The year of Brexit and Trump: Annual report 2016

Annual report

It is far too early to tell whether 2016 really was a turning point in the history of the West. Both the votes for Brexit and for Donald Trump – the two biggest shocks of the year – were very close and could easily have gone the other way. Without doubt, however, 2016 was a wake-up call for liberals. Since the 1980s they had taken for granted a plethora of economic and political trends, such as the spread of democracy, human rights, global governance and international law, as well as deepening economic integration through freer trade and cross-border investment.

Liberals have now learned that there are no inexorable historical movements. They must not only fight hard to uphold their values, but also find better policy responses for the big contemporary challenges. If the EU’s leaders had not made so many mistakes in managing the eurozone, or if they had combined the Schengen system of borderless travel with much stronger external borders and more rigorous methods for co-operating on security, the UK would probably not be leaving the EU. And if successive British governments had concentrated resources on the municipalities where immigration created the most tensions, or more generally had made a better job of helping ‘left-behind’ social groups and areas, the UK might not be leaving. 

Similarly, if recent US administrations and Congress had done more for the regions disrupted by the loss of manufacturing jobs – which have fallen by a third since 1990 – or enacted policies to prevent the fall in median incomes during the same period, Hillary Clinton might well have won the presidency.

The CER is an unashamedly liberal – with a small L – think-tank. We are serious and sober and believe that policy-making should be evidence-based. At a time when it is fashionable to frown on experts – Michael Gove famously said during the referendum campaign that “people in this country have had enough of experts” – the CER is proud of its expertise. While accepting the constraints set by political and economic realities, our ideas and policy-proposals aim to nudge decision-makers to act in ways that are in tune with our underlying values. These are economic openness combined with assistance for the disadvantaged, international co-operation, and respect for the rule of law and human rights.

Twenty-sixteen gave liberals plenty of reasons to worry. A peaceful solution to the myriad problems in the Middle East seemed more distant than ever. Though flows of people into the EU from the Middle East were halted – at least temporarily – by both Turkey and Balkan countries closing borders, the southern route into the EU across the Mediterranean remained open. Turkey’s government abandoned a number of democratic norms. Terrorist attacks in Turkey, France, Belgium and Germany, among other places, gave succour to the enemies of openness.

Meanwhile the eurozone muddled along without having resolved some of its fundamental economic contradictions. Like the refugee crisis, the eurozone’s ailments have fostered ill-feeling among member-states and damaged the EU’s reputation. The decision of the British people to leave the EU on June 23rd only added to the club’s woes.

Several developments in 2016 suited Vladimir Putin’s autocratic regime in Russia. Brexit will clearly weaken the EU, particularly in the field of security policy. In 2016 Russia ignored its continuing economic weakness and intervened in several parts of the world – not only in Eastern Europe, where it scares some neighbours, but also in Syria and even in the US presidential election. President Bashar al-Assad’s victories in the Syrian civil war were seen as Russian triumphs. And the American people chose a president who has never said a harsh word about Putin and who shares at least some of his hostility to the liberal world order. 

While some of Donald Trump’s future policies are hard to discern at the time of writing, his basic worldview is not. He does not believe in much of the rules-based international order that every US president since World War II has subscribed to. He is sceptical about free trade, democracy promotion and multilateral institutions. His particular views on Iran (very hostile), China (hostile), Russia (sympathetic), Middle East strongman regimes (good for stability) and Israel-Palestine (apparently against a two-state solution), let alone issues like climate change, are likely to create huge tensions with the EU.

If an immediate and perhaps premature judgement on the dramas of 2016 is possible, it may be that the political ingredients of the liberal order face the gravest threats. The economic forces driving globalisation, such as technological change and the growth of cross-border investment and supply chains, may well be largely unstoppable, whatever Trump thinks about free trade. Countries such as China and Turkey can still engage in economic globalisation while clamping down on freedom of expression.

The referendum campaign

The CER did not take part in the referendum campaign on EU membership. The constraints of the Political Parties, Elections and Referendums Act limited what we could spend on events and publications that were in any way biased to one side. And when we organised seminars and meetings we had to ensure that Leavers took prominent roles.

Having said that, what my colleagues and I said during the campaign – at our own and others’ meetings, as we travelled up and down the country – highlighted the evidence for the benefits of EU membership. In fact we were content with our semi-detached role; we did not want to be seen as an adjunct of the sadly lacklustre Remain campaign. For obvious reasons, the CER was busier with the world’s media than it had ever been.

Most of our analysis of the UK-EU relationship – both before and after the referendum – came in the form of shorter pieces, in the CER bulletin or in insights. For example in a bulletin article in late May I explained why Leave was likely to win. I touched upon the growing hostility in Western countries towards globalisation and the elites who profited from it; this explained why great-and-good establishment figures lining up to warn the British not to Leave were making little impact. I also highlighted David Cameron’s grave error in assuming that he could turn around the British public’s deep hostility to (and ignorance of) the EU during a few short months. If he had been serious about winning the referendum he should have spent years trying to shift opinion, rather than attacking the EU in order to placate his own party’s sceptics and the EU-phobic press. Having rubbished an unreformed EU, he then won some not terribly impressive reforms in February 2016, changing little of substance, which meant that he then lacked credibility in urging the British to stay in the club.

The day after the referendum, my CER insight summarised the reasons why Remain had lost the campaign as the ‘battle of the five Ms’: Leave had better messengers, with Boris Johnson, Michael Gove and Nigel Farage being more convincing than Cameron, George Osborne and Jeremy Corbyn (the Labour leader was always ambiguous on the EU); a better message, of ‘Take Back Control’, while Remain focused relentlessly on negative economic messages and said nothing positive about the EU; much more media support (with the BBC, to the surprise of many, deciding that its obligation to be impartial meant that it had to forget its obligation to educate and inform); a line on migration that resonated, while Remainers were embarrassed to talk about that subject; and finally, much more effective campaign machines, that had no scruples about saying things that were simply untrue.

The CER also produced longer papers on Brexit. That by Jean-Claude Piris, ‘If the UK votes to leave: The seven alternatives to EU membership’ – published in January – became the most downloaded policy brief (over 25,000 times) in the CER’s history. Piris, a former head of the Council of Ministers’ legal service, explained the legal complexities of activating the ‘Article 50’ exit procedure. He pointed out that no sort of ‘half-membership’ would work for the UK’s partners. Piris also ran through the seven options available to any country wishing to leave: the Norwegian option of membership of the European Economic Area; a customised relationship with the EU, similar to the Norwegian model; joining the European Free Trade Agreement; the Swiss option of a series of bilateral treaties; the Turkish option of forming a customs union with the EU; a free trade agreement on the model of that recently negotiated between the EU and Canada; and reliance on the rules of the World Trade Organisation. Piris concluded that all these alternatives would carry heavy political and/or economic costs for the UK.

Our magnum opus of the campaign was a 120-page report published in April on the economic consequences of leaving the EU. CER researchers led by John Springford based this report on the work of the commission on the UK and the single market that we had established in 2013 (a shorter and less ambitious version of the report was published in 2014). The CER constructed a gravity model of trade which showed that EU membership had boosted the UK’s trade in goods by 55 per cent, beyond the trade that would have happened in any case because of geography. So the ‘EU effect’ amounted to £130 billion a year of extra trade. The report found that the UK was extraordinarily integrated in other ways too – the EU was the source of 30 per cent of the stock of FDI in the UK; and 45 per cent of UK banks’ assets were held in the eurozone.

The report then analysed the impact of EU regulations on Britain, pointing out that even if Britain departed, it would need to keep most of them if it wanted to remain in the single market. In any case, Britain already had amongst the least regulated product and labour markets in the Western world. The report highlighted the dependence of the City of London on business with the other 27 member-states, large parts of which would be lost if the UK cast off EU regulations. Finally, the report analysed the immigration of EU nationals into the UK, finding that their impact on low-skilled wage levels was minimal, and that skilled immigration was highly beneficial to the British economy.

Gordon Brown, the former prime minister, gave his opening speech of the referendum campaign at the launch of this CER report. The panel which followed featured two prominent Leave economists, Gerard Lyons and Roger Bootle, and two prominent Remain economists, Martin Wolf and Stephanie Flanders.   

During the referendum campaign there was much discussion of how Brexit would affect the UK, but little thought given to its impact on the EU. So in April, a team of CER researchers wrote ‘Europe after Brexit: Unleashed or undone?’. They forecast that the EU without the UK would not become significantly more protectionist, but that the eurozone would be increasingly predominant in EU policy-making (without integrating much further). As for security matters, the EU would be less likely to take a hard line on Russia; move ahead with integrating its defence institutions while having weaker military capabilities; and find that the absence of the British would impair the fight against crime and terrorism. Finally, the CER researchers predicted, Brexit would increase worries elsewhere in Europe about the preponderance of German power in the EU. So far none of our predictions has been proven wrong.

The companion piece written by CER researchers in June, shortly before the referendum – ‘Europe after Bremain: A strong team?’ – is now of less relevance. This policy brief argued that, in the event of a vote for Remain, David Cameron’s government should reinvigorate EU policy-making on the single market, trade policy, foreign policy and defence co-operation. But on June 24th Cameron resigned, soon to be replaced by Theresa May.

Throughout the referendum campaign, we organised seminars on Brexit not only in the UK but on the continent too. In February we teamed up with Pro Europa, an organisation based in Brussels, to organise a panel there with The Economist’s Tom Nuttall and a Liberal Democrat peer, Julie Smith. In the same month Mathew Baldwin, chief of staff to the then British commissioner, Lord Hill, spoke alongside business leaders at a CER/Kreab breakfast in Brussels.

One of the big uncertainties about Brexit is its impact on the union between England and Scotland. So in March we were happy to host David Mundell, Secretary of State for Scotland. He spoke on the complex interaction between Scottish, British and European politics. In April we organised a conference in London on ‘Business, Brexit and sovereignty’, with Andrew Mackenzie, CEO of BHP Billiton, Andrea Leadsom, a leading Leave campaigner and Dominic Grieve, a former attorney-general and a Remain campaigner, as speakers. 

In the same month David Lidington, then the minister for Europe, and Joschka Fischer, a former German foreign minister, spoke at a CER/DIW roundtable in Berlin on Britain and the EU. In May we and Das Progressive Zentrum held a second Berlin roundtable on the same subject. Speakers included Jörg Asmussen, former ECB board member, and Almut Möller from the ECFR.

Also in May, the CER held its second annual dinner at Rothschild in London. Martin Selmayr, the chief of staff to President Jean-Claude Juncker, lived up to his reputation for controversy and plain-speaking with his off-the-record remarks as the keynote speaker.

After the referendum 

The pace of our work did not slacken after June 23rd. From then until year-end we organised 15 seminars and conferences specifically on the consequences of the Brexit referendum. These began with a roundtable on the Monday after the vote, at which CER researchers gave their views on its impact. The next day Yvette Cooper, a prominent Labour politician, spoke at the CER on Britain and the EU, with the focus on refugee policy. In early July we and the Corporation of London pulled together a conference on Brexit, with the speakers including leading sceptics such as Douglas Carswell, the UKIP MP, and Bernard Jenkin, a hard-line Conservative outer. They were joined by Konrad Szymański, Poland’s Europe minister; Nathalie Tocci, an adviser to High Representative Federica Mogherini; Ludger Schuknecht, head of policy in the German finance ministry; and, from the pro-EU side of British politics, Nick Clegg, the former deputy prime minister and Sir Malcolm Rifkind, former foreign secretary.

Also in July, two eminent Europeans – both out of office and currently running charities – did their best to cheer up our friends by speaking at the CER’s 18th birthday party, hosted by the Irish ambassador. David Miliband, former foreign secretary, and Helle Thorning-Schmidt, former Danish prime minister, held out hope for strengthening co-operation to tackle global challenges, despite Brexit.

In September, shortly before declaring himself a candidate for the French presidency, Emmanuel Macron spoke at the CER on how the EU would respond to Brexit. He made an unabashed case for further political and economic integration and warned the British that they should not expect too many special favours from the 27. In the same month, Nick Clegg and Peter Sutherland spoke at a CER roundtable on the consequences of Brexit for Britain’s trade, and Alexander Stubb, a former Finnish prime minister, spoke at the CER on the political consequences of Britain’s departure. Then we moved to the annual political conferences of the Labour and Conservative parties, where we organised fringe events with Open Europe. At the former, in Liverpool, our Brexit panel included Liam Byrne, former chief secretary to the Treasury, and Axel Schäfer, a senior German social democrat. With the latter, in Birmingham, our speakers included Dominic Raab, a former minister and leading Leaver, and Detlef Seif, a German christian democrat.

One thoughtful contribution to the debate on how Brexit might affect the shape of Europe came from the think-tank Bruegel. A paper written by, among others, Jean Pisani-Ferry, head of policy planning in the French government, and Norbert Röttgen, chairman of the Bundestag foreign affairs committee, proposed a ‘two-circle’ Europe: a more integrated eurozone would be surrounded by countries such as the UK, Norway, Switzlerland, Ukraine and Turkey, in the single market but excused from free movement. 

This paper went down very poorly in most EU capitals, since it would allow the British to ‘have their cake and eat it’. Two of the authors – Pisani-Ferry and Paul Tucker, a former deputy governor of the Bank of England – outlined the paper at a CER roundtable in October, at which Peter Mandelson, a former commissioner, responded. The conclusion I took away was that though the paper has little chance of being implemented in the next few years, in the long run, when the British have left the EU, Bruegel’s ideas for boosting economic integration between the eurozone and the rest of Europe will return to the agenda.

In November we held CER dinners with both Jeroen Dijsselbloem, Dutch finance minister and Eurogroup chairman, and Pierre Moscovici, the commissioner responsible for the eurozone. They brought similar messages to the business leaders around the tables: the priority of the 27 is to stay united vis-à-vis the British, and not to compromise on the indivisibility of the ‘four freedoms’ of people, goods, services and capital. Thus if the UK restricts free movement of labour it cannot expect to remain in the single market, including that for financial services.

In the same month we held a roundtable to examine the ‘Turkish model’, of the UK forming a customs union with the EU, with Sinan Ülgen, who runs Turkey’s EDAM think-tank, and Roderick Abbot, a former EU trade negotiator. Another roundtable in November compared and contrasted the Norwegian, Swiss and Canadian models of associating with the EU. Speakers included Michael Ambühl, a former Swiss state secretary, Ulf Sverdrup, director of the Norwegian Institute for International Affairs, Miriam González Durántez, an eminent trade lawyer and the Financial Times’s Wolfgang Münchau. The conclusion of the two seminars was that none of these models suits Britain’s political priorities or economic interests.

The UK’s debate on Brexit remained painfully Brito-centric, with few politicians or senior journalists paying much heed to continental viewpoints. That is why in December we teamed up with the Economic and Social Research Council’s ‘UK in a Changing Europe’ programme for a seminar on others’ views of Brexit. The Financial Times’s Henry Foy explained the perspective of Central Europeans, while Daniela Schwarzer (the new head of the German Council on Foreign Relations) and Vivien Pertusot (who runs the Brussels office of the French Institute for International Relations) did the same for Germany, France and other member-states. Sir Stephen Wall, a former British permanent representative to the EU, did what he could to analyse Britain’s negotiating strategy, though at year-end that remained largely obscure.

Between the referendum and the end of the year we analysed the British government’s hesitant approach to Brexit, and the position of the 27, in a series of CER insights and bulletin pieces. One of these, published in July – ‘Theresa May and her six-pack of difficult deals’ – describing how many distinct negotiations the UK would have to engage in, was downloaded more than 40,000 times from the CER website.

The future of the CER

The referendum result prompted the CER, guided by its advisory board, to review its role and strategy. We wrote a new mission statement (at the front of this report) and decided on three shifts in our work and organisation. First, the CER will focus on making practical and constructive proposals for the UK's future links with the EU. The CER favours as close as possible an economic and political relationship between the UK and the EU, while respecting the result of the referendum. In the months since the referendum, we have experienced an enormous demand for our publications on Brexit, as well as for private briefings on the positions of the British government, the 27 and the EU institutions. 

Second, we have launched a programme of research and events on the economic causes of populism, to be concluded in the spring of 2018. Many of the factors driving populism in the UK – such as resentment of stagnant living standards and inequality, discontent about migration, hostility towards elites and a sense of powerlessness – are present across the EU.   Simon Tilford describes this programme later in this report.

Third, we are extending our reach, geographically. More than half our researchers are from EU countries other than the UK, but we have decided that an office in Brussels would, post-referendum, reinforce our European credentials. So at the start of 2017 we opened in Brussels. Our chief economist, Christian Odendahl, had already moved to Berlin in October 2016, where the Jacques Delors Institute Berlin is kindly hosting him.

Though Brexit is driving these changes, much of our work will remain on other issues, such as the trials and tribulations of the eurozone; on the EU's single market and its energy and trade policies; on its foreign, defence and security policies – including the EU's relations with its neighbours, and with Russia and China; on the way the Union handles refugees and migration; on law-enforcement and counter-terrorism in the EU; and on improving how the Union’s institutions work and relate to voters.

Our staff has been very stable over the past year. Sophia Besch, the 2015-16 Clara Marina O’Donnell fellow, became our defence analyst and took on responsibility for podcasts. Luigi Scazzieri became the 2016-17 Clara Marina O’Donnell fellow, working on EU security policy. Paola Buonadonna, an experienced media hand, returned to the CER for four months to help raise our profile during the referendum campaign.

The way we communicate with our audience is evolving rapidly. Our website traffic continued to grow: in 2016 we had about 750,000 hits on our site, 250,000 more than in 2015. Our regular podcasts, sometimes linked to particular CER publications or events, have developed a following. And we are now live-streaming some of our events on the internet. At the end of the year, two of our researchers, John Springford and Christian Odendahl, launched #AskCER, a new format of 500-word instant responses to events. But we still value the old-fashioned medium of the newspaper opinion piece. In 2016 we published more of these than ever before, in outlets such as the Financial Times, The Guardian, Le Monde, Project Syndicate, the Frankfurter Allgemeine Zeitung, The Telegraph, El País, Prospect, Die Zeit, The Spectator, the New Statesman, Tagespiegel and Politico.

The advisory board, which continued to give valuable advice to the research team, was largely stable in 2016. Paul de Grauwe and António Vitorino stood down, to be replaced by Dev Sanyal, an executive vice president at BP, and Alexander Stubb.

We regret the referendum result but understand that it makes the CER’s work more relevant and necessary than ever. The EU badly needs reform, while the UK's ties with it need serious and sensible analysis. The CER's work will continue to be guided by the same principles that have served us well since our foundation in 1998: sober, rigorous and realistic analysis, combined with constructive proposals for reform.

Charles Grant