Despite high expectations by some, the summit of the European Council of 17 October did not yield any visible Brexit-related results. As was to be expected in line with progress so far, this meeting between the English Prime Minister Theresa May and her colleagues from the other EU countries was a non-event (or so we were made to believe). The focus of parties in this phase of the process is primarily to negotiate the conditions of exit and to provide a framework at a later stage post-Brexit in which the future relationship is established (although the British like to treat these two elements as inextricably linked to each other). The parties broadly agree on a large number of points regarding the conditions of withdrawal. Fuzzy rumors even imply that the EU and the United Kingdom are close to an agreement on the delicate issue of how to deal with the border between Ireland (EU) and Northern Ireland (UK). The sensitivities on this point are significant, and care must be taken to avoid half-hearted compromises that turn out to be untenable at the first best headwind.
No one in his right mind would long for the return of similar violence as endured during the 30 years period preceding the 1998 Good Friday agreement. During this dark period, more than 3,500 died, more than 47,500 were injured and the whole situation caused untold economic damage both in Ireland and in The United Kingdom. For the sake of stability in both the EU and the UK, the EU has used this sensitive nerve, to convince the British to make concessions. According to some sources, this has resulted in proposals under which the United Kingdom would remain part of the European Customs Union after the Brexit. It is the details of such a deal that determine whether it is marketable to the various parties and their grassroots support in Ireland, Northern Ireland, the United Kingdom, and the EU. It is up to Theresa May to come up with such an exit treaty and contours of a framework for the future relationship with the EU that she can isolate the 'hard-core' Brexiteers in her group without tearing her party and also a majority in the Parliament gets the agreements with the EU. From a distance, this seems an impossible task, but Theresa May has often surprised friend and foe alike with her ability to stand up and fight back from impossible situations.
Regardless of whether parties will clinch a Brexit-deal, this whole discussion continues to be a battle between principles and hard facts. The fundamental point is the loss of influence to and interference from 'Brussels' after joining the EEC in 1973. This perceived surrender of sovereignty took place under the conservative leadership of Edward Heath. The Labor Party at that time was much divided about whether this was such a good idea. When this party subsequently came to power in 1975, she called a referendum in which the British voter could (at long last) pronounce himself on this question. With a turnout of almost 65%, more than 2/3 of the voters embraced the accession to the EEG. Brexit was triggered by a national-populist movement which exploited an assumed aversion against supranational powers and the influence they embody. Albeit that David Cameron called a referendum on the EU, we must assume he did not intend it to be highjacked by privileged back-benchers within the Conservative Party for their advancement in government or elsewhere alone. What were they thinking and whose agenda did the pursue? Sovereignty in a world full of necessary intergovernmental agreements (UN, International Criminal Court, Interpol, NATO, WTO, OECD, and others) is not absolute and thus remains an illusion. Conversely, being part of a supranational organization does not imply that the responsibility to manage your affairs is out of your hands.
The economic reality seems to suggest that not 'Brussels' is the problem of the British, but British politics and politicians themselves. In 1973, Ireland had the lowest GDP per capita in the former EEC (US$ 4,658) measured by purchasing power equivalents (PPPs) in current US$ 's. Today (based on 2017 data) it occupies the second highest place (US$ 75,304). Comparable numbers for the United Kingdom are US$ 4,752 for 1973 (third lowest) and US$ 43,402 in 2017 (still ranked bottom third).
The GDP/capita growth spurt that Ireland went through after the conclusion of the Good Friday agreement in 1998 is quite spectacular and once again underlines the importance for Ireland of robust and sustainable agreements around the border between Ireland and Northern Ireland. It is fair to say that part of Ireland's success is dependent on granting tax-friendly facilities to foreign companies. This said, however, the GGPI 2018 which monitors government performance relative to its burden on citizens that I recently published also shows that the fruits of government policy indeed find their way to Irish citizens.
The United Kingdom has missed out on the possibilities and did not take full advantage of the opportunities that the EU offers to its Member States. The story of the British that the Brussels bureaucracy and interference stand in the way of the rebirth of a glorious nation must, therefore, be seen primarily as an attempt by the most hawkish part of the Conservative Party to disguise the fact that the elite succeeded in advancing themselves at the expense of the population as a whole. Since the mid-1970s until the last measurement (2015), income inequality has not risen so sharply in any of the countries mentioned above as in the United Kingdom (+ 31.3%). Whether this is due to the influx of 'new money' from less free parts of the world (Russia, Middle East, and the Far East) or by the large numbers of professional service providers and bankers who cash in on their financial services related activities, it does not change the staggering income gap within British society. The United Kingdom depends to a decreasing extent on the labor-based manufacturing industry and increasingly on the education-based service economy (now more than 60% of GDP excl. trade and retail). For large parts of the British population, this means that its chances of equal participation have diminished and the breeding ground for anti-'Brussels' sentiments is high. Ironically once the UK loses its automatic access to the EU market, the services sector, dependent as it is on its financial passport into the EU, will presumably take a hard hit.
The idea of the British being able to conclude better trade treaties independently, outside the EU, than being part of it, also testifies to a particular view on global developments and the British's ability to become an exporting country again. As is currently the case, the size of British exports at present is about 84% of the size of the Netherlands (which in turn accounts for more than nine percent of the total EU exports). This fact also underlines that it is not the 'Brussels' regulatory drive that hampers the export potential of the British, but the British themselves. The British have consistently failed to develop an export policy based on manufacturing industry. The Dutch economy is almost a third (31.6%) of the British and generates a multitude of export value. On balance, the United Kingdom imports more from the EU than it exports to it. Lacking a safety net (like a trade treaty or customs union), British citizens will face higher prices due to import tariffs and trade restrictions imposed by its government. It is evident that the British 'Leave' voters did not have a clue when they decided to leave the EU and where only reciting mantras made up by puppet masters with less than altruistic interests (whatever they may have been). There was, and there still is no plan that supports the sovereignty thinking of the British, whether or not based on illusions. It is especially regrettable for those who lack the insight themselves to poke through the misleading propaganda and thereby contributed to the realization of a fait accompli which may well hit them hard.
For all the above reasons it would be good if there were indeed a breakthrough between the EU and the United Kingdom. Time is in short demand, and a lot still needs to be done. Much, of course, depends on what a possible agreement covers and how May gets her party to back it and guides it through Parliament. It does not help however that many self-proclaimed conservative voters think that a no deal Brexit is a better solution than a soft-Brexit of sorts. Moreover, with Jeremy Corbyn still being more concerned about the inherent political risk and his future as potential PM when misjudging the public reaction when supporting a soft-Brexit, it may be next to impossible to reach a solution which most British voters currently desire to reverse the most tragic consequences of the Brexit-referendum. The price for an acceptable agreement for all concerned probably lies in a certain vagueness to buy time for more informed decisions. Whether this is politically sustainable or leads to the best result, can only be established in time.
Brexit monitor second quarter 2018
The Brexit monitor is intended to follow the economic ups and downs of Great Britain, the Netherlands and the EU on eight different parameters relevant to the impact of the Brexit's consequences.
While Dutch performance in the monitor has leveled off, the UK and the EU as a whole are still showing a modest increase, albeit at a significantly lower level than before.
Changes compared to the previous quarter and a year ago
The EU as a whole performs best in relative terms compared to the last quarter, but the differences are minimal. The positive news is that British exports continue to grow as a result of the deterioration in the price of the GBP and the total income in the financial sector continues to rise. These positives are offset by the relatively lagging development of house prices in the United Kingdom as a whole and British GDP as well in addition to falling consumer and business confidence in the British economy. In the Netherlands, we see that consumer confidence and economic sentiment experienced by the business community have fallen relative to the high level previously. Positive developments in the real economy offset this decline in confidence.
Looking back over a period of a year, the Netherlands performed best on almost all performance levels of the index. The British do relatively poorly on the whole, but on balance, we see positive results. The volume of British exports and the total remuneration in the financial sector remain to be on the rise. It is precisely this last component that, if the Brexit is a fact after March 2019, is the most vulnerable. In the financial and most prosperous heart of the United Kingdom, house prices fell sharply in the period between June 2017 and June 2018 (in brackets the figures for the period March 2017-2018): City of London -23.8% (-13.1%), Westminster -12.1% (-4.6%) and Kensington and Chelsea 13.9% (-2.6%). Does this foretell a threatening drain on the City?
The overview above shows the relative values, with the second quarter of 2016 as the benchmark (index = 100). The table below shows the absolute values for the second quarter of 2018, allowing a better insight into the magnitude of the numbers involved.
Development of export from and to the United Kingdom with the Netherlands and the EU
In addition to the Brexit monitor as such, I follow the evolution of trade flows between the Netherlands, Great Britain, and the European Union separately. The volume of exports in GBP from the United Kingdom to the EU, partly due to the drop in the GBP to € rate as from June 2016, has risen considerably (plus 24.4%). Interestingly, since 2015, exports from the Netherlands to the United Kingdom have grown more than exports from the United Kingdom to the Netherlands. Based on the aggregate numbers, this does not point towards an adverse 'Brexit effect' so much feared by the Dutch exporters. Compared with January 2015, the relative share of exports from the Netherlands to the United Kingdom rose from 8.2% to 8.6% of total Dutch exports. If the GBP further deteriorates against the Euro after the Brexit is a fact, the picture may (possibly) be very different.
Last quarter I assumed that some plan B might be in the works in which, at the expense of giving up some degree of economic autonomy by establishing a customs-union, the borders remain open post-Brexit. It is too early to indicate whether this is politically feasible, although it seems the most sensible alternative for the British given the reality of this moment. Another factor is that the time required for decision-making in the British and the European Parliament will come under pressure if more time is spent cooking decisions. As such, I suspect that the initial Brexit-agreement provides a legally binding framework with many details up for negotiation at a later stage. In this way, May will presumably eventually realize what she probably had set her mind on from the moment she took up office as prime minister: a warm relationship with Europe, but at a certain distance. For the time being at least, May deserves our respect. Although she certainly did not opt for the Brexit initially, she still is in business after nearly one and a half year in a dauntingly complex and adverse environment. During that time, she tried clinching a deal for the one-half of the British people who voted 'Leave', without destroying the future for the other half of the British people. To this day, it is uncertain who will win the showdown within the Conservative Party: Theresa May or the hardliners. Regardless of the outcome, it is almost certain that the British people as a whole will suffer for a long time.