Thursday, November 24, 2016

How good a negotiating position does Britain have in the Brexit talks?

Most of the articles I had read before today about what Britain's negotiating position would look like in the Brexit negotiations were either absurd Panglossian optimism from Leave supporters or equally absurd counsels of despair from Remainers.

The former were far too inclined to assume that because it is in the economic interests of groups like German car manufacturers to have a good trading relationship with the UK this would necessarily feed through into the EU negotiating position. As was demonstrated recently when the EU/Canada deal was nearly blocked because of objections not even from one of the 28 EU member states but because of two regional parliaments in Belgium, this is very far from being the case. Some parts of certain member states have very narrow interests that they will fight hard to protect even when this is not in the interests of the EU as a whole. And some elements of the EU want to take a hard line against Britain so that other countries do not get the idea that leaving the Union is a good idea. Hence it is by no means certain either that rational arguments will prevail or that they would necessarily help Britain get a good deal if they did.

However, some of those who are pessimistic about what sort of deal Britain will be able to get have gone to the opposite extreme and suggested that Britain has no negotiating leverage at all in the Brexit negotiations, which is equally silly.

A mutually hostile Brexit in which both sides ended up putting up tariff barriers at the World Trade Organisation level would hurt Britain, but it would also hurt the rest of Europe. I don't want to rehash all the silly arguments about relative impact which were thrown about by both sides during the referendum campaign but it is fairly clear that the damage such an outcome would do to the economies of the other 27 EU member states would not be trivial. Sufficiently so that rational EU negotiators should not want such an outcome.

There is an article by James Forsyth in the Spectator here which tries to rationally assess what cards Britain actually holds. Without agreeing that Britain is in as strong a bargaining position as the title of the article suggests - the UK is not "holding all the aces" - our position is stronger than it had appeared a few months ago that it might be.

On the security front, given Donald Trump's election and his clear policy that Europe should shoulder a greater share of the burden of collective defence, it would be insane for the nations of Western Europe not to try to co-operate more closely on defence issues. Britain is arguably the most powerful, strongest, and is certainly one of the top two, military powers in Western Europe and the present British government remains totally committed to the collective defence of Western Europe through NATO. Fighting a trade war against an ally whose co-operation you need more than ever for mutual defence co-operation would be a very foolish thing to do.

A huge proportion of Britain's income is earned by the international financial institutions which we generally refer to as the "City of London," which is currently not just the largest financial centre in Europe, but on the basis of the Global Financial Centres Index, just pips New York to be the largest in the world. It is also effectively the financial capital of Europe.

It is recognised by the vast majority of people who know anything about economics that failure to agree a suitable "passporting" regime allowing financial institutions based in London to sell services to EU member states would be a significant blow to the UK economy.

However, it is also true that attempting to sabotage London would, in the short term at least, disrupt the financial economy of Europe and thereby do significant damage to other EU member states as well, at a very bad time.

According to James Forsyth's article this particular penny has dropped in most of the capitals of Europe (with the exception of the French government. But as only about 4% of the French electorate are satisfied with the performance of the current French government and it is facing elections next year which it is extremely likely to lose, that situation is subject to change.)

None of this means that we can bank on the UK getting a favourable deal from the other countries of the EU as we negotiate the terms of departure. But it does mean that if we negotiate hard, while doing our best to avoid annoying our neighbours in Europe, a deal we can live with may be obtainable.

No comments: