With fewer than nine months to go before the UK is expected to exit the EU, Theresa May’s government has articulated its wishes for the country’s post-Brexit relationship with the EU in a white paper. Judging from the political turmoil that followed the cabinet meeting at Chequers in early July, the plan appears to displease both Leavers and Remainers. But it stands. And the negotiations on this final leg of the withdrawal agreement can at long last start.
That EU policymakers have not yet rejected the plan outright for failing to stay within their red lines has been put down by some commentators to politeness and sympathy for the British prime minister. From an investor perspective, however, the Chequers plan, while not perfect, provides a basis for a deal that could be positive for both the EU and overall market sentiment.
Some argue that the white paper violates the indivisibility of the EU’s “four freedoms” of goods, capital, services and people. But this is a matter of interpretation — the four freedoms are not absolute. And, critically, the British government’s proposal, in its broad outline, meets a fundamental goal of EU leaders: it does not create a bad precedent. Indeed, it potentially creates a good one.
With the UK willing to sacrifice full market access for 80 per cent of its economy (specifically, services), this can hardly be called having one’s cake and eating it. The plan will only retain frictionless access to the single market for goods insofar as the UK chooses not to exercise its reclaimed right to have its own trade deals and regulations. This price is high enough to make any existing EU member think twice about rejecting any of the four freedoms. But this model is also a good precedent for any third countries that might want an even closer goods-trading relationship with the EU.
Economic self-interest points to the same conclusion: the model on offer is the best of both worlds for the EU’s largest economies. It allows Germany and the other manufacturing powerhouses with bilateral trade surpluses with the UK to keep selling it their goods. And it gives more service-based economies such as France an opportunity to capture some market share.
In addition, EU policymakers should not lose sight of the fact that global market sentiment, roiled by fears of a global trade war, is fragile. Several leading gauges of risk appetite are at multiyear lows, and European equity markets have already suffered several months of outflows.
Finally, the EU should be mindful of the geopolitical context. Longstanding alliances are being questioned, and the values of liberal democracy and openness on which the EU was founded are being challenged from inside and outside the bloc. Meanwhile, next year’s European Parliament elections look likely to pit disorganised liberal-globalists against highly co-ordinated and vocal populists.
In such a context, it is essential to fight the right battles. Therefore, dismissing the Chequers plan out of hand would risk deepening the political chaos in the UK, possibly requiring an extension of the Article 50 period, prolonging uncertainty and creating an unwelcome distraction in the run-up to the elections. In the worst-case scenario, a highly disruptive no-deal exit would be the likely outcome.
Granted all that, it would be wise for the EU to accept the basic premise of the UK’s proposal: frictionless trade in goods; more limited access based on sector-specific regimes for services; and some levers to manage immigration flows between the EU and the UK, on a reciprocal basis. For financial services, with mutual recognition declared off limits by the EU, a modernised and expanded form of “equivalence” would seem appropriate. The white paper is very detailed. But only big picture items need to be settled in the withdrawal agreement between Britain and the EU.
The EU should focus its efforts in the final phase of negotiations on making sure of the following, therefore. First that, as already agreed, there will be no hard border between Northern Ireland and the Republic of Ireland. Michel Barnier, the EU’s chief negotiator, has already said there is scope for further discussion on the definition of the “backstop” needed to accomplish this.
Second, it must ensure that there are no loose ends in terms of the jurisdiction of the European Court of Justice and citizens’ rights. If it does so, the UK’s “association” model could become one that Brussels should be happy to offer to any willing third party.
In these turbulent times, showing that it is possible to solve a thorny problem without first going through a destabilising political crisis would do a lot to bolster the confidence of citizens and investors in the viability of the European project.
The writer is chief multi-asset strategist at BlackRock and a former official at the IMF