What next for Britain and Europe after Brexit?

Boris Johnson has “got Brexit done” and it was hard to miss the photograph of him cheerfully grinning with a thumbs-up sign in newspapers even in India. Phew! What a relief, is what most Britons must be thinking.

Surely, they are not feeling terribly ecstatic over Brexit. Especially not when the country is also grappling with a surge in Covid cases and with a new, more virulent strain that has forced the government to declare London and southeast England a tier 4 area. Thankfully, UK was the first to start vaccinating people, especially the most vulnerable, and one hopes that life can only get better from here.

I have written before about how Brexit will affect Britain and its economy on my blog, so I will not go over those issues again. I think it’s tragic that Britain had to break away from the EU in this fashion because of politicians who couldn’t help their country keep pace with globalization, nor manage it well, nor explain it to their people. It is even worse that they actually think Britain on its own will be better than before, and will somehow be “global”.

It is only relief that one can feel, as the EU Commission President, Ursula von der Leyen, rightly put it, that the UK didn’t crash out of the EU with a No-Deal Brexit. The way the Brexit negotiations went down to the wire, even the British Prime Minister was sounding rather iffy when he spoke to the media on TV. This, when he spent the entire year refusing to ask for an extension of the transition period, and worse, drafted an internal market bill that was in clear violation of international laws and was going to scupper the negotiations with the EU.

Ursula von der Leyen announcing the Brexit agreement on December 24, 2020; Image: europa.eu website

After years of trying to work out a feasible solution to the Irish Border issue, the main sticking points in the negotiations in the last many months were level-playing field, fishing rights and state aid. The fact is that if UK wanted to have a free trade agreement with the EU even after leaving the Union, then it was going to be negotiating from a much weaker position anyway. However, it had no choice but to negotiate a free trade agreement, in order to allow it more time to settle into a new framework of international trade independent of the bloc.

In the end, it was the least unpalatable decision – to leave the EU with a somewhat free trade agreement, and agree to maintain good relations and extend cooperation in several areas. And while it is not the Norway-style, soft Brexit one had hoped for, it seems to be better than the deal that Canada has with the EU, according to this news report from the Financial Times.

The fine-print of the deal will be pored over, by many over several months as details trickle in, but the main point for relief right now is that for goods and merchandise trade, the agreement is a zero-tariff, zero-quota one. That is certainly good news in terms of keeping prices stable for Britons. But since a large part of UK’s trade with the EU is in services, and since this Brexit deal does not yet cover that, plenty is yet to unfold in the coming months. In fact, the UK has traditionally had a services trade surplus with the EU, while it had a significant trade deficit in goods. Of late, that trade surplus in services too seems to have eroded with the UK-EU trade data from ONS (Office for National Statistics) for November 2019 reporting a fall in UK’s trade in services surplus with the EU of as much as ￡ 7.5 billion from 2018. It also reveals that UK’s overall trade deficit with EU had widened in the year to November 2019 by ￡ 3.6 billion to ￡ 96.3 billion because of a rise in goods imports of ￡ 1.9 billion and a fall in exports of ￡ 1.7 billion. I suspect that much of this is due to stockpiling during the Brexit uncertainty, many financial services companies already relocating to continental Europe and difficult negotiations. On the other hand, the overall EU trade in goods balance grew by € 45 billion to € 197 billion during 2018-19.

The fishing rights and level playing field issues have been settled with a stop-gap arrangement and while the UK might be relieved that it doesn’t have to submit to the European Court of Justice, arbitration on several of the disputed issues isn’t going to be easy either. Besides, arbitration never ensures justice, only that a settlement is reached.

EU Chief Negotiator, Michel Barnier, at the Roundtable after the Brexit Agreement in Brussels; Image: europa.eu website

The main immediate impact on UK and EU citizens is that neither will enjoy freedom of movement, of travel, of work and of better opportunities anymore. The agreement in fact clearly states that it does not permit professionals from either region to work in the other without permission from the particular member state.

The estimates of UK’s GDP with a Brexit deal already indicate a contraction of 4%, increasing to a 6% contraction, if there was no deal. Now that we have a deal, the damage has been contained. Having already written about how Brexit will harm the UK economy, including its younger and future generations, I would like to look at how it will impact the EU this time.

The European Union, as the world’s largest single market, depends less on the UK than the UK does on the EU for its goods and services trade. Germany might be a tad more dependent on the UK thanks to its sizeable car industry, but for a single market as a whole, the EU can find many other economies to do business with. In fact, the UK going solo doesn’t just represent diminished power, it represents weaker bargaining power as well.

The Economist says that the EU has made the best of what is bad business and could have been worse if the UK were to crash out without a deal, and I agree. However, no matter how acrimonious and fractious the last few weeks of negotiations were between the two sides, I wouldn’t play up the rivalry between UK and Europe so much; after all they both still need to do business with each other and need to cooperate in a whole lot of other areas.

The EU is so much more than a single market and a trade bloc. It is a forum for cooperation in many areas, from climate change, security and defence, to energy, regulation of tech, and diplomacy. It is encouraging to hear the British Prime Minister indicating at least for now that UK will stay committed to the Paris Climate Accord and will also be introducing data privacy rules along the lines of GDPR. There is also mention of cooperation on defence and security, including cyber security, though Britain will not be part of Europol and Eurojust. Britain will, of course, continue to be part of NATO and will have opportunities to work with EU on this as well.

The EU had common standards for so many areas from food and medicine safety regulations to fuel emissions and carbon trading, etc. that the gargantuan task facing Britain now will be the development of its own safety regulations and standards. This, along with working out its place in international trade within the WTO system, will take several years.

A blustery winter ahead for Britain; Image: John Cameron on Unsplash

The EU is for the most part led by the Franco-German alliance and that should continue, even though Angela Merkel stepping down next year does raise some doubts about German leadership and indeed, the strength of that alliance. The European Union will continue to focus on its own region, its budgets, enforcing the rule of law in errant countries such as Poland and Hungary and most of all of finding ways to boost economic growth across the region. It will have to formulate a common and tougher stance against Russia, without antagonizing Poland and Hungary so much that they are pushed closer to Russia. It is here that the EU will miss British participation to add voice to the rules-based single market economic order. This, when Britain itself has moved so far to the right in recent years, in terms of its anti-immigration, anti-Brussels, and populist policies.

The other big issue facing Europe is how it will deal with the world’s two superpowers, America and China. Thankfully, with a new administration in place in the US, all hopes seem to be for a mending of fences and strengthening the relationship between old allies. Regulation of tech seems to be a thorny issue between the two allies, but with a greater recognition now even in the US of the urgent need to regulate their tech titans, it might not be the cause of friction in the near future. There should be greater cooperation on trade, investment, defence, climate change and more.

On China, Europe is circumspect, and perhaps with good reason. However, it cannot and should not block, ban or raise tariffs or adopt any of Trump’s confrontational measures on trade and investment. It should find ways to make its own economy more competitive with respect to China and indeed the world, as well as engage on issues where there is likely to be agreement with China such as climate change, infrastructure development, etc. As the world’s largest single market, the EU used to be China’s largest trading partner, but it appears that ASEAN countries have taken that place now. Europe needs to think about how it can get back to the numero uno trading position with the world’s largest market, and soon- to-become world’s largest economy. The EU’s largest trading partners are America, followed by China and the UK.

Both Britain and Europe need to focus immediately on the coronavirus and controlling its spread in their towns and cities. The search for a Covid vaccine has been a truly global endeavour and one hopes that its distribution and availability will also be global. This sense of solidarity and cooperation should inform and guide their future actions and discussions as more of the Brexit agreement details are negotiated and finalized in the coming weeks and months. Discussions on a range of services are due, from financial services, information technology and defence to data flows, media and entertainment, telecom and energy.

This should help focus minds for the year ahead, by the end of which we should also see the pandemic recede. Brexit never made sense in the first place, but both Britain and Europe need to make the best of it in the final analysis, on which the jury is still out.

This article first appeared on my blog on January 14, 2021.