A Slow Negotiation Might Help Achieve a Better Brexit Solution

Writes Patrick Honohan for the Peterson Institute’s blog here. I’ve said a few times that the Brexit negotiations will take years (and–gasp–require immigrant labour).

Patrick’s point is well made. The sheer length of the negotiation process may give time to let the British people understand the benefits of being within a free trade area, while also managing somehow starting to solve the problems the referendum result threw up. These could be solved, arguably, by less austerity and more capital spending in areas left behind in recent decades.

Cameron’s Referendum Gamble

This is Colm McCarthy’s latest column for the Farmer’s Journal. They’ve very kindly let us repost it here:

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The decision last Thursday to detach the United Kingdom from the European Union was taken by referendum, a procedure familiar in this country but a constitutional novelty in the UK. Ireland has a written constitution and one of its provisions is that it can be modified only by popular vote. If the Irish government wished to scrap EU membership it would have to seek deletion, by referendum, of the article inserted on entry in 1972. There are other countries with written constitutions which can be modified without a popular vote, usually by some kind of parliamentary supermajority.

Britain is completely different. There is no written constitution at all and parliament is completely sovereign. The UK joined the European Economic Community without a popular vote, could leave without a popular vote, could abolish the monarchy, invade France, expel Scotland or opt for a decimal calendar. Constitutionally a referendum in the UK is always a war of choice, never a war of necessity. The referendum last week was only the third such national poll in British history and the first to go against the incumbent prime minister.

Britain’s first-ever national plebiscite was called by Harold Wilson, the Labour premier, in 1975, not to approve British entry to the EEC but to confirm the entry decision already taken and implemented by simple majority of the sovereign parliament. Wilson called a referendum to heal a rift on Europe in his party, as did David Cameron this time round. Wilson won a comfortable 2 to 1 majority with all main political leaders, including Margaret Thatcher, campaigning in favour. He was widely criticised for this unprecedented constitutional adventure but it was low-risk – there was little likelihood that the electorate would vote for exit. The cost of the ‘wrong’ result was also low – Britain had been in the EEC only a few years, it was a much more limited organisation than the EU has since become and exit would have been a major nuisance rather than a major crisis.

The second also produced a vote against change. When the Conservatives formed a coalition with the Liberal Democrats in 2010 they promised their partners a referendum on the voting system. It was opposed by both Conservatives and Labour and duly defeated 2 to 1. The ‘wrong’ result would again have been no big deal, a limited move towards proportional representation.  Britain’s first two national referenda thus shared some key features. The Prime Minister who initiated each had good reasons to expect a win, and the stakes were not too high. Defeat would hardly have ended their political careers.

The third referendum shared none of these features. David Cameron’s decision was announced in January 2013 at a time when his party trailed Labour in the polls and faced vote leakage to the Eurosceptic UK Independence Party of Nigel Farage. Both his Liberal Democrat partners and the Labour party favoured continuing in the EU and opposed the holding of a referendum. At the time a YouGov opinion poll showed that 40% would vote to stay in the EU with 34% voting to quit and 26% undecided. Cameron promised to hold the referendum should he win a Conservative majority at the election in 2015 which he duly did. It was never likely to be anything but close.

Moreover the European Union had become far more than a free trade zone, with extensive and detailed common policies covering energy, transport, environment, worker protection and a single market in financial services. The international economy had not recovered from the worst downturn since the Second World War. The consequences of withdrawal from the EU by a key member were unlikely to be minor, never mind predictable or easily managed. Cameron’s decision in January 2013 has been described, accurately, as a roll-of-the-dice, a high-stakes gamble driven by concerns about internal party management. His decision to resign was the correct one: he has landed Britain, Europe and indeed the world economy in an unholy mess at the worst possible time.

He is not the first of Europe’s leaders to place domestic political concerns ahead of economic prudence. The faulty design and subsequent mismanagement of the Eurozone owes much to short-sightedness in Germany. The next domino to drop could be in Italy, for long the least successful of the major Eurozone economies. The government plans a referendum in October on constitutional reforms supported by mainstream opinion. But it may be lost. It provides an opportunity to disgruntled voters to give the establishment another kicking in an over-indebted country with a dodgy banking system and could end the political career of Prime Minister Matteo Renzi. More importantly for Ireland, it could spark a terminal crisis for the common currency. The anger of European leaders with the United Kingdom’s referendum gamble is entirely understandable.

Brexit and the Idea of European Disintegration

Britain has voted to leave the European Union (EU), or more accurately, England has voted to leave. The majority in Scotland, Northern Ireland and Gibraltar voted to remain. The opinion polls, the bookies and the markets did not predict this outcome. The mood of the nation, it would seem, is becoming increasingly difficult to measure. Or is it?

There is a lot of data suggesting that ‘immigration’ was the dominant concern for those who voted to leave the EU. This should not be too surprising. In the latest Eurobarometer data, immigration was cited as the main concern of UK citizens, alongside Germany and Denmark.

According to YouGov data, which is more revealing, income was the best predictor as to whether someone intended to vote to leave or remain. Basically, the lower your income, the more inclined you were to vote leave. Some have referred to this category as ‘those with lower education’. But let’s be honest, it’s called social class.

Another predictor as to whether someone was more inclined to vote leave was age. Younger, more liberal voters, were much more supportive of remaining in the EU. The only problem with this category of voter, is that they failed to turn out en masse to vote at all. According to the data, electoral turnout among 18-25 year olds was pitiful. Older workers were much more inclined to vote.

The precise data on how particular communities and constituencies across England voted is perhaps most revealing. The poorest twenty districts in England overwhelmingly voted to leave the EU. Or to get at it another way, according to this report, those areas with the most stagnant wages are the same communities with the most anti-EU attitudes.

What can we infer from all of this? What should EU policymakers infer from all of this?

The core inference is that England is a deeply class divided society, and that the poorest in England are increasingly venting their anger at immigrants and the EU. Further, and what is not captured in the above data, is that right-wing political parties are now mobilising working class England.

Those same electoral constituencies most likely to vote leave, and with the most stagnant wages, are the same constituencies most likely to vote for the far-right populist UKIP party. In addition, they are the same people most likely to be discursively conscripted into the anti-immigrant lies of the red-top tabloid press.

Class politics in England increasingly overlaps with enthno-nationalism, whereby identity and immigration, rather than economic self-interest takes precedence in shaping electoral behaviour.

In political science, there is a large literature on economic voting. One of the core findings of this literature is that in times of crisis and economic austerity, voters punish incumbent governments. This is partially what happened in the UK. Disenfranchised working class voters punished the Tories, liberal elites, the EU and the city of London.

However, the economic voting literature, whilst useful in describing why voters punish government, tells us very little about who these voters turn to, when expressing their social grievances.

In theory, those voters most affected by austerity, unemployment, underemployment and precarious work, would turn to parties on the left and those parties committed to reducing economic inequality. Most research, particularly within Europe, however, suggests, working class voters are turning to the ethno-nationalist far-right.

To put it simply, those affected by austerity and right-wing economic policies don’t necessarily vote in their class interest, they increasingly vote in their ethno-nationalist interest. UKIP’s economic policies are aggressively libertarian, not social democratic.

Economic liberalisation, rising inequality, and the complete free movement of peoples has social and electoral consequences. Societies will react to this disruption in different ways. Nationalism provides a sense of meaning, community and belonging, to those most affected by liberalisation. Far-right parties, such as UKIP, know this.

This realisation, however, does not seem to have seeped through to policymakers in the EU or  Germany, who, despite a near complete destabilisation of the parliamentary party system in Southern, Eastern and Central Europe, remain committed to their failed neoliberal economic adjustment of austerity induced cost competitiveness.

Most political science research in the aftermath of the great recession increasingly suggests that not only are electorates losing trust in the EU, but that the support for national democracy, in general, is in decline. When the politicians change, and the policy remains the same, voters lose faith in the institutions of liberal democracy.

The question for national leaders in the European Council, and policymakers in the European Commission, is whether they need to wait for the election of Trump in the US, Le Penn in France, or the Five Star Movement in Italy, to realise that their economic policy response to the crisis has failed, and must fundamentally change?

Polities disintegrate when they begin to loose control of their external boundaries and their internal legitimacy. Or, as W.B Yeats poignantly wrote in 1919, “things fall apart; the centre cannot hold; mere anarchy is loosed upon the world“.  The UK and the EU are now faced with the potential for disorderly disintegration. Political scientists are accustomed to thinking that ‘more EU integration’ is inevitable. This is wrong.

Yeats wrote this after WW1, which coincided with the end of the first wave of free-market globalisation, when economic inequality peaked, much like today. In many ways Brexit can be interpreted as Europe’s Polanyi moment. It was a counter-reaction to a political economic system that is perceived to be designed in the interest of the comfortable elite.

It would be naive to assume that the popular reaction to rising inequality, precarious work, economic uncertainty, liberal elites and fear of immigration will lead to something politically progressive. The wave of anti-immigrant, nationalist sentiment, sweeping England, clearly shows that it won’t. France could be next. The EU should not wait to find out.

Britain and the EU

Though Ireland and the UK joined at the same time, the UK always remained semi-detached from the EU. Brussels affairs received barely a mention in the Blair-era diaries of British government ministers and advisors. That this was not even noticed by British reviewers is telling. London regarded itself as more significant on the world stage than Brussels. And, strange as this might sound to Irish ears, until German reunification it had perhaps good reason to do so.

The “supra-national” nature of the EU was designed by France to limit German post-war independence. As Ernest Bevin, Britain’s post-war Labour Foreign Secretary, commented: “when you open that Pandora’s box you’ll find it full of Trojan horses”. Britain felt neither the need nor the desire to have its independence limited in this way. For centuries it had stood secure in its island fortress, holding the balance of power between competing continental states. In the immediate post-war period it looked as much to the US and the Commonwealth as to Europe. The US was of much greater military importance. And as the world’s first industrial nation Britain had long pursued a ‘cheap food’ policy: the agricultural protectionism of the Common Market held little appeal.

Britain’s interest in Europe is as a free trade area. It viewed the creation of the single currency as a federalist step “far too far”, a position with which very many economists agreed.

Post-referendum Britain is not the only polity in existential crisis. The EU itself is clearly in the same position. The eurozone crisis side-lined the European Commission as member states looked to their own interests first. As a leading academic wrote recently, “supranational agents’ ability to take autonomous decisions can only be sustained in matters where the extent of disagreement among national governments over policy outcomes is relatively low”. The European elite thinks that the only way forward is through further integration: “more Europe”. But there is almost zero support across the European electorate for this.

The reaction to the referendum outcome has thrown a sharp light on clashing cultures. British political culture has always been suspicious of grandiose schemes and popular culture has always been irritated by layers upon layers of bureaucracy. (Ireland bears some responsibility for the latter, in that “a Commissioner from every member state” was given to us as a concession after one of our ‘no’ votes. Every commissioner views as their legacy the amount of legislation that they leave behind on the statute books.) The other side of the culture clash is reflected in the furious reaction of the European elite to the British vote, and the apparent desire to get the British out the door as quickly as possible. Twice the Irish voted no, and twice we were asked to vote again. Why did Europe react so differently to us, when there was so much less at stake?

The British vote is also clearly an inchoate reaction to globalisation, or perhaps more accurately to its “collateral damage”. In this it seems as one with the political support for the Trump campaign in the US.

Surely European leaders would be better advised to take a long hard look at how such widespread concerns might be addressed rather than rush to accept a British withdrawal? The latter may well lead to the break-up not just of the UK but to the withdrawal of other EU member states over time. It will entail years of negotiation on future relationships – at the bare minimum between the UK and Europe, and between the UK and Ireland. More worrying perhaps – given the class, age and geographic fault lines reflected in the referendum vote – is the legacy of bitterness and, quite possibly, civil strife that it will bequeath to Britain.

There is no need to rush Britain to withdraw, other than as a threat to other potential waverers. But this is hardly what the European project was supposed to be about. A year or two of uncertainty, particularly given the fragility of the global economy, is clearly undesirable. But the next general election in Britain is likely to offer the electorate an opportunity to visit the issue anew. Europe can use the hiatus to consider how the concerns of so many of its electorates can be addressed. A substantial electorate has spoken. Is Europe prepared to listen?

Ireland’s Negotiation Game Strategy for Brexit

Ireland needs to play its hand deftly and aggressively during the EU-wide Brexit negotiations. Irish interests in the Brexit process, post-vote, differ from those of other EU states. For EU enthusiasts in states with limited UK trade, a tempting strategy for preventing a NEXT-IT (Netherlands, Austria, Denmark, etc.) is to punish the UK via a spiteful exit deal. That would be a disaster for Ireland due to spillovers. Ireland needs to fight hard to let the UK be allowed a smooth and minimally-disruptive exit, not face a mini trade war. Ireland would be hit very badly in the crossfire.

Some thoughts on Brexit

Although I was a member of the Centre for European Reform’s Commission on the UK and the Single Market, I declined to sign a resultant letter to the newspapers on what the UK ought to do, as well as similar subsequent efforts. There were two reasons for this. First, I’m not British, and I know how irritating it is to have foreigners tell you what to do at times like this. Second, it wasn’t at all clear to me that economists’ letters were particularly helpful. On that score at least, I think I was right.  But Thursday’s vote is going to have implications for all of us, and especially for Ireland, so we all need to start thinking about what happens next.

Oxford vote 70% to 30% in favour of remaining in the EU, and I have lots of colleague who are absolutely devastated this weekend. It’s hard for people outside Britain to understand just how sad so many people are at what has happened. This isn’t just about economics, or even mainly about economics: it’s about identity, and a great many English people feel, profoundly and sincerely, that they are both European and British. Both identities are under threat today.

Of course, a healthy majority of English people are happy with the outcome, including some friends of mine, and I’m pleased for them. And presumably we all wish England well. But it’s also true that the English voted without paying the slightest heed to what was in the interests of Ireland, including that part of the island which remains part of the United Kingdom.  It was ever thus, for perfectly understandable reasons having to do with the relative sizes of the two countries, which is why Irish independence was always both inevitable and desirable. But that is another matter.

One of the truly extraordinary features of the British political landscape today is that neither the Leave campaign, nor apparently the British government, knows what it wants to happen next. But it is perfectly obvious what we in Ireland should want to happen next. England and Wales have voted to leave the European Union, and hence the Single Market. The reality therefore is that, as things stand, the UK is headed out of the Single Market that it was always such a keen supporter of. And that would be bad for Ireland in a whole host of ways that are by now well understood.

Of course, the British may decide to reapply for Single Market membership, as part of the process of negotiation which now has to take place on the terms of their exit from the European Union. They are perfectly entitled to do so.  If they do reapply, they should be granted membership of the European Economic Area on the usual terms: Ireland, and Britain’s many other friends in the European Union, should insist on this, and indeed it would be in everyone’s best interests. But only the British can decide if this is what they want. Given that labour mobility will be part of the deal, I would have thought that such a decision would require another referendum on both moral and political grounds. I don’t view that as an insuperable obstacle, since I don’t see why such a referendum could not be won — especially since this may well be the key to avoiding a hard border with Scotland. And if the English don’t want to join the EEA, we need to know that too.

The rest of Europe should resist the temptation of a “fuite en avant”, attempting to move full speed ahead towards a fiscal and political union that nobody wants. (Yes, that has implications for the survival of the euro, at least in the long run. So what? The single currency was always a terrible idea.) Far better to accept the reality of a multispeed Europe, which better reflects the diverse opinions of its many citizens.  If the United Kingdom, or England and Wales, were to become firmly embedded in the European Economic Area, while remaining outside the European Union, not only would economic disruption be kept to a minimum, and Ireland’s best interests be protected; this would be an important move towards a looser and more shock-resistant economic architecture for Europe as a whole. And there would actually be a certain upside to that.  Too much rigidity, and the entire European project risks implosion. This is not so much a case of “reculer pour mieux avancer”. It is a case of “reculer pour survivre.”