As the battle of Brexit enters its twentieth month – six times longer than the Battle of Britain so far – the latest front is a war of words over the trade in goods. People who were previously largely unaware of how goods were traded in the EU are now ferocious champions for or against the Customs Union. Or is it a customs union? They can’t always remember, but they know they’re as mad as hell.
The trade in goods is important. But it makes up only about 20 per cent of the British economy. It’s also an area where over the years the EU has succeeded in developing an integrated market and supply chain. Disentangling ourselves from it was therefore always going to be very hard – as British manufacturers knew and politicians are discovering. So the short-term costs of leaving the current system are going to be high against an unknown pay-back over the longer term.
It is also the case that British manufacturers who want to carry on selling into European markets are going to carry on following European standards and rules, come what may. Some of this argument seems theoretical rather than practical. And looming over the whole debate, the question that won’t go away: how do you resolve the question of the Irish border if you don’t have regulatory alignment with some certainty that common rules can be enforced?
Instead of fighting to the death over goods, perhaps it is services, which make up 80 per cent of our economy, where we should be concentrating our effort. Here, we really are world leaders. And the single market for services is less well-integrated. So a decision to go our own way on rule-making, although not without real cost for some businesses and economic loss for the country, would be easier to achieve.
But first, we need some honesty from the government. The reason we have the saying “he is trying to have his cake and eat it” is because we know it is physically impossible both to eat your cake and still have it after you have eaten it. So, to state what should be obvious by now, we are simply not going to be able both to be in the Single Market and free to make our own rules where we want to.
It is not just European theology, or legalistic minds which will prevent us from converging where it suits us to have continuity and diverging where we want to be more competitive. It is economics. Why would the EU make it easy for us both to manage a transition smoothly and then take more business from them? They won’t. And we need to stop pretending they will.
The more we ask for things that are impossible to give, the worse the political dynamic of the negotiation becomes, and the smaller the scope for real compromise.
However we try to dress it up, at bottom there is a choice. A choice between continuity of market access and being a rule taker, or being free to set our own rules to shape the long-term success of the most important part of our economy, but recognising that it will have a short-term price.
During the referendum one of the reasons I voted Remain was that I thought it would make no sense for a service-based economy like ours to be bound by rules over which we had no influence. Now we have voted to leave, for me the same logic holds. Or actually, the logic is even stronger, because the act of Brexit is itself changing the dynamic in Europe. Contrary to one of the referendum myths, we had a lot of influence in the EU: pro free trade, pro-markets, pro-business, pro-proportionate legislation. But that voice has fallen silent.
To take one obvious example: British Ministers in the European Council and British MEPs in the European Parliament had a big influence on financial services legislation. Now that we’re off, the void we have left at the heart of rule-making will be filled, is already being filled, by someone else: France.
So, the nature of our future relationship with the EU will not be static, but dynamic. And it is already moving: moving in directions we have traditionally resisted, whether that is a financial transaction tax, or more screening of overseas investment, or more centralisation of supervision of financial services.
For an economy that is as dependent as ours on services, how could we in all seriousness subcontract our rule-making to someone else? Some people say that Norway manages, but our economy is not remotely like theirs.
There is another reason why we must surely place a greater priority on being able to shape our own future than on preserving things as they are: technological innovation is itself going to change the status quo, whatever we decide on Brexit. It would make little sense to tie ourselves to a framework that works well for current players if it means we forego the opportunity to shape a regime that works well for fintech.
And if you listen to the leaders of Britain’s service sector, you will hear them saying that access to world-class talent is their most critical issue, much more important in the long-run than maintaining access to the Single Market. An immigration policy that encourages talent to keep on congregating in the City of London is more important than passporting.
But whichever way the government goes – if it decides to treat the trade in goods differently from services or not – it must now end its wishful thinking and choose. And then do some long-overdue thinking about life after Brexit.
It is not the act of Brexit itself which will make us successful or doom us to failure. It is what we do next that will make the difference. Just because we’re not in the EU won’t mean that British regulation will automatically strike the right balance. Gold-plating of European legislation has become something of a British specialty, after all. What it will mean, though, is that all future governments and parliaments will no longer have anyone else to blame. And maybe that will be a good first step to rediscovering a more grown-up political system.
Lord Hill of Oareford is a Conservative peer and former Leader of the House of Lords. He served as European Commissioner for Financial Stability, Financial Services and Capital Markets Union from November 2014 to July 2016.
