Senior Adviser, Rock Creek Group; Executive Committee Member, Peterson Institute
Managing Director, Europe, Eurasia Group (via videoconference from London)
Robert Bosch Senior Fellow, Center on the United States and Europe, Brookings Institution
Europe Editor, Washington Post
After the United Kingdom’s January 31 deadline to leave the European Union, questions remain regarding how Brexit will affect the United Kingdom’s relations with the European Union and the United States. Our speakers discuss the transition period, the consequences of Brexit, and what to expect in the coming year.
BELLACK: Welcome to the Council on Foreign Relations meeting “Delivering on the Deal: Brexit, the European Union, and Beyond.” I’m Marisa Bellack from the Washington Post and I’ll be presiding over today’s discussion.
We’re lucky enough to have joining us by videoconference from London—you’re in London, yes? (Laughs.) Eurasia Group’s—
RAHMAN: I am.
BELLACK: (Laughs.) Eurasia Group’s Mujtaba Rahman. And we also have at the end here Caroline Atkinson, former deputy national security adviser for international economics to President Obama and former head of global policy for Google; CFR Senior Fellow for Europe Matthias Matthijs; and Brookings Senior Fellow Amanda Sloat. Thank you all.
Now, if we were working for the British Foreign Office we’d have to engage in this conversation while abiding by the Downing Street directive that we avoid the word “Brexit,” along with “no deal,” “partnership,” “special partnership,” “deep partnership,” “unique,” “ambitious,” and “level playing field.” You think we could pull that off? Probably, but we are not going to be shackled by other people’s rules here.
So let’s begin with one of the big looming questions: Can Prime Minister Boris Johnson realize this vision of a global Britain freed from the constraints of the EU to strike lucrative free trade deals around the world and exert itself as a major power player? Or will Britain find itself diminished, having to spend years seeking trade deals and political relevance? Does prioritizing sovereignty—taking back control—mean that you have to accept less influence, as some have suggested? Caroline, do you want to start us off on that one?
ATKINSON: Thanks very much. Well, the U.K. has always managed to punch above its weight even as a declining power, declining military and economic power obviously, since the Second World War. As you can tell from my accent I grew up in the U.K., but I’m actually an American citizen, having been born here, and have worked mostly for the U.S. government, as Marisa said. And it was always striking that in meetings of the G-7, the G-20, and other international meetings the British were able to draft well, use language well, and have ideas.
I think that a focus on tearing—either tearing up the regulations and rules and connections with Europe or rushing around the world trying to seek new trade deals will diminish the U.K. They have been more powerful inside Europe, partly because their economic ties are very strongly with Europe. I believe that their influence in the world will depend a lot on remaining strong or becoming stronger economically. And if they try to do that by separating economically from Europe, that will actually lead to probably the decline, maybe death of some of their important manufacturing industries.
Now, I also think Boris Johnson is a very clever politician. I think that his desire to get Brexit off the front page and to the back of the business pages where nobody cares may well be successful. And then, if he is pragmatic, he will end up not changing the economic relationship that much with Europe. But I think both Europe and the U.K. are at risk of becoming weaker within the global system.
BELLACK: Let’s look at that economic relationship with Europe and what’s going to happen over the next year. Mujtaba, could you talk us through a little bit. For the coming trade negotiations, you have suggested that we’re looking at a 60 percent chance of a limited trade agreement focused on goods with other issues to be sorted out later, a 15 percent chance of a no-deal departure at the end of the year, 15 percent chance of an extension of the transition period, and a 10 percent chance of a speedy happily-ever-after comprehensive trade agreement. Can you walk us through those? And kind of also—I know you’ve been both in Brussels and talking to people at Whitehall—what you’ve been hearing.
RAHMAN: Sure. So it’s a pleasure to join you all from London.
I’ll perhaps set the stage with a few contextual remarks. What I would—what I would start off by saying is we have a very different government in power today than we did under Theresa May, and I think it’s important to recognize that. We have a group of people at the top of government, all of the people with agency—Boris Johnson, Michael Gove, Sajid Javid, Rishi Sunak, David Frost—the lead negotiator—Dominic Cummings—these individuals are big believers in doing things differently. And I think we mustn’t—we mustn’t misperceive or misinterpret or not recognize that fact. I think it’s very, very important. So this is a government with a very, very different worldview than the regime that came before, and of course there is politics involved in its approach to Brexit. But there’s also real worldview here. This is a government that believes in doing things differently. It’s a government that is using divergence as a starting point, and that, I think, will underpin and characterize its approach to the entire phase-two process.
So I’m absolutely of the view we have to take this government at face value. And if you think this is about negotiating—a negotiating tactic, an opening gambit, you’re likely to end up in the wrong place analytically. Kind of my high-level and a remark about where I see this administration. Everything will be subordinated to the timeframe.
Sorry, did you want to come in with a—
BELLACK: Yeah. Just wondering about when you’re saying they’re doing—committed to doing things differently, does that reflect something ideological—(audio break).
RAHMAN: I think it’s even more primal and tribal than that. These are people that just don’t like the EU. And they question—they question—you know, as one minister puts it to me, you know, well, Europe is a regulatory superpower. It sets the rules and then you’re judged, essentially, or given a mark out of ten as to whether or not you’re congruent with those rules. Now, this administration questions whether Europe is the best place to determine the rules and whether they should be—
BELLACK: But which rules?
RAHMAN: I mean, I think—I think, frankly, it’s across the board. Honestly, I think it’s across the board. I think they—you know, if you push—if you push senior figures in the government on, OK, you believe in the principle of divergence but in practical terms what does that mean, how does that help the economy—think about supply chains, think about manufacturing—they don’t have an answer. But that’s the point. It’s the principle, not the objective benefit, that they care about. It’s about, quote/unquote, “democracy.” It’s not about economics. And I think actually at the top of government you do have a very consistent, unified approach to that question. Now, but that’s kind of—as I say, kind of the philosophical approach of the administration. And I think they’re quite consistent.
The second point quickly I’ll make—and then I’ll conclude—is everything will be subordinate to the timeframe. I think Boris Johnson wants to get this done this year. And the working assumption in Brussels—and I think that’s the correct working assumption—is that this will be done this year. Now, if you’re going to do a deal over the course of the year, that will of course restrain what the deal can be because you’re absolutely limiting the timeframe. I think that the vote—the coalition of Labour voters that have delivered this administration a majority want Brexit delivered (by ?) a deadline, and that’s the government’s interpretation of the mandate it has from these voters even if that comes with a serious amount of economic pain.
But the deal will be done in the year and divergence will underpin the government’s approach to phase two. I think if you put those two things together it can only be a minimal, fairly unambitious deal that does introduce lots of friction both in terms of—(inaudible)—and regulatory barrier.
BELLACK: Matthias, could you maybe speak to what the biggest stumbling block might be? Is it going to be cod? (Laughter.)
MATTHIJS: First of all, I want to agree with the kind of—the gist of what Mij was telling us, right? The fact that there is this timeframe, you need to have a deal by October, if this is going to be a comprehensive trade agreement that needs the ratification of all member states including my own people from Belgium and Wallonia and sub-parliament, there’s just no way. So it’s going to have to be a limited free trade agreement if there’s going to be a deal.
But you could see the areas of priority. So Europe will finalize its negotiating mandate by the end of the month. And then I expect the spring, March and April, to be dominated by fish, access to territorial waters, and financial services, right, because it’s—there’s a couple of things, right? For continental European countries, including Portugal, Spain, France, Belgium, the Netherlands, these fishing waters are very important. And it’s clearly something that, for the Brexiteers, the Boris Johnson government is incredibly important to show, listen, we’ve taken back control of our territorial waters. So they’re not going to buy into some EU quota system. Johnson himself has talked about licenses for everybody who enters waters and so on. So that’s something where I think they’re willing to compromise, right? I mean, the British side, that is. And as Leo Varadkar of Ireland has hinted at, well, financial services is something where, of course, Britain has great interest because they have a great surplus in financial services with the rest of Europe.
That being said, I think this is—what’s often being underestimated is also the desire of the city of London to be free of regulatory control from the rest of Europe. Many, many, many financial service businesses—banks, insurance companies—have set up their subsidiaries in the rest of Europe and they will get around this that way. So I mean, there’s been a couple of deadlines with, you know, hard-cliff edges where they’ve prepared for. So I think there the kind of idea that Britain will diverge financially and that they have to, Mark Carney, very reasonable sort of Canadian Bank of England governor, has spoken to that as well.
And then I think you’ll run up to the point in the summer where, you know, it’s up to the U.K. to ask an extension to the transition period and they won’t ask for one. And it’s not up to the EU to offer it, either. And then I think the reality will sink in: OK, we need to do this bare-bones straight deal by September/October, otherwise we’ll have this new sort of cliff edge. So that’s how I kind of see this play out.
But the priority will be for the U.K. to show that they’ve taken back control and have this, you know, bare-bones, limited trade agreement, not too much regulatory alignment, including control of immigration. And on the EU side, very much it will be about preserving the kind of unity of the single market.
BELLACK: And then, of course, at the same time they’re going to want to start talking to the United States. (Laughs.) Do you want to talk a little bit about that relationship? Obviously, there’s major concerns on the British side about access to the NHS market, about hormone-injected beef and chlorinated chicken. Do these make it very difficult in an election year to get very far on this? Where do you see things going?
SLOAT: Sure. Let me say a couple things about trade and then talk a little bit about the relationship more broadly.
Yes, the Conservative Party in their manifesto said that they intended to negotiate these free trade agreements at the same time. I believe they said they wanted 80 percent of their trade to be covered within three years by trade agreements with the U.S., Canada, Japan, and Australia. For all of the reasons that folks have been discussing so far, it’s already going to be an almost impossible task to get a comprehensive free trade deal done with the European Union, so the idea that you’re also going to negotiate a free trade agreement with the United States during the same time period I think is almost impossible. And this is on top of the fact that the U.K. hasn’t had to negotiate any trade agreements for the last forty years because they’ve been a member of the European Union. So for starters I think you’re going to have a bandwidth issue.
This has been disappointing news to the United States. I think Trump, Secretary Mnuchin, Secretary Pompeo all have been speaking in Davos, speaking in London recently, very keen to press forward with a trade agreement. But practically, I think it’s going to be difficult.
Second, I think it’s going to be hard for the U.K. to be able to do free trade agreements with the United States and other countries before the free trade agreement is done with the European Union. The U.K. simply cannot align in regulatory terms with more than one system, and so it is going to have to make some of these decisions about alignment, especially on things like environment and agriculture, with the EU before it has the bandwidth to negotiate with the U.S. and others.
Third, I think you’re absolutely right that there’s going to be very tough negotiations with the United States. Yes, Trump has been enthusiastic about a trade deal. Yes, the countries have a special relationship. But special relationship does not mean special deal. And as I think we’ve seen, Trump fancies himself a very tough trade negotiator. And it’s very clear from the U.S. side what they’re going to be looking for from the British side, and it’s going to be greater access to agriculture markets, including the much-discussed chlorinated chicken. There’s questions about genetically modified food and environmental standards. And then there’s also the question about access to pharmaceutical pricing within the National Health Service. So all of those things are going to be incredibly difficult.
Then, of course, we also have the issue of congressional ratification. A lot of unhappy noises especially coming out by congressional Republicans in the last couple of days after the British government’s Huawei decision. There’s been a lot of concern in Congress about the situation in Northern Ireland. So I don’t think it’s going to be an easy ride there, either.
BELLACK: Were you mentioning, too, that you felt like there was a misunderstanding on the U.S. side of Boris Johnson and what he’s about?
SLOAT: I do. I do. I think there’s been a tendency in Washington—I think particularly among some of the Republicans, but I think also more generally—about Boris Johnson. Yes, Boris Johnson and Donald Trump both have, you know, sort of animated blond hair. (Laughter.) They both have, shall we say, fairly populist styles of rhetoric that they have used in their campaigning. But they’re actually quite different types of politicians.
Donald Trump really is the quintessential outsider, whereas Boris Johnson really is the quintessential establishment figure. He went to Eton. He went to Oxford. He’s long been a member of the Conservative Party. And if you look at a lot of the policies he’s putting forward, they’re actually much closer with where the Democrats are in the United States. He’s moving away from the conservative focus on austerity in his domestic politics. He is moving towards more social spending. He wants to get Brexit done so he can start focusing on a lot more bread-and-butter issues domestically.
And if you look at where he is in foreign policy terms, he is again much more closely aligned with Europe than he is with Donald Trump. He’s been supportive of the Paris climate deal. He was a strong advocate of the JCPOA when he was foreign secretary and continues to be. The U.K. decision on Huawei last week is much more closely aligned with where the EU is and obviously not something the U.S. wanted. And he’s also closely aligned with the EU on this question of digital tax, which makes him potentially subject to automotive tariffs from the United States.
So, yes, Donald Trump was excited about Johnson. He shared his enthusiasm for Brexit. Both sides want a free trade deal. But I think beyond that, especially in foreign policy terms, we’re likely to see them in a very difficult or different place. And then the question for Johnson is, how much does he try and stay aligned in the name of maintaining the special relationship and getting a trade deal done? And how much does he, ironically, stay aligned with the union that he just left simply because they’re much more closely aligned philosophically?
ATKINSON: I think that you’re absolutely right. And Boris Johnson has been political savvy, again, in aligning on these big foreign policy issues with Europe. So he’s been signaling—it’s important to remember that Donald—President Trump is very unpopular in the U.K. across the board. It’s not a party/political thing. So the special relationship always has a tinge in the U.K. of, you know, are we—this happened with Tony Blair and George W. Bush; you know, is Blair being Bush’s poodle? And the whole idea of the U.K. sort of now doing what the U.S. wants, and what the U.S. wants under this president the people in the U.K. don’t particularly admire, would be counter to all of the independence and all the rest of it.
I think that a free trade agreement between the U.S. and the U.K. in 2020 is basically impossible unless people decide to sign a piece of paper and call it something when it isn’t really—doesn’t really address anything.
I also think it’s interesting what you were saying from London. I fully agree with you that these people in the government want to show and believe that they need to show divergence, but I don’t agree that that necessarily means the divergence will be from the kind of regulatory standards that actually are what’s important in trade today. Free trade doesn’t work in a place like the U.K., with the ties to Europe, unless you buy into a whole bunch of regulations—regulatory standards. And if—Boris Johnson has been pretty clever in making a big deal about the language, but also the flags going down, where you sit in the chair. He’s really presenting to the British people that, actually, Brexit has already happened; that the U.K. left on January the 31st. I think he wants them to get bored and not interested in the—in the minutiae of a trade negotiation. I agree that politically they won’t want to say, yes, we’re asking for a transition, but I think that if you call it something other than a transition and it basically amounts to allowing the regulatory systems to remain closely aligned in the areas where the U.K. is particularly dependent, then that may be something that is much more important.
So it does depend—yes, they want to deliver Brexit. But can they argue that they already delivered it, and that delivering the next piece will just be, you know, something that most people won’t be bothered to think about? Because, as you rightly point out, they would need to get—if they’re going to keep this parliamentary majority—and they don’t have to worry about that for a number of years, but nevertheless they really need to be doing something for the regions and something for the north. And killing the car industry, which is what separating from European regulations and standards would ultimately do, is not a way to help—to help those regions.
The numbers of people in Wales that are employed by Airbus is huge. So I think that maybe they know these things already, but they will be told them. And the prime minister, I think, will not want to irritate everybody that has just voted for him.
BELLACK: Mujtaba, do you want to jump in?
RAHMAN: If I could—yeah, maybe I could—maybe I could come in here with a few remarks because I think—you know, the—I think the view that you’ve just reflected in consistent with how I think people view phase one. So Boris ultimately conceded, he sticks a fiscal and regulatory body in the Irish Sea, does a deal, and then can take some of that to the way he now thinks about the second phase. So maybe Boris Johnson does align across different sectors and just pretends that he’s not, and nobody’s paying attention because of the symbolism around Brexit having been delivered. That deal has been done in the year. But that nobody pays attention, and he can actually ultimately be more sensible when it comes to the economy.
Again, I think I have a—I have a different—I have a different view. And there are lots of different data points that support the fact my view is different. I think number one I think we have to think about horizontal and vertical alignment differently, so that the kind of alignment that you’re talking about at the sector level perhaps is possible for the government, but the European Union is asking for alignment across a whole swath of horizontal issues—the labor market, social issues, environmental, and fiscal issues, tax, state aid. And on those questions the government I think is absolutely clear that outside the European Union it cannot be a long-term rule taker.
And, frankly, that is not a stable proposition or equilibrium for the Labour Party, even if a sensible individual like Keir Starmer, imagine becomes the leader of the Labor opposition. I cannot believe that long term the Labour opposition can settle on a proposition where the House of Commons is subordinate to decision-making in Brussels by the commission parliament and council. That is just not a stable equilibrium for the country. Long term, Europe will do something, we will disagree, the model will break. So I agree, at the sector level there might be a degree of alignment that the government is willing to concede, but on these horizontal questions—fiscal, social, labor, tax, state aid—I think the government is going to be incredibly tough now.
That does, of course, introduce headwinds to the economy. That’s why I would look to fiscal policy. I mean, there’s a great debate taking place now between Number 10 and the treasury over the role fiscal policy has to play to counteract some of the challenges to the deal the government I think in on the verge of—or is attempting to implement. But you know, those headwinds that that deal will introduce to the economy, I think there’s a conversation now about the role fiscal policy has to offset some of those headwinds. It’s a combination of capital investment, it’s a combination of loosening the day-to-day spending rules—that will be a conversation for the autumn—and the use of state aid as well, I think, which is precisely why the government is so nervous about aligning on this question of a level playing field, because they want to do more using microeconomic policy instruments to protect the sectors that are going to be hurt by virtue of the deal I think they’re going to implement.
BELLACK: Matthias, did you want to add to that?
MATTHIJS: Yeah. Actually, I mean, Mij took my main point. This is a government that’s very happily going to go with a very loose and fiscal and monetary policy combination that will offset some of the drama that may well play out in manufacturing. But also what you’ve seen in the manufacturing sector in the U.K. in just, I think, less than a year—it used to be close to 60 percent of their inputs came from the European markets. Today that’s close to 47-48 percent. So there is a decoupling going on. Whether they can go all the way to zero, that’s obvious they can’t. But I think this government, because it’s at the beginning of a five-year term, it, for Brexit, may be willing to take a bit of pain that they can upset fiscally and even through industrial policy, because that’s the big price.
BELLACK: Can I stick with you for a minute, just to talk about the ordinary people’s experience of Brexit. We hear a lot of people complaining about Brexhaustion and saying that they want to move on. But at the same time, the labels of levers and remainers have been such a central part of people’s identity for the past three and a half years. Do you see people letting go of those identities, reverting to more traditional ways of thinking of themselves—coming together, healing? Or does that tribalism persist?
MATTHIJS: Yeah. I mean, that’s been the remarkable think about British politics, is that the party political identification has become a lot weaker and the Brexit leaver identification is stronger. It really—I mean, I hate to give you the economist answer, but the answer is it depends. It depends what this government does, right? If Boris Johnson, as some fear, ends up being Thatcherite two, the sequel, then you’re going to only strengthen these views, right? And you’re going to have a lot of discouraged leavers that voted for—after thirty-forty years—always voted Labour, now voted Tory, changed their minds.
But I do think, and Amanda pointed it out very eloquently, that Trump is a very different politician—sorry. Johnson is a very different politician from Trump, right? He is—I mean, if you looked at it, I mean, he’s much closer to Mike Bloomberg, in the end, from that point of view. He was mayor of London. He was a very progressive mayor. He’s willing to—he’s not fiscally restrained from that point of view. So I mean, there is—the optimist in me thinks there is a real opportunity here to address some of these, you know, imbalances—the north-south divide, the rural-urban divide, the young-old divide—with massive investments, right? Of course, they could have done this within the European Union. We all—we all know this.
But it really will depend on what Johnson does. And it seems to me a guy like Dominic Cummings being at the heart of Number 10 very much thinks along these lines. So I mean, my hope is that it will heal, but I worry that it may not end up being that way.
ATKINSON: Can I just say that I—we’re ignoring a little bit what is Europe going to do. And you raised this, about the horizontal versus vertical, which I think is right and interesting. But Europe has also suffered from Britain leaving, and that can go different ways. It can go towards, well, good riddance—(laughs)—as the—you know, there was a mistake when the Croatian ambassador said good riddance meaning—thinking that it meant good luck. (Laughter.) In her final meeting with the U.K. ambassador. (Laughter.) So there could be some genuine good riddance feelings. But I think there will also be—and particularly in Germany and mainly in northern Europe—they will not have that voice from the U.K. that is anti-too much regulation and so on.
But Germany is facing a transition with Merkel coming to the end of her term. I think it’s quite unpredictable which way that will go, maybe, again, towards more fiscal loosening, the Greens, and so on. But will Europe and Brussels allow a fudge? Will they allow the U.K. to remain connected so that the economic ties, and to some extent the political ties as you were pointing out, can remain real? Or will they be trying to show that they don’t need the U.K. either? And I think that that will also depend—because no amount of fiscal stimulus—I agree with you, there will be fiscal stimulus, just as, actually, President Trump is doing here. But that can’t replace, I don’t think, dying industries in the middle of the country, the north of the country, the west in Wales. And even on fish, you know, 80 percent of the fish that the British catch they sell to Europe. So they can’t turn on a dime and sell that somewhere else. They need to reach a deal—
RAHMAN: Perhaps can I—
ATKINS: Go ahead. (Laughter.) We’ve been opponents.
RAHMAN: To reframe the question, Boris Johnson has sacrificed the integrity of the union to deliver Brexit for Great Britain. I mean, Northern Ireland de facto remains a satellite of the European Union. And Boris Johnson thought that was a price worth paying to deliver Brexit for England, Scotland, and Wales. So it is inconceivable to me that having sacrificed the integrity of the union he will now subject England, Scotland and Wales to long-term rule-taking from the European Union. And that is the price for market access.
Now, in no state of the world do we remain status quo. When the transition ends, we leave the customs union and the single market. So there will be friction. Certainly regulatory—there will be new regulatory barriers to trade. The question is, not status quo, it’s how inferior things are going to get from where we are today. And, as I say, if we want slightly easier access to the single market, then Boris Johnson has to subject England, Scotland, and Wales to long-term rule-taking. And having sacrificed Northern Ireland to deliver the benefits of Brexit—trade sovereignty and all the rest—I just can’t see him doing it.
And, again, you know, I’m always taken aback by how consistent and how strongly the principals at the top of this government believe in this message. This is about democracy and sovereignty. It’s not about the economics. And if we think the economics is going to force a softening, as I say, I think, you know, our very specific guidance to our clients is this is a narrow trade agreement that will not prioritize economics.
Just one other point I think is very important on this—on this level playing field and question of alignment. We’re not going to become a banana republic. Boris Johnson will remain continental in the way he thinks about standards, I think, the labor market, environment. The problem is less the substance and more the codification of any agreement that’s been upheld in the European Union. That’s the problem. You know, I think the government is clear. We’re not going to go backward.
So, you know, what we call non-regression will—that will be the baseline for our relationship with the European Union. We won’t go back from where we are today. But how do you codify that agreement? Because as soon as you put that into a treaty, the European Union will say, well, you’re in EU framework. And that creates a role in the context of the ECB. And that’s very clearly what Barnier said when he produced the draft mandate earlier this week. And that’s a big problem for the government as well.
BELLACK: So I want to—
ATKINSON: I completely agree. But that’s a political problem. That is fundamentally a political problem. And that’s why I say it will be interesting to see, is Europe willing—and maybe they won’t be willing—but are they willing to come up with a fudge of a kind that is acceptable. And maybe I’m more cynical than you, but I believe that Boris Johnson was very keen to be prime minister, and he’s very keen to be a successful prime minister. And that means not losing all those seats. In a way, it does depend also on economics. And you’re right that this is a very weird kind of trade discussion, because normally you have negotiations about how to converge. This is one where you’re already converged, and the negotiation is about how much divergence do you either allow or insist upon. And I think that the more the divergence can be of the headlines, of the symbolic issues, the less the divergence needs to be and will be about the kinds of things that in today’s globalized world actually facilitate trade. But it could be that they all screw up. (Laughs.)
BELLACK: That’s a very good point. I want to open—
RAHMAN: (Inaudible)—the environment. (Inaudible)—the environment, fiscal policy, these are—these are not symbolic questions.
BELLACK: I want to open up—hold on, Mij—
ATKINSON: Fiscal policy is not an issue.
BELLACK: We want to open this up. I just want to pause for one more minute to talk about the union for a second. Amanda, you’ve done a lot of work on Scotland, Northern Ireland. We already have the SNP already reiterating its calls for another independence referendum. It’s unclear what the picture’s going to look like in Northern Ireland with some sort or border checks in the Irish Sea. Sinn Féin gaining strength, the DUP having lost its kingmaker status. Can you just talk a minute? And then I’d like to open up for questions.
SLOAT: Sure. I think I’m the only non-economist on this panel, so I will let the fight out the fiscal policy questions. But let me say a few things on Scotland and Northern Ireland, because I think when we talk about the polarization within the country between the leavers and the remainers, one of the big sources of polarization is what’s happening in Scotland and Northern Ireland. And it is possible within ten years that one of the consequences of Brexit is the dissolution of the constitutional unity of the United Kingdom.
So let me take Scotland first. In Scotland, 62 percent of people voted in the Brexit referendum to remain in the European Union. So an overwhelming majority of people there that wanted to stay and have grown increasingly frustrated with what’s been happening with Brexit. Earlier this year Nicola Sturgeon, the first minister of Scotland, went to Boris Johnson, asked to hold a second independence referendum, was told no. Last week the Scottish Parliament passed a motion again calling for a second referendum. And she marked Brexit day by setting out her vision on how this goes forward.
Scotland had an independence referendum in 2014. It narrowly lost. The argument that the SNP would make, with some justification, is that there has been a material change in circumstances following Brexit that makes it worth looking at this question again. Boris Johnson, not interested in looking at this right now, but I think that call is going to grow. There’s elections to the Scottish Parliament in 2021. If the SNP does well, they have the vast majority of seats coming out of the December elections, you’re going to continue to see those calls grow.
Two things worth noting on there. One is, there’s something known as the Sewel convention, which is non-legally binding, but it is a political convention that says that if the Westminster Parliament is legislating on issues that affect the devolved assemblies in Scotland, Northern Ireland, and Wales, they get a confirmatory vote. All three of those regional assemblies voted against Johnson’s withdrawal agreement bill. And the government chose to ignore it and go forward. So you already have a certain amount of constitutional tension there.
Second, when those assemblies were set up in 1999, especially in Scotland, the way the Scotland Act was written said that all things not reserved to Westminster—which was a very narrow set of things, somewhat similar to the federal system we have here—in terms of trade, national defense, taxation, everything else was devolved to Scotland and the other assemblies. A lot of those powers that were dissolved were actually largely within the competence of the European Union, things like agriculture, fishing, and environment. So with those policy competences now coming back to the U.K., there’s going to be a scramble for power between the devolved assemblies and London in terms of who has primary jurisdiction over those, with the U.K. not surprisingly saying we can’t have different agriculture policies in different parts of the country and the Scots not surprisingly say this is a big power grab—this is powers that we’ve had for the last twenty years you can’t take back.
Notably, there was also three opinion polls that came out within the last five days that have shown support for independence over 50 percent. So I think as Brexit plays out, and especially if it plays out badly, you are going to see continued calls from Scotland for an independence referendum. Unlike Catalonia, the Scots want to do this within the framework of a constitutional arrangement. They don’t want to do a rogue referendum. But that political pressure is going to be there.
Second, to say a brief word on Northern Ireland, the Northern Ireland assembly, one good thing that happened a couple weeks ago was the assembly was stood back up. Northern Ireland had been without a government for three years. And even though the assembly fell apart for domestic political reasons, it really risked being a big casualty of Brexit, that one of the key components of the Good Friday Agreement was not there. That said, the way the Irish protocol came through in the withdrawal agreement deal is that Northern Ireland, even though it is staying part of the U.K. customs union, essentially is going to follow EU customs and VAT rules. So when we talk about the degree to which the U.K. is going to deviate from the European Union, the more mainland Great Britain deviates from the EU, the more Northern Ireland is going to deviate from the rest of Great Britain.
And you’re already seeing differences politically in this interpretation. Boris Johnson has said emphatically that there are not going to be checks east-west over the Irish Sea between goods crossing in that direction. Michel Barnier, the Brexit negotiator, says that is categorically false and if you simply read the agreement there have to be checks there. So that’s going to be another area of tension that potentially is going to have long-term political consequences. We’re seeing Sinn Féin gaining strength in the Irish election, which are going to be happening in the next couple of days, and already increasing talk about potentially having a border poll in Northern Ireland to look at this question of unification of Northern Ireland with the Republic.
BELLACK: All right. So at this time I would like to open it up to members to join our conversation with their questions. A reminder that this meeting is on the record. Please wait for the microphone and speak directly into it, identify yourself and your affiliation, and please limit yourself to one question and keep it concise. We’ll keep our answers concise, too, so that we can allow as many people as possible to ask questions.
In the center.
Q: Bill Drozdiak, McLarty Associates.
I’d like to hear the panel speak more about where they see the future course of continental Europe going now that Britain is leaving. Do you think it’s plausible that the other—the twenty-seven member states will rally behind President Macron’s call for a more integrated set of polices to unite Europe? Or are we likely to see the current splits between north-south and east-west Europe continue to grow and lead to the increasing fragmentation of the continent?
BELLACK: Caroline, do you want to?
ATKINSON: Well, that is a huge question. Optimistically, I hope that they—that Europe will manage to overcome some of those differences. The best chance for that, I think, is that in Germany there are already stresses arising from the economy and globalization and so on, and failure to keep up with technology in the auto industry. So I think that the kind of hardline German view, which has solidified some of the north-south divide and refusal to integrate on fiscal policy, may change in the future, and that that will help to hold the union together.
I think it will always be difficult for Europe—as our colleague from London was saying, there is so much work to do all the stuff of the regulations and so on it’s always, I think, going to be hard for Europe really to have a big global voice. And France is the natural country to be leading that, but they also have a lot of domestic issues.
So my hope is that Europe does remain strong, I think, and becomes stronger. But I think there’s a lot of—that will require a lot of skillful management, including skillful management of these issues we’ve been discussing. Because we’ve been talking about the economic costs for the U.K.; there are also economic costs for Europe if there is a tearing apart in a rapid way of that economic fabric.
BELLACK: Matthias, did you want to—
MATTHIJS: Just quickly, Bill, most of the problems of Europe were not caused by the U.K., right, and the U.K. was not blocking eurozone reform. They were not the problem in the migration crisis. They were not the problem in Hungary and Poland backsliding, right? So I—call me more pessimistic. When I—when I see the future of continental Europe, I think they’ve been remarkably united when it comes to dealing with Brexit and I expect them to remain that way. But when it comes to the big issues Europe is facing, I mean, I think you have three fundamentally different views in Berlin, Rome, and Paris today. And I agree with you: If the German government switches to a Green-CDU government following the Austrian example that we see, there could be real movement there that I think you’ll need towards more solidarity, especially on the fiscal side in Europe.
SLOAT: I think I would also put myself on the slightly pessimistic side. I mean, I think there is going to be a period of realignment. I mean, you’ve had the three big countries—with the U.K., France, and Germany—making a lot of these decisions. Now, with the U.K. out, there’s going to be questions about how some of these other countries try and align around that. Certainly, there is an increasing call within the EU for strategic autonomy, some of that vis-à-vis what they’re seeing here in Washington. If we have a second Trump term, I think that is going to continue to grow and there is going to be that continued push to try and have greater cohesion on the EU side.
But I think you’re right that with the financial crisis, with the migration crisis, we’ve seen an increasing split between north and south. We have some of the questions about what’s happening democratically in Central and Eastern Europe. And so I think there’s a political desire to have greater cohesion in Europe, but I think there’s also a lot of countervailing forces that are going to make that difficult.
MATTHIJS: And less money. The British paid net $8 billion into the budget, and that’s going to be gone.
BELLACK: Down in front here.
RAHMAN: If I could say—if I could, sorry, just very quickly come in and say that I think there’s one reason to be very positive about the future of the European Union and one reason to be quite negative.
The positive reason, from my perspective, is what’s happening in France. We have a very young leader with lots of agency, Emmanuel Macron. If you look at the performance of Le Pen in European elections last year, it’s clear she’s not growing name recognition in parts of the country. She would need to do that in order to win in 2022. So I think you can say with a fairly high degree of conviction Macron will win the election in 2022, probably with a slightly smaller majority. But that means you have a leader who’s young, liberal, pro-European, you know, smart. People say he—you know, Macron is his own sherpa. He understands economics. And he’s really, I think, looking to reframe and reposition Europe’s role in the world, and I think Macron will be in a position to play that role through to 2027.
In Germany, I think the government is essentially going to remain intact but be weak. They have the presidency in the second half of the year. Both the Social Democrats and the CDU are very concerned about the government falling apart when Germany’s going to have a leadership role in Europe. So I think the government will be weak, inward-looking. I don’t think Merkel will have much agency. So look to France for big leadership signals from the EU, I think, over the course of the next few years.
The big negative is Italy. That’s the euro area’s single most important sleeping risk. There is no good formula for Italian growth in the euro area. Nobody has an answer to that question. And the reason that’s a problem is I think if you look at the trajectory of Italian politics, at some point it’s highly likely Salvini, the demagogic leader of the Northern League, will become the prime minister. Probably not this year; maybe next or the one after. But there is a—there is a fundamental question there, I think, about Italy’s membership in the euro over the longer term that will require resolution. So that’s the reason to be a bit negative, I think.
BELLACK: Thank you.
All right, in front right here.
Q: Thank you. Diana Negroponte from the Wilson Center.
In the face of pressure from the United States on taxation and breakup of IT, do we anticipate London staying with Brussels for an aligned position or do we see fragmentation?
ATKINSON: On the digital taxation, well, probably Mij from London will have a sense of that. The optimistic view would be that there is—that the work on aligning on taxation and the BEPS—you know, the base erosion and profit shifting—push will succeed. It can’t be just aimed at technology companies. It needs to be broader than that. And so the question is whether that is—that is possible.
I don’t—if I understand your question correctly, I don’t expect the U.S. to sort of give up on protection of American tech companies unless there is a sort of quid pro quo that all multinationals are involved in, you know, some tax deal. But it’s politically very popular—maybe not quite as popular in the U.K. as it is in France, but a digital tax really—you know, I worked for a while at Google, and going to Europe you realize how much they hate American tech and they believe strongly that they are being cheated by it. They don’t sort of see the advantages that maybe we can see, that it’s great to be able to Google something, but. (Laughs.)
BELLACK: But Europe itself has not been aligned on that decision, right? France had to kind of go its own way. And although many of them are discussing similar things, they were not able to come together on it yet.
ATKINSON: Right, and that’s partly because Germany realizes their own—their own vulnerability because they’re a big exporting nation. And if you really switched all of the taxation around to coming from where the consumers are rather than the producers, that would also lose Germany a bunch of tax. What we need is an international agreement.
BELLACK: All right. Just right there.
Q: Avis Bohlen, retired State Department.
I’d be interested in the panel’s view on what kind of an agreement the EU wants. Is it—is it trade lite or a comprehensive agreement? And also what they think is possible. Thank you.
MATTHIJS: I think the simple answer is, is that ship has sailed. I mean, what—(laughs)—the ideal outcome for the EU would have been the U.K. staying in the single market and in the customs union and leaving, and then they would be complete rule taker and they’d pay into the budget and they wouldn’t be so annoying around the table when it comes to making decisions.
I don’t think that’s going to happen. I think it’s sunk in amongst Michel Barnier, as least, that it’s going to have to be a minimal free trade deal. But they want as close as possible alignment, right, and that’s where the tradeoff—the tradeoff is going to be.
RAHMAN: I would agree with Matthias. I think strategically in phase two, certainly in Berlin but other member states as well, they really want to keep the U.K. close, and I think are very worried about a U.K. that not only becomes a competitor on Europe’s doorstep but, you know, what does that mean for Europe’s agency on things like foreign policy, military policy, defense, things like that. But it can’t come at the expense of the single market. So if Boris Johnson wants a zero-quota, zero-tariff deal, which he claims to want, that will come with a fairly substantial ask on the level playing field. That means dynamic alignment on state aid. It mean non-regression on the environment. It means codifying that in a legal treaty that could potentially create a role for the ECJ. Difficult to do, I think, for this administration for the reasons I’ve said.
ATKINSON: In a weird way, the last is I think the hardest, the—maybe on both sides. I think the codification and especially the ECJ, I agree with you, that would be extremely hard.
The substance I don’t think would be so hard to negotiate because it’s more—the symbols are very, very important here on both sides maybe. So I’m not sure if the Europeans will be able to bring themselves to have a sort of fuzzier kind of arrangement.
RAHMAN: I think it’s interesting. I was in—sorry, very quickly—I was in Brussels last week and I was speaking to the EU’s top trade official, and she said to me I’m not going to do Brexit; I’m going to delegate that to my team. I’m doing U.S. and China and the WTO. So I think we also have to think about Europe’s strategic priorities in light of this agenda Amanda was talking about around strategic autonomy.
The EU has bigger fish to fry. Brexit is an annoyance for Europe. It’s a problem that has to be managed, and it’s about damage limitation. You know, the big agenda for Europe this year is the Green Deal, getting a deal on the EU budget, dealing with the Italy risk, you know, being technologically solvent. And these are big initiatives. It’s not about Brexit. That’s not where their priorities are.
Q: Hi. Jennifer Hillman from the Council on Foreign Relations.
So we’ve talked a lot about regulatory alignment, and what that’s going to mean, and whether we’re going to really get there. But for me, when you think about that, that largely comes down to the people and the institutions that both write the rules, and then administer and enforce them.
So I guess I have two questions. One is, how far along is the U.K. at replicating all of the agencies that are going to need to be doing this? I mean, you think about it: OK, we’re withdrawing from Euratom, all right? Well, that’s where all of the inspector of nuclear power plants reside. Forty percent of the power in the U.K. is nuclear. Right now there are no nuclear power plant inspectors in the U.K. They’re all coming from Euratom. How far are we at recreating all of the many regulatory agencies? I taught a class at Georgetown Law. We came up with ninety-six of them. How far along are we at the U.K. getting the human beings that are going to be writing and implementing and administering those regulations?
And then second question is, having worked a little bit on the TTIP issue, the view, I think, at the end of the day in the United States was that if you are going to actually have regulatory sort of alignment, convergence, et cetera, it really does mean populating each other’s regulatory agencies at least with an observer, or an ombudsman, or somebody that is literally housed within the key regulatory agencies to make sure that you know beforehand whether you’re about to go on a divergent path. Any hope of that between the U.K. and the EU?
BELLACK: Before you jump in I just—Jennifer was on the panel almost two years ago here, right, and at that point we were talking about, well, the U.K. and EU are going to have eighteen months to get this done in the transition period; there’s no way they can get it done in eighteen months. And now we’re talking about eleven months, so. (Laughs.)
SLOAT: I mean I may have a better sense on some of the details on London. I mean, in terms of the personnel, there’s apparently twenty-five thousand civil servants in Whitehall who are working exclusively on Brexit, which is more than the smallest six Whitehall departments combined. And that number has steadily increased since 2018. So the personnel is there, but it’s not clear how far along they’ve come yet in terms of implementing all of this. And of course, DExEU, which had been doing a lot of the Brexit negotiations, is being closed down and a lot of those people are being repurposed as well.
ATKINSON: But they may not be nuclear experts, for example, or financial regulation experts, or food-safety experts, or many others. So I think you raise a very good—you know, a very good point.
MATTHIJS: I think that’s the reason why you can see the pragmatic Boris Johnson come in in September and basically say, OK, let’s have thousands of mini transitions—they’ll come up with a new term for it—that on every single area they’ll say, well, we’ll pay a little bit to be part of the EU for just a little bit longer on that specific thing and so on. They’ll say it’s because we choose to and because it takes us a bit longer to set up our own agencies and so on.
But I mean, I would expect—I mean, you see this with Switzerland, with Norway, right, with—I mean, there are many areas where taking back control doesn’t matter all that much, right? There’s these—I mean, you’re right, there’s these big symbolic things where you have to show, look, now Westminster is back in charge of this and we chose this. And I think there will be even things where they say we want higher standards than the EU on certain things. I mean, that’s a key thing Boris Johnson likes to talk about as well. But it’s too early to tell for that. And they’re nowhere near to where they would have to be. And this is forty-five years of kind of convergence on one thing and on sending British people to the EU, and many of them are staying in these institutions, and they became Belgian or French citizen(s). They’re all dual citizens now, right? Good for them. (Laughter.)
BELLACK: So we have about five more minutes. We can take a couple more questions. All right. Exhausted everything.
ATKINSON: I thought Carla had a question.
Well, in the absence of questions, I would quite like to ask people their views, but I also think that is there a way to marry the strong view from Eurasia, which that Boris Johnson and the rest of his Cabinet is very clear that they want to show that this is a change and different and it’s about democracy and so on. I can believe all of that as part of what gets talked about. I guess what I’m less clear about is, does that really mean that the U.K. believes that it can be alone? Because in today’s world it’s actually not very—you can have democracy, of course, but that doesn’t mean that you’re an autarky. You still need to trade, and the U.K. has always been this big international, globalist nation. And if it starts off very close with a lot of countries, is it really going to find it in its interests to move away?
I think there will be more attraction to—I agree with you about the sacrifice, if you like, of Northern Ireland. That was just—you know, that was Boris Johnson being very—being pragmatic and also not—and you could say being cynical or something, not needing—thinking in the end I’m—what I really want to do is get elected with a proper majority, and I don’t want to be told what to do by these ten or eleven or whatever they were DUP MPs. And there’s always a little bit of, you know, despising in the U.K. or in Great Britain of Ireland. So I can see that drift happening. But I don’t feel that that is the kind of—that that shows the determination to strike out alone. I think it shows the determination to get political control and become the ruling government of—at Westminster.
Then what you do with that, I—
RAHMAN: I would very much agree. I think—I think—I very much agree with that view. I think, you know, the question, really, is where we are in the fourth quarter of this year. Where is the economy? Where is the market? You know, you saw at one point 4 percent drop against the U.S. dollar yesterday on the back of an announcement Boris made which was fully expected by most people that are following the story closely. And yet, the market adjusted and sterling adjusted in a very negative way, which suggests if the government continues on this path financial markets will at some point continue to get more negative because they are clearly of the expectation the government will soften at some point.
I think it’s the Q4 question. It will happen very, very late in the day. If the government does concede more ground on this question of alignment, it will do it at the very end of the process, not before. So at the least it suggests we do have a very bumpy year, one where the government philosophically prioritizes this divergence. It may not be where we fully end up, but that will be the philosophical approach of the government through the first—through the second phase, I think.
MATTHIJS: Yeah, one more—one more comment. I mean, my one defense of the Brexit cause is that if—and this is late, very recent research I’ve been doing with Craig Parsons at Oregon—is if you compare the EU’s economic authority over its member states, it actually goes quite a bit further in both single-market authority and fiscal affairs than Washington has over the United States, than Ottawa has in Canada, and then Canberra has in Australia. And so that’s quite remarkable, I think.
And think about public procurement, where, you know, there’s kind of a level playing field, which there isn’t in the United States. Think of services, where there’s complete alignment. Think of state aid and fiscal affairs. I mean, the idea that Texas, before it passes a budget, would have to send it to a D.C. bureaucrat to be approved here before they send it back, which is basically what happened to Italy, I mean, that’s unthinkable in the United States, right? So from the point of view where Brexiteers are saying this is not the kind of union that we thought we’d joined in the 1970s, I mean, they’re absolutely right.
Of course, they were part of making the single market and they stayed out of the euro. So the single market is very much their own creation, and now they don’t like the rules because they want to kind of, you know, diverge on certain things. And that’s true for Labour as well as for Tories. But it’s something to keep in mind as, you know, you see these cases, the Canada beer case where you can’t sell alcohol across state—provincial borders and things like this. I mean, there’s quite a bit of regulation even within liberal federations like the United States, Canada, and Australia, where I think the EU probably went a little bit too far in believing that this was necessary to make a single market work.
SLOAT: And can I just—thirty seconds. I did my Ph.D. in Scotland. I moved to Belfast a week before 9/11 and then lived there for three years. I agree that Boris Johnson made a political calculation that Northern Ireland was a price worth paying to deliver Brexit, but there are real-world consequences to that decision. The constitutional question is back in Northern Ireland in a way that it has not been in the over twenty years since the Good Friday Agreement was delivered and that the region finally started moving in the right direction. And so I think these constitutional debates in Scotland and Northern Ireland are going to be worth watching because it is very possible that Brexit is not simply affecting one union, but has a long-term impact on the unity of a second.
BELLACK: And that brings us to our exit deadline. So I’d like to thank Caroline, Matthias, Amanda, and Mujtaba—thank you all—and to Sam for bringing us together today. Thank you. (Applause.)