Confused about what Brexit actually means and how it will impact you? This month, STAND’s Brexit Series will help you understand how we got in this situation, what the proposed deal contains, where the negotiations are at now, and how a no-deal will impact Ireland, the UK and more widely the EU. If you missed the first piece, no worries, it’s here.

 

This second article will give you an insight of the European Union’s perspective on Brexit.

 

A quick update: Where are we now? 

At the beginning of the month, Prime Minister Boris Johnson wrote a letter to Jean-Claude Juncker, President of the European Commission, suggesting a new Protocol on Northern Ireland and Ireland. In fact, Johnson did everything he could to keep its proposal secret. Unfortunately for him, but not for democracy, the EU wanting transparent negotiations, secrecy was off the table. Some might read this as PM Jonson’s admission of weakness.

After insisting on the “very little time left to negotiate”, he developed what he called a “fair and reasonable compromise”: the “two borders, four years” proposal. The idea is that Northern Ireland would leave the European customs union (the tariff-free trading area), but would keep following the Union’s single market rules (safety standards for all goods, including food) which are the most complex to check. It is nicknamed a “two borders” deal because there would be a border on the Irish island for customs, and another in the Irish sea to monitor single market rules. This proposal to create two borders where there is none so far is a way of multiplying the problems. The reason of existence of that proposal is clearly due to the DUP (even though the party doesn’t hold the majority in Northern Ireland).

If this proposal should be accepted by the Union, it would start to apply at the end of the transition period. But first of all, Northern Ireland’s assembly would have to give its consent, initially in 2021, then every four years. If the assembly, which has not met since early 2017, contests the deal, it would know that this would bring hard border back. Two lectures of the deal exist. On one hand, as Northern Ireland’s Assembly does not meet anymore, it won’t be able to use its veto and the proposal will be granted anyway. On the other hand, you can read into it that this proposal could be the only reason for them to meet again.

Brussels and Dublin see this offer as relying on vague promises. Indeed, PM Johnson gives no clear answer on where the checkpoints would be and how the control would be organised, putting close cooperation between British and Irish authorities forward. European countries agreed that this deal “does not provide a basis for concluding an agreement”. 

Yet, Thursday’s meeting between Taoiseach Varadkar and PM Johnson shows that negotiation may not be dead (or not as dead as we thought). This common statement stays really ambiguous, and the situation was never that uncertain. But a deal seems now possible to reach as “promising signals” have been sent according to Donald Tusk, the President of the European Council. Yesterday, Michel Barnier and Brexit Secretary Steve Barclay held a two-hour meeting, said to have been “constructive”. We’ll see if there is a deal on the table for the EU heads of government summit, taking place on the 17th and 18th October. If so, many European countries would be looking for the Irish approval before giving their own. If Ireland goes along with the deal, then it would most likely be voted. We could even reach unanimity. 

 

A bit of economy: How will Brexit impact the EU’s economy?

The outcome of Brexit is not yet known. Various scenarios are still plausible. So far, it’s down to a deal or a no-deal Brexit. The first scenario would imply a soft Brexit (in case of an agreement leading to a close relationship between the UK and the EU), a hard Brexit (in case of a deal leading to a distant relationship), or an in-between. In the second scenario, Brexit will definitely be hard but might be orderly. The EU-UK trade relationship would fall back on the World Trade Organisation’s (WTO) regime, without any major disruptions on the markets. All member states of this global body for international trade give the organisation a list stating the trade tariffs and quotas they seek to impose on any other member state. Therefore, in a WTO scenario, the UK would have to follow the restriction list submitted by the EU. 

According to Johnson’s letter to Juncker, the UK is asking for a Free Trade Agreement (FTA) with the EU, very much alike the CETA, the comprehensive trade agreement between the EU and Canada. If this should happen, we would face a deal Brexit, but it’d still be a hard Brexit since the UK would be out of both the customs union and the single market. But, surely, any agreement would reduce the barriers inherent to the WTO regime and be more profitable for both parties.

The EU’s trade partners will suffer some loss on account of Brexit, but nothing in comparison to the UK itself. Actually, the EU’s main source of economic loss due to Brexit should be trade (and not the loss of the British contribution to the European budget), in the short as well as in the long term, in both deal and no-deal scenarios. On the contrary, the UK’s economy will endure some tough deprivations losing international investments (including from the Foreign Direct Investment, FDI), as banks and companies which want to operate at a European level will relocate their activity to the continent. UK will also miss high-profile workers coming from the Union. 

Post-Brexit, the Union’s GDP could be between 0,3 and 1,5% inferior than without Brexit. It doesn’t convey that the Union will face this concrete loss, but the EU’s GDP won’t be as high as if there was no Brexit. Most national European GDP should be less impacted than the EU’s. The main economic victims of Brexit are expected to be Ireland, Cyprus and Malta (due to the importance of trade from these former British colonies with the UK), the Benelux States (Belgium, Netherlands and Luxembourg), and Denmark. Unfortunately, Ireland’s economic losses from Brexit are presumed to be worse than the UK’s, whatever Brexit option is followed, even with an FTA.

In the eventuality of a no-deal, the value of the GBP compared to the euro or US Dollar prices would drop in the short term. Yet, it is difficult to predict whether it would be bad news for the UK or EU’s economy. All we know so far is that the 8,5% depreciation suffered by the GBP in June 2016 helped the competitiveness of UK export companies but was hardly counterbalanced by the rise of import costs, affecting both import companies and consumers. 

Brexit consequences on wages and unemployment would depend on each member state’s policies. If struggling because of the Brexit, companies shouldn’t impact their misfortune directly on the wages. They’d presumably abandon raises or reduce the number of working hours of their employees. Even if employment losses are expected, no unemployment boom is likely to happen. The employment market is under the influence of many other various events, such as Trump’s protectionism policy for example. 

 

A bit of geopolitics: What will be the consequences on borders within the EU?

From a European perspective, the border issue caused by Brexit is firstly a safety issue. When talking about the Irish border, the EU is well aware of the island’s history and aspire to avoid a renewal of tensions. The Union holds the same concerns regarding the (former) dispute about Gibraltar’s sovereignty. 

Border is also synonym of trade control, meaning the great come back of checkpoints, queues, etc. Moreover, it brings restrictions on the number of products that can travel, including what you carry with you in your car. 

Even if the Eire-Ulster’s trade is not such a big deal in comparison with the UK-EU’s trade (5 billions GBP against 600 billions GBP), this should impact Northern Ireland’s economy (more than the Irish economy). As suggested by PM Johnson earlier this month, a “double border” could be implemented. This would make Northern Ireland an ideal place for (frauds in) trade. The UK would most certainly mainly trade with the EU through the North. 

The situation in Gibraltar, a British territory located in the South of Spain who voted massively to remain in the EU in 2016 (about 92%), also needs to be settled. The 1,2km Spanish-British border issue was sorted in the third Protocol of the draft agreement, but not without raising the anger of Spain first. The accord reached in 2018 should remain applicable in case of Brexit with a deal. The UK and Spain will have to reach a specific agreement on Gibraltar’s status by the end of the transition period. 

The come-back of the immaterial border of Britain will also have some repercussions. Long queues are to be expected on motorways around harbour cities, such as Dover in the UK or Rotterdam, Zeebrugge, Oostende, Calais on the continent. 

 

A bit of solidarity: why is the EU behind Ireland?

The EU immediately took Ireland’s side as one man. There was kind of a “club reflex”. The UK chose to leave and create difficulties, not Ireland. The Union protects one of its own, victim of a situation it didn’t choose. That is for sure the main thing. However, the EU is also afraid that Ireland would fly solo and reach a bilateral agreement with the UK, putting the EU in difficulty. 

So basically, the Union’s support is based on two reasons: first, Ireland is one of the EU members and therefore is entitled to solidarity; second, if Ireland should be a UK’s privileged partner it would be damaging for the EU. 

 

 

Based on interviews with Patrick Bisciari, economist at the National Bank of Belgium, and Marianne Dony, professeur ordinaire at the Université Libre de Bruxelles.

 

 

Photo by Dunk on Flickr.

 

 

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