU referendum, I argued for a “ pro-European Brexit”.  My key contentionwas that the UK should leave the EU, to respect the referendum result, but that a majority ofthe British people had voted either to Remain or for a “soft” version of Leave – particularly the so-called LiberalLeavers, who wanted the UK to stay in the European Economic Area (EEA), like Norway.  I also believed that a softBrexit was in the best economic and political interests of Britain.At that time, many Remainers refused to accept this logic, favouring instead trying to block the triggering of Article50.  On the other side, many Liberal Leavers back-tracked quickly on the EEA option, under pressure from thetabloid press and Conservative backbenchers, who kept banging on about sovereignty from EU Court of Justice(ECJ) rulings and restricting immigration, as if economic interests should be ignored.  After all, “Brexit means Brexit”.Photo: Elisa Levien da Silva via a CC-BY-NC 2.0 licenceMeanwhile, Theresa May and her cabinet have launched the UK towards a hard Brexit that would take us outsidethe single market and the customs union.  Soft Brexit is no longer on the table. We now face a Hobson’s choice:either a “bespoke” EU-UK free trade agreement, which will inevitably favour the EU given the relative sizes of ourtwo economies (the EU economy without the UK is approximately five times as large as the UK economy); or fallingout of the EU without a deal, and relying on World Trade Organisation (WTO) rules to govern trade with our largestexport and import market.So is the game up for pro-European Brits?  Should we carry on “moaning” and seeking Schadenfreude in eachsnippet of news about how Britain is heading for economic and political ruin, be it the EU’s demand for a €60bn1/4divorce payment, or firms moving business to the continent, or Spain threatening the sovereignty of Gibraltar?While I share the view that May, Johnson and Davis have played a weak hand badly by posturing, chest thumpingand making hollow threats, I cannot share the Schadenfreude. People’s livelihoods and our rights and freedoms areat stake. So, as someone who knows a thing or two about the EU and how it works, I feel duty bound to set out whatI believe would be in the best economic and political interests of the British people.There is still a lot to play for over the next two years and beyond, in terms of the rights of EU and UK nationals totravel and work in each other’s countries, the trading and economic relations between the UK and EU, issues ofregulatory equivalence and dispute resolution, how much the UK will pay into the EU budget and what for, oursecurity and defence relations, and the longer-term institutional architecture for collectively governing our continent.What would a “pro-European Brexit” now look like?  I see four main elements.First, in terms of the rights and freedoms of UK and EU citizens, there could be a new bilateral arrangement. This would not be unrestricted “free movement of people”.  However, there could be mutual rights to work and settlein each other’s countries, and gain access to benefits after paying taxes for a certain number of years.  Forexample, there could be a joint EU-UK “Blue Card” permanent residence scheme, modelled on the US GreenCard, where citizens could apply to work in the EU or UK if they had certain qualifications or had a job offer in aparticular economic sector (as defined by either side each year).  One option would be to allow UK cities or regionsto opt in to such a scheme, for example with a “London Blue Card” (just as provinces in Canada have differentemployment visas for immigrants).  Not only would such a scheme give more security to the three million EU citizenscurrently in the UK and 1.5 million UK citizens in the EU, it would allow future generations to maintain some of theeconomic and citizenship rights they currently have. It would also limit the potential economic impact of ending thesupply of labour between our two markets: Jonathan Portes estimates that restricting EU migration to the UK couldhave a negative impact on our economy of a similar order of magnitude to leaving the single market.Second, regarding economic and trade relations, the choice is now between a “comprehensive and deep” EU-UK free trade agreement (FTA), covering goods and as many service sectors as possible and light-touch customschecks, and a “light” FTA mainly covering zero tariffs on goods and some limited trade in services.  The former willclearly be more beneficial for the UK economy than the latter, particularly as 78% of the UK economy is services –such as financial services, legal services, creative industries, health and education – and these sectors are highproductivity and high value and are likely to see the most export growth going forward.  However, a comprehensiveagreement covering all these sectors will require agreement on regulatory equivalence on non-tariff barriers, suchas minimum social and environmental standards.From an economic costs point of view , the various economic models of Brexit estimate that a free trade agreementbetween the UK and EU (like Canada or Switzerland) as opposed to remaining the single market (via the EEA) couldcost the UK economy between 2 and 5% of GDP over the next 10 to 15 years, which would have a related negativeimpact on public finances.  Hence, a comprehensive FTA, covering extensive free trade in services but requiringregulatory equivalence, which would in practice be closer to the EEA option, would significantly limit the likelynegative effects of Brexit on the UK economy and public finances.The problem for many hard Brexiters, though, is that regulatory equivalence will mean some limits on UKsovereignty in the future.  Rather than “slashing EU red tape”, regulatory equivalence would mean accepting currentand future EU social and environment standards, rules on financial services and many other EU standards, althoughwith perhaps some tweaks for the UK context.  Short of full regulatory equivalence, even a comprehensive FTAwould require some pre-commitments on social and environmental standards, which would still restrict UK choicesgoing forward.  A majority of British people might want to keep many existing EU employment protections andenvironmental standards.  Irrespective of the politics of these standards, though, it would be in our economicinterests to accept some minimum EU standards and limits on our regulatory autonomy, in return for unrestrictedsupply-chains for manufacturers and continued rights to trade on a level playing field for our financial services and2/4creative industries.  What is more, such a package would be more acceptable to the EU side if a specialarrangement could be reached on the movement of people, as discussed.  After all, the free movement of servicesand the free movement of people are closely related.An additional potentially divisive issue will be how to resolve disputes once an EU-UK FTA has been implemented. From the UK side, May has set out independence from the ECJ as a “red line”.  But, from the other side, after theexperience of trying to ratify the EU-Canada FTA, the EU is reluctant to agree to any dispute resolution mechanismthat would not give primacy to the ECJ, and is likely to insist on oversight of regulatory equivalence by the Court. Realistically, the UK may have to compromise on this to achieve an agreement on a sufficiently comprehensive FTAfor our service sectors.Third, regarding payments into the EU budget, there is a danger that negotiations will get bogged down in theprecise amount of a “divorce bill”, especially if the British tabloids demand that we do not pay a single cent to the EUwhile the EU demands €60bn or no deal.  One way of resolving this would be to ask an independent panel, withsome experts from both sides, to assess the evidence and to set a sum, which the UK should pre-commit to pay andthe EU should pre-commit to accept.  Independent analysis, for example, suggests that a case could be made forUK liabilities anywhere between €25bn and €60bn.  The sooner this is resolved amicably, the better for both sides.Once the liabilities sum is agreed, a second set of issues relate to how much the UK should pay going forward andfor what.  Here, there is a strong case for the UK to pay to be part of particular EU programmes.  For example,British universities and students would benefit from continuing to be part of the Horizon 2020 research programme,the European Research Council, and the Erasmus student exchange programme.  Many non-EU member states aremembers of these programmes.  Similarly, UK film and TV production companies would benefit from remaining inthe EU’s programmes that support innovation in these sectors.  Every sector of the UK economy should be invited tomake the case for participating in particular programmes, and UK ministers and committees in the House ofCommons could assess the arguments on a case-by-case basis.  These ongoing payments to the EU are not justabout economics, but also about maintaining close personal, social and cultural relations between the UK and therest of our continent.Fourth, there is the question of the longer-term institutional arrangements for collectively governing our part ofthe world.  Regardless of the precise terms of any free trade agreement and related arrangements, the UK and theEU will continue to have shared economic, security and defence interests that will need to be addressed.  None ofthe existing institutional architectures, such as the joint EU-Swiss panels or the EEA committees, are appropriate forthe size of the UK economy or for the magnitude of these issues.  What will be needed is a new set of institutions,from committees to negotiate and oversee regulatory equivalence, to dispute resolution panels, to police and anti-terrorism co-operation working groups, to high-level ministerial councils, to perhaps even an annual EU-UK summit. A coherent architecture will take time to design. In the meantime, the UK should seek regular ministerial levelmeetings to address ongoing issues; for example between the UK chancellor and EU finance ministers, betweenthe foreign secretary and EU foreign and defence ministers; between the UK home secretary and the EU justice andhome affairs ministers, and between the prime minister and the European Council.  In time, these arrangementscould evolve into something like the “Continental Partnership” proposal by the Bruegel think tank.We are heading for life outside the EU and outside the single market.  Yet there are still many choices to be madeabout our ongoing economic, social and political relations.  Our economic interests suggest that we should seek theclosest possible relationship in terms of access of our services to the single market and some rights for themovement of labour between our two markets.  There are also strong political and cultural reasons why we shouldseek a close relationship between British and continental European societies.  We will all benefit from the free flowof ideas and skills, and will need to co-operate closely to collectively promote our common values and securityinterests in an unstable world.  In short, there is still a case for a “pro-European” version of Brexit.This post represents the views of the author and not those of the Brexit blog, nor the LSE.3/4Simon Hix is Harold Laski Professor of Political Science at the London School of Economics and Political Science.Copyright © 2015 London School of Economics4/4

What would a pro-European hard Brexit look like?

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