The Black-and-White of Referendum Politics is Ignoring Major Questions in the Brexit Debate

Some leading Euro-sceptics in the UK expressed shock when Mr Cameron declared that his Government had made no plans to deal with the situation that would follow a referendum vote for Britain to leave the EU.  They presented this as evidence that the prime minister did not seriously entertain the option of Brexit and, given his stance, would not be able to wring serious concessions from EU leaders.  In fact, whatever Mr Cameron’s response to the question about Government preparations, he could not win.  If he had said that contingency plans were well-advanced, he might have roused suspicions among EU heads of government that he was negotiating with them in bad faith.  In the circumstances, he might well have felt it was not an issue on which he was obliged to be transparent.  Probably, UK policymakers have given much thought to what they might have to do if the UK electorate were to reject continuing EU membership.  It is hardly conceivable, for example, that officials at the Bank of England have not thought about the market implications of a vote for Brexit.  Nevertheless, there can be no doubt that, should the UK decide in favour of a future which is independent of the EU, there will need to be intensive discussions between the UK Government and the EU authorities over the terms of separation.

Both sides in the referendum debate are presenting the case in black-and-white terms.  Either the UK remains in the EU on whatever conditions Mr Cameron is able to secure, or there is a clean break between the UK and the EU, each going their separate ways.  In fact, a Brexit vote would put the onus on the UK Government to state what it wished its future relations with EU member-states to be, and then to confer with EU authorities with a view to reaching new arrangements.  The key question facing the UK would be whether to remain inside the European Economic Area (EEA) or to leave that also.  This is not a question that will be presented to voters in the referendum but it might very well be crucial to how Brexit would work out in practice.
The political campaign leading up to the referendum is most likely to see the Britain Stronger in Europe (BSE) group warning of the loss of trade with the EU

The fundamental point is that if the UK were to opt to stay in the EEA, alongside other non-EU members, Norway, Iceland and Liechtenstein, it would retain access to the EU’s internal market.  To be sure, non-EU members of the EEA do not have a vote on changes to the internal market rules.  However, according to the EEA Agreement, the EU is required to undertake extensive negotiations with non-EU members of the EEA before implementing any changes to those rules.  A government that expected usually to be in a small minority in EU decision-making, under the ‘qualified majority voting’ regime, might see no practical difference, as far as trading relations with the EU were concerned, between participating in the EU and shifting to EEA status. The advantage in leaving the EU but staying in the EEA would be that the UK would take control of its own policies with respect to a wide range of activities, including agriculture, fisheries, international trade, foreign relations, security, police and judicial matters.  Leaving the EU but retaining EEA membership is popularly described as ‘the Norwegian model’. It might seem to offer the best of both worlds.  However, there are substantial drawbacks to ‘the Norwegian model’ that might lead UK policymakers to prefer a different outcome, should Brexit be the people’s choice.

The UK government would be obliged under the EEA arrangements to make certain payments to support pan-European aims.  The EEA is committed to financing policies to reduce social and economic disparities within Europe, which is also a goal of the EU though these EEA disbursements are not directed through the EU budget.  The contributions of EEA member-states to financing this and other EEA expenditure are linked to the size of their respective GDPs. In the UK’s case, the payments would be substantial, though very likely much less than its current net contributions to the EU.  Another problem is that the EU internal market, though supposedly the aspect of EU membership that the UK most highly values, has provided grounds for the UK government’s loudest calls for reform.  The internal market is based on the so-called Four Freedoms, one of which is the freedom of movement of people.  On the assumption that Mr Cameron secures some qualification of this freedom before putting the matter before the electorate, a Brexit vote would cast no light on whether EEA membership had also been rejected. After all, in such circumstances, voters could have voted against the UK’s participation in the internal market via the EEA as well as against EU membership.

The political campaign leading up to the referendum is most likely to see the Britain Stronger in Europe (BSE) group warning of the loss of trade with the EU if the UK leaves and the proponents of leaving the EU stressing the financial savings to be expected from Brexit.  But, if the UK Government were to adopt ‘the Norwegian model’, the losses and gains might be nowhere near as large as protagonists on both sides claim.  EEA participation might not be as advantageous to the UK as it is to Norway and Iceland, however.  Those countries benefit from retaining national control over their policies with regard to fisheries, an important sector for both of them but now a very small segment of the UK economy.  UK acquiescence in the free movement of people from the EU when there are doubts whether the EU has adequate control of its borders might well be a stumbling-block to the UK’s continued participation in the EEA.

A clean break with the EU would present more fundamental problems for UK negotiators.  Chief among these, perhaps, would be the voiding of trade agreements with third countries.  This trade is currently governed by treaties between those countries and the EU.  If the UK were to leave the EU, there would no longer be any agreements to govern its international trade. The most elegant way of solving this problem would be for the UK to negotiate an inter-governmental agreement with the EU providing for existing EU trade treaties with third countries to continue to apply to the UK.  Arriving at this outcome would depend on the EU’s goodwill but EU governments have an interest in maintaining friendly relations with the UK, not least for reasons of regional security.  With a hostile power to the east of them, they would probably prefer not to have another hostile power offshore.  The UK Government might, therefore, strengthen its case by undertaking to redeploy its military forces from far-flung operations in distant theatres of war to the defence of Europe.   To avoid a shock to the EU budget, the UK might also agree to taper its payments to the EU.

As for trade between the UK and the remainder of the EU, a new set of treaties might need to be forged.  But in most areas where trade is currently free, it might be uncontroversial to continue current arrangements and to embody them in a UK-EU treaty.  The UK enjoys some protection from potentially discriminatory EU measures as a result of World Trade Organisation (WTO) rules that outlaw restrictions on trade.  Similarly, in a situation where the UK imports far more than it exports to EU countries, these same rules would prevent the UK government from wielding the trade weapon in negotiations with Brussels.  Possibly more to the point, to the extent that the current trade patterns optimise the balance of economic advantage in free markets, there would presumably be powerful private interests exerting pressure on both sides of the negotiating table in favour of a continuation of existing trade relations.

That would still leave the UK outside any future process of integration of the EU internal market.  Since the sector where that integration is less far advanced, namely, trade in services, is a vital concern for the UK, the UK government would be under pressure, in future, to engage in intensive negotiations with the EU authorities whenever new proposals emerged in Brussels or Frankfurt. It would be unlikely, though, and probably undesirable, for the UK and the EU to agree the final shape of the trade regime governing the provision of services during their negotiations over Brexit.
the referendum campaign is likely to be waged on narrow economic issues

One important matter that would have to be settled, however, relates to the enforcement of legal judgments against powerful interests domiciled in third countries.  It would be in the interests of an independent UK and of the EU, we may suppose, that such interests should not be able to play them off against each other, thereby rendering the public interest indefensible across Europe.  In practical terms, this might be addressed by developing a set of rules common to the UK and the EU to regulate business practices throughout the region.  This might give further reassurance to remaining EU member-states that the UK did not intend to use its independence to undermine EU nations’ economies. To oversee these arrangements, a joint UK-EU body might be established by treaty.  The final shape of the business regime, however, might well depend in large part on the fate of the proposed Transatlantic Trade and Investment Partnership (TTIP).

Relations with Ireland would present a special challenge to a post-Brexit UK.  Fortunately, Ireland, like the UK, does not participate in the Schengen Agreement.  As long as Ireland retained control of its borders, there would not necessarily be reason to change the present freedom of movement between Ireland and the UK.  The problem is that, whatever the Dublin government has thought about ‘ever closer union’ across the EU, it has regarded common membership of the EU with the UK as pointing to the ever closer union of the Republic and Northern Ireland.  With this hope irrevocably dashed by Brexit, the future of Ireland would be cast into doubt.  The sensitivities are evident in the alignment of Northern Ireland political parties ahead of the referendum.  The Democratic Unionist Party is supporting Brexit, while the SDLP and Alliance parties are campaigning for the UK to stay in the EU.  Most significantly, Sinn Fein, which south of the border has been critical of the EU, has come out in support of the UK’s continued EU membership.

Though the referendum campaign is likely to be waged on narrow economic issues, especially relating to trade and the movement of labour, there is much more at stake than that.  A rational judgment on the advisability of Brexit would take full account of the benefits and risks of the UK’s staying in the EU, and not merely the balance relating to leaving.  After all, Mr Hague once likened the euro arrangements, at the EU’s heart, to being trapped in a burning building with no exits.  If that were right, it would not bode well for the EU’s future, though Mr Hague seems to have woken from this nightmare vision recently.  How the EU is likely to develop is, even so, an important question when considering whether the UK should remain inside.

Another key issue to consider is what impact Brexit would have on the EU’s development (or decline).  It would deliver at least a jolt to Continental ideas, owing to Hegel, of the inevitability of the historical process.  Since it is not clear what tendencies the EU has been keeping in check, any weakening of confidence in the EU project could unleash negative forces from which the UK could not wholly insulate itself.  These forces could, of course, predominate even if the UK remained in the EU.  As an EU member, the UK might then be even more exposed to the negative fall-out than if it went its separate way.  But, as with the 1975 referendum, when the price of butter became the key issue, the Brexit debate is unlikely to focus on these major historical questions.

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About the author

Stephen’s career spanning five decades has made him one of the most respected and unique voices in the City of London. Disclaimer regularly publishes a selection of his elegant and thoughtful essays on the global economy, which he has been writing regularly since he founded Fifth Horseman Publications in the late 1980s. As well as an economist, Stephen serves as Treasurer of the Forum for European Philosophy and was elected to the Royal Institute of Philosophy.

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