12 December 2017

To save Brexit, Hammond must go


Theresa May is the second British prime minister to attempt to recast the UK’s problematic relationship with the European Union. David Cameron tried to reformulate our relationship by giving the UK a special status inside the EU, culminating in the deal he agreed with Brussels in February last year. But that effort died when he lost the EU referendum a few months later.

Now it’s Mrs May’s turn. On Friday, we saw the first results of her own attempt in the 16-page joint report with the EU Commission which concluded the first phase of Britain’s exit negotiations. Although the commitments outlined in the report are not definitive – nothing is agreed until everything is agreed, it states – the direction of travel is to a destination materially worse for British interests than the deal voters rejected in the referendum.

That earlier deal was the subject of a lecture last month given by Sir Ivan Rogers, Mr Cameron’s former top EU adviser. In his lecture, Sir Ivan stressed the importance Mr Cameron had attached to protecting the economic interests of the City of London. Resolving the tension caused by the City being the premier financial centre in the European timezone but located outside the eurozone was the central issue of UK membership, he believed.

Mr Cameron’s objective was to prevent an inner core of eurozone members from taking decisions that would prejudice the City’s future viability. To this end, he developed a set of principles he wanted the EU to adopt, the two most important being protecting the integrity of the EU’s Internal Market and ensuring that any issues affecting all member states must be discussed and decided by all member states.

The fruit of these efforts was a legal guarantee from the EU that these concerns had been addressed. In return, the UK would agree not to place any obstacles in the way of further deepening governance of the eurozone. Mr Cameron argued that his deal would give Britain the best of both worlds. But, as I wrote at the time, it could equally be argued that it was the worst of both: formalising Britain’s semi-detached “special status” without allowing it the institutional carve-outs it would need to give it effect.

In essence, David Cameron’s was a “Half-In” solution to the decades-long problem of Britain’s loveless membership of the EU. But it would have provided some institutional safeguards for core British interests. They would not have been fail-safe, because such decisions are subject to Qualified Majority Voting, but at least Britain would have had a seat at the table, a vote and diplomatic leverage on issues of vital concern and, in Jonathan Hill, it had an EU commissioner responsible for financial services.

But, then, the result of the referendum required Cameron’s successor to embark on a different approach. “Brexit means Brexit” and “no deal is better than a bad deal” were Theresa May’s twin mantras, at least until the June election, called to increase her majority and strengthen her negotiating hand with the EU. It did the opposite.

Until the election, the Government’s approach appeared settled and Mrs May was resolute. She had triggered Article 50. We were on our way out. But then came the disastrous election and everything changed. She lost her majority, her authority was weakened and the clock was now ticking. And the Remainers had to change tack.

The most powerful argument for EU membership had been that it allowed Britain to keep its seat at the table of the world’s largest trading bloc and from there to promote our interests from within, shaping the EU’s future development and giving Britain added global heft. May’s triggering of Article 50 made that moot.

So the Remainer argument had to rely exclusively on the alleged economic detriment from Britain no longer being a member of the Internal Market and the EU customs union. At the same time, it involves denying that there could ever be any economic benefit from leaving the EU other than not paying into the EU budget. According to this reasoning, because WTO rules do not cover financial services, the City would be particularly at risk from Brexit.

The Remainers’ position dovetails neatly with the EU’s unstated but implicit aim: the UK should not be able to extract an ounce of economic advantage from leaving the EU. In this, the EU has been aided and abetted by the Chancellor of the Exchequer. Intent on proving that there is not a single economic upside to leaving the EU, in July, Philip Hammond was boasting to Le Monde that Britain was in right in the middle of the European pack on taxation and promised not to undermine competing continental economies to attract global business.

What, then, is the economic point of Brexit? If the Government does not seek any economic gain from leaving the EU, then as night follows day, there will be net economic costs. Thus the Government’s approach to Brexit has become a damage-limitation exercise: there are no potential gains, only losses, therefore seek to minimise the latter. This logic explains why the conclusion to the first phase of the negotiations marks a Remainer victory and portends one in any final withdrawal deal.

Added to that, the phase one report gives the EU a powerful lever, in that it obliges the UK to find agreed solutions to avoid a hard border between Ireland and Northern Ireland. If it does not find an acceptable solution, the UK must maintain “full regulatory alignment” of all the rules of the EU internal market and the customs union that support cross-border co-operation and maintenance of the 1998 Good Friday Agreement. These obligations on Britain could well preclude any meaningful Free Trade Agreements with the United States and other countries.

The extent to which the UK’s post-Brexit freedom will be constrained by Brussels will crystalise in the second phase of the negotiations, which includes a heads of terms for a future trade agreement. This won’t be a free-trade agreement but a heavily regulated trade access agreement.

France’s President Macron, now Europe’s most powerful leader, wants a protectionist Europe, and talks of  “un Europe qui protège”. Social dumping, environmental dumping, races to the bottom – at the very least, the EU will insist on a trade agreement that prevents UK businesses acquiring any competitive advantage from leaving the EU and thus impose a regulatory level playing field on Britain.

The UK’s chief Brexit negotiator, David Davis played along with this in a speech in Berlin last month. In one excruciating passage, Mr Davis pledged that Britain would use its trade policy to engage in a regulatory “race to the top”. Thus the price of the special partnership the UK is seeking with the EU will most likely be full-alignment with the EU’s current and future internal rules and regulations. British ministers have yet to admit publicly that such regulatory linkage between Britain and the EU will operate in one direction only – from Brussels to London.

In contrast, what Cameron secured in his Half-In deal was a measure of institutional capacity to protect the City. Being half-in the EU meant Britain would have had a say. Theresa May’s Half-Out solution means Britain has none, leaving de facto regulatory control over Britain’s economic crown jewels in the hands of Paris, Berlin and Brussels – a clear and present danger to Britain’s economic security.

If the UK is to be bound by EU rules or their equivalent, self-evidently it is better to be Half-In than Half-Out. David Cameron had it right. Half-In is not the same as Half-Out, and is very much worse in terms of safeguarding British interests from predatory EU regulation, a problem that would not arise were Brexit really to mean Brexit.

Now Britons are beginning to realise that Theresa May’s Brexit actually means Half-Brexit. Her declarations that Brexit meant Brexit were honestly made. But she now gives the impression of no longer believing that no deal is better than a bad deal. Having a Plan B was an absolute prerequisite for a successful Brexit. There was none. Even Neville Chamberlain had a Plan B – rearmament.

This present course could well mean electoral suicide. At the June election, the Conservatives scraped back into government thanks to modest swings towards them in north of England seats from pro-Brexit voters that partially damped larger Labour swings in pro-Remain areas such as London. Of the 33 seats the Conservatives lost in June, only one had a Remain vote of 50 per cent or higher. Of the nine seats they gained outside Scotland, seven had Leave votes of more than 60 per cent. Next time, the Conservatives will be gambling that a deal that sees the UK bound to Brussels but outside the EU will win back more Remain voters than the Leavers it risks losing.

In what must be music to Jeremy Corbyn’s ears, environment minister Michael Gove invited voters who they don’t like the deal to vote against the Conservatives. “If the British people dislike the arrangement that we have negotiated with the EU, the agreement will allow a future government to diverge,” Mr Gove told readers of The Telegraph. By contrast, the normally voluble Foreign Secretary, Boris Johnson, has been silent.

The one grace of last Friday is that it is a milestone, not the final destination. Britain can still change course. Doing so would require a change of personnel; in particular, Mrs May needs to find herself a Chancellor who wants Brexit Britain to prosper and wills the economic means. As one EU official commented on the phase one report, the “Hammond doctrine” had prevailed.

Absent a decisive change of direction, Remainers will score a Pyrrhic victory. Britain and its financial sector will have swapped formal regulation from Brussels, over which it had a say, for the EU’s de facto strategic regulation of the City, over which it has none. And David Cameron would have earned vindication of sorts for attempting to achieve what Remainers wantonly sacrificed in order to win an argument that was lost when Theresa May sent the Article 50 notification.

Rupert Darwall is the author of 'Green Tyranny: Exposing the Totalitarian Roots of the Climate Industrial Complex'