The authoritative source for independent research on UK-EU relations

18 Dec 2020

Relationship with the EU

The EU’s single market is a singular achievement, unparalleled in any other arrangement between nation states (or indeed within some big federations). But the ability to conclude a Brexit deal has been complicated by the EU’s lack of confidence in the value it confers.

The UK’s red lines have been quite clear throughout the Brexit process. No free movement, no budget contribution, no future jurisdiction of the European Court of Justice.

The EU, too, has been guided by a hard red line throughout: the need to protect the ‘integrity of the single market’ and its four freedoms. That was in the original mandate set for Michel Barnier, and it will be in the last mandate standing.

At the outset, the EU appeared motivated above all else by fear of emulation by other member states. It was ranged against a British government that was promising its people that it could have the “exact same benefits” of the single market and customs union without the pesky obligations of membership.

Had Brussels conceded that – access on similar terms to members, but for free, and with an unshackled UK able to set its own rules, control its own borders and rush off to cut its own trade deals – it is easy to see how some other member states, not to mention EEA members, might have been tempted.

Theresa May’s attempt to square the circle of delivering on her red lines while avoiding a hard border on the island of Ireland, and any kind of border within the UK itself, ended up with her Chequers proposal.

This, in turn, prompted Donald Tusk’s social media jibe about cakes and cherries and her ousting at the hands of her own party.

That was then. The demise of Theresa May meant the demise (ironically, given the man who had coined the term) of cakeism.

In his first letter to presidents Tusk and Juncker, Boris Johnson made clear that Chequers had been ‘chucked’. He signed the Northern Ireland protocol to allow him to negotiate a more distant relationship for the rest of the UK.

The language of ‘exact same benefits’ is long dead. The government is, with increasing desperation, warning business of a mass of red tape coming its way in the shape of new customs formalities, new regulatory checks at the border and new behind the border processes, deal or no deal.

In short, it is erecting a substantial border between the UK and the single market and customs union.

It is perfectly fair to say that the UK was never asking just for Canada. It added in some asks on road transport, services access and permission for UK regulators to certify goods meet EU standards. Any country negotiating a trade agreement is bound to have its list of offensive interests.

But the noise coming out of Brussels and London is that few of these asks have survived contact with Michel Barnier’s blue pencil – and the deal in prospect will be very thin.

Yet the EU is acting as if a deal that offers little more that – tariff- and quota-free trade in goods – puts the single market at real risk from an unleashed UK.

The UK’s official forecasters think that will significantly hobble UK economic performance, but the EU reaction seems oblivious to its consequences.

Most economists reckon that non-tariff barriers impose much greater costs on companies than tariffs. Honda estimates that 15-minute delays to its just-in-time supply chains could cost to £850,000 a year – around 10% of its normal yearly profit. Estimates of the costs of new routine border formalities range up towards £20 billion.

The chemicals industry has estimated that re-registering for British REACH regulations will cost them £1 billion.

And even though the British public may see ending freedom of movement as a benefit, it will deny British businesses access to a source of willing, trained and often quite cheap labour, which it can employ without becoming a visa sponsor or incurring the Home Office’s battery of costs and surcharges.

Add to that the impact on services, who have to jump through a whole range of new hoops to serve their EU clients. Those very real costs come at a significant economic price.

Of course, subsidies could create very specific problems in certain sectors. But on the more general level playing field concerns – changes to environmental and social regulation – it is hard to see what the UK could do that would offset the competitive disadvantage of being outside the single market.

The EU also oversells just how level a playing field there is within the existing single market. Labour costs vary enormously between member states, as do payroll and social insurance taxes. Payroll taxes in 2019 varied from between 5 per 100 euros in Romania to 48 in Sweden and there is currently no minimum wage.

Or look at non-household electricity costs. The UK has the second highest in the EU – just below Germany’s €0.18 per kilowatt hour – compared to €0.06 in Denmark, according to Eurostat.

These are likely to have a much greater impact on competitiveness than the impact of EU environmental and social regulations and dwarf any benefits the UK could derive from diverging from them.

The EU is, of course, perfectly entitled to press the UK to sign up to stringent level playing field provisions. But it should not justify these, as Ursula von der Leyen did, on the basis that the UK will have “seamless” access.

To do so undersells the EU’s negotiating success: to have used its power to deliver its members a deal that offers tariff-free access for their goods exports to the import-hungry UK while offering next to nothing for services, where the UK has a surplus.

The EU should have more faith in its single market.

By Professor Anand Menon, director, and Jill Rutter, senior research fellow, both UK in a Changing Europe.

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