What does Theresa May's speech tell us about how Britain will leave the EU?

Insight
17 January 2017

Theresa May has decided on a hard Brexit, putting sovereignty ahead of economics. She thinks the negotiations will take only two years, but they will take longer.

Until now, Theresa May’s government has avoided being open about the trade-offs that Brexit entails: the more that Britain restores sovereignty, the greater the economic costs. In her Lancaster House speech, May came closer to admitting the existence of trade-offs. She said Britain would leave the EU’s single market and customs union. Now there will be a real debate in Britain on the price of Brexit. 

May will seek a Free Trade Agreement (FTA) with the EU, which means negotiating access to the single market, sector by sector. She said she wants “an agreement about our future relationship by the time the two-year Article 50 process has concluded”. That is very ambitious; FTAs often take five years or longer to negotiate. And there will be much to negotiate in addition to the FTA, on issues like security. Working out the framework of the future relationship in two years may be feasible – Article 50 provides for that – but the details will take much longer. Sensibly, May has committed herself to an ‘implementation phase’, to start when Article 50 is concluded, which will in practice last until the various negotiations are completed. But it was unwise of No 10 to brief after the speech that everything would be negotiated in two years, because it will not be. 

Many British-based companies will be unhappy with the speech. Quitting the single market means financial firms will lose passporting – the right to do business across the EU from a UK-regulated base (May hardly mentioned the City of London, to which she often appears indifferent). 

Meanwhile many manufacturers, such as car-makers and aerospace firms, will fret about losing the customs union. Their integrated supply-chains sometimes require products to cross frontiers five or six times. They will now have to worry about tariffs (on some goods), rules of origin, checks for compliance with EU standards and possible delays at the border. Clever agreements on ‘customs facilitation’ may curb some of the hassle. But it was notable that when May discussed the Irish border, she could not promise that customs controls would not return. Many Irish – from north and south – will worry about the impact on the peace process. 

Given that May’s message was hard, she wisely addressed her audience of ambassadors with a soft tone. She affirmed that she wanted the EU to succeed. She was right to remind the 27 that the UK contributes a lot to their security. But she also made a threat that rang hollow: “If we were excluded from accessing the single market, we would be free to change the basis of Britain’s economic model”. That implies that Britain could choose to be a low-tax, low-regulation country like Singapore. But other parts of the speech reminded the audience why May’s own brand of Conservatism is very different: she spoke of employee rights, workers on boards and industrial strategy.

Today we learned that the British face a hard Brexit, even though polling suggests most of them would like it soft. The reason is that the politics of the Conservative Party, and the stance of influential media groups, make it very hard for the government to pursue any other path.

Charles Grant is director of the Centre for European Reform.

Comments

After this speech many non-UK EU nationals now in the UK and UK nationals now working and living or retired elsewhere in the EU, or who may want to do so in future, of their own volition or because their employer wants to relocate them, will become even more nervous about what awaits them. The facts on the ground will change during Brexit negotiations. Individuals, companies, institutions, EU politicians etc. are not going to be driven by the timetables or the priorities of internal UK politics. The UK Government seems to lack a basic understanding of the motivations and attitudes of the rest of Europe as well as of the realities of today's economic relationships and supply chains.
It strikes me as extraordinary that any responsible government could take the UK out of the Single Market and the Customs Union without securing that suitable substitute arrangements are in place, at least on an interim basis. Yet that would seem to be the implication of the Prime Minister’s words that no deal would be better than a bad deal and it also arises from the fact that, once the negotiations commence under Article 50, there appears to be no unilateral option for the UK to revert to the status quo (which would be the normal result of a failed commercial negotiation). Since the government appears prepared to take this risk, surely, at the very least, it should be prepared to publish an analysis of the impact of such a policy on the UK economy. The stakes in this impending negotiation could not be higher.
It seems to me that if Britain wants to play hard ball aginst the EU 27, it might already know it will loose. If "loweriing corporate taxes" is their biggest guns, it only take a single move to block any corporation poducts and services trying to enter EU through the back door - regardles of what country it comes from - at least that is what I would do to enforce my single club rule - no outsiders allow unless you are a full member. And on the issue of security, I belive Europe should go ahead and start developing their military alliance outside of the control of US and UK - it must do this to be truly independent - it may take years you say, surely, but you have to start sometime.

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