Constitutionally independent, no longer subject to EU law and the European Court of Justice, the UK has reclaimed its ‘sovereignty’. The Prime Minister says he envisages big changes. The UK is now free to diverge from EU standards and, where it’s in our interests to do so, we will do things differently, he promised in a New Year interview.
The Government has been less forthcoming about exactly what “differently” involves, as a growing chorus of commentators have been pointing out. It is a critical unknown because the way in which the laws and regulations that govern our lives change post-Brexit will determine the kind of society we live in during the coming decades.
There are some clues, however, about where we are heading and the destination is somewhat surprising. In one respect we are becoming more European rather than less.
The UK Government is determined to take a more activist and interventionist role in the economy. In his New Year interview, the PM waxed enthusiastic about the opportunity for “the state to lead, to make the investments in infrastructure, education and technology”. It could almost have been President Macron talking – or perhaps dirigisme with British characteristics.
There is a singular irony in this conversion to Tory-style Big Government – and the fact that the Brexit negotiations almost foundered at one point over the UK’s determination to have the right to subsidise strategic industries. For many Brexit-supporters, escaping from the statist, interventionist economic models of the European continent was a core part of the economic case for Brexit.
Taking back control of our rules and regulations was also central to the case for leaving the EU. This was an ambition shared by both those who cared about sovereignty, those who wanted to be able to subsidise strategic industries and by free market economists who saw Brexit as a way of sweeping away barriers to unfettered free trade.
The EU was said to be inherently protectionist and membership imposed endless red tape on business and burdened the public with mindless rules and regulations – everything from the shape of bananas (apocryphal) to unnecessary regulations on the City of London. All this bureaucratic interference, so the argument went, restricted freedoms, stifled enterprise and held back the economy. Outside the EU, the UK would be liberated to become a dynamic, buccaneering Singapore-on-Thames.
Well, the decisions on regulation and standards are now ours and ours alone but it looks increasingly improbable that the UK will end up diverging significantly from EU standards. Quite apart from the retaliation that divergence could incur from the EU under the trade agreement, there is no sign that this is what the public wants, nor is there an appetite for a lowering of European-style standards and protections.
An insight into how the UK has approached regulating the lives of its citizens in the past is provided by the Nanny State Index, compiled by the European Policy Information Centre (EPIC) – a network of free market European think tanks, including the influential British think tank, the Institute for Economic Affairs.
Charting what EPIC sees as an undesirable slide towards ‘coercive paternalism’, the index ranks the best and worst places in the EU to enjoy those pleasurable but unhealthy activities such as drinking, smoking, vaping and consuming fizzy drinks and sugary food.
Surprisingly for those like the Prime Minister who believe that Brits are too bolshie and freedom-loving to follow rules, the UK is one of the leading culprits – second to only to the Baltic region – when it comes to nanny statism. It ranked fourth out of the then 28 EU countries in the 2019 index – behind only Finland, Lithuania and Estonia.
Even more surprising, those stodgy, rule-bound Germans turn out to be living it up in the freest country in Europe when it comes to having a drink and a smoke. Germany ranked 28th in the index – last place, or perhaps first place depending on your perspective.
One conclusion to be drawn from the Nanny State Index is that the British public is far from averse to paternalistic rules and regulations when it comes to public health. In fact, most accept the need for high standards which protect consumer welfare across the board.
Another is that our political class is all too keen to legislate to ‘improve’ the way people live their lives. In fact, even the Prime Minister is a recent convert to government action to discourage unhealthy food and restrict junk food advertising – despite his libertarian instincts and long opposition to such paternalism.
Of course, stricter rules on junk food are not related to Brexit, but they are an indication of the direction of travel.
Talk of the UK being reincarnated as Singapore has all but died out and many of the supposed deregulatory benefits of Brexit, which would involve reduced costs for business or opening the door to cheaper imports, have been quietly evaporating.
In fact, in a number of areas, the Government has been committing itself to upholding existing standards inherited from the EU – or even raising them; there will be no reduction in protections for workers because of Brexit; there will be no lessening of environment standards – in fact, the UK plans to raise them; and there will be no change in the law banning imports of chlorinated chicken or hormone-injected beef.
Agriculture is one area where the UK can now do things differently as a result of leaving the EU and no one will mourn the passing of the Common Agricultural Policy (CAP). Although subsidies helped small farmers, the CAP contained perverse incentives and much of the money went to wealthy landowners.
The Government has already unveiled radical plans to phase out subsidies based on how much land you farm to a system tied to improvements in productivity and the environment. It is the biggest overhaul of agriculture in half a century according to George Eustice, the Environment Secretary.
The proposals are radical and the aims are welcome. However, deregulation it is not. A relatively simple, inefficient system is being replaced with a complex new system. It will doubtless involve increased bureaucracy and red tape for farmers. It will certainly involve tougher standards. The Agriculture Bill contains proposals to encourage the production of “healthier, higher-welfare animals at a level beyond compliance with current regulations”. There are also proposals for a ban on exports of live animals and tighter rules on transporting them.
Ironically, this will make it even harder to reach a trade deal with the US where the real stumbling block on agriculture is not chlorinated chicken per se, which is perfectly safe, but animal welfare. US farmers have a significant cost advantage because they are not subject to EU/UK welfare conditions and it is because of the low welfare standards that they wash the chickens in chlorinated water.
Besides agriculture, there will be some other benefits for the UK in being able to diverge from EU standards. In financial services there have long been grumbles about the negative impact on the insurance industry of EU rules known as Solvency II. The UK would also have more scope to encourage new retail banks through easier capital ratios.
These can now be addressed but this is hardly radical stuff. The benefits are marginal and John Glen, the City Minister, has made crystal clear that the idea of rapid divergence and deregulation to make the City more competitive and undercut Europe financial centres is for the birds.
The City Minister knows all too well that it is much better for the long-term competitiveness of the City to have a reputation as a well-regulated financial centre that embraces the highest standards.
There are other reasons why deregulation and divergence from the EU in financial services is simply not going to happen.
First, having ignored finance in the Brexit negotiations, the UK is now a supplicant seeking agreement with the EU that UK financial regulation is equivalent to that of the EU. This will be a poor substitute for the access to the EU market the City used to enjoy. It will not cover many important activities like banking and it is entirely dependent on the EU’s say so. In fact, an equivalence agreement of this kind was long considered completely unacceptable for the City. However, now it is a question of making the best of a bad job.
There is also very little appetite in the mainstream financial industry for deregulation. And much of EU financial regulation has been crafted by the UK anyway.
While the bonus cap was one rare instance where the Brits were outvoted on a financial matter in the EU, UK regulators have been hugely influential in Europe. Where there have been differences between the UK and the rest of the EU, it has generally involved the UK pushing for tougher, not laxer financial regulation.
Within the manufacturing industry, as in the financial industry, there is generally little enthusiasm for deregulation. Leading UK industrial companies trading with the EU in areas such as chemicals, pharmaceuticals, motor and aerospace will want to follow EU rules in the future because that is the price of admission to the EU market. Rather than cutting red tape for these industries, Brexit is increasing it through additional bureaucracy and form-filling for export declarations and, eventually, rules of origin.
Some argue that the Brussels effect – the idea that business complies voluntarily with EU rules because it is a big, powerful regulatory behemoth and has influence well beyond its borders – will not apply in the new frontier industries such as technology and AI.
Perhaps. But in the meantime, any Brexit dividend in the form of deregulation to transform the competitiveness of the UK economy, looks like being painfully small. The fact is, that when it comes to rules and regulations, the UK is already a very competitive economy despite all those EU standards and rules we helped to shape. In the World Bank’s 2020 Ease of Doing Business table, the UK ranks 8th place out of 190 countries – just a whisker behind the USA and ahead of all other EU countries except Denmark.
Maybe those EU rules and regulations were not the real problem after all. At any rate, now we can no longer blame the EU for unnecessary red tape. We will have no one to blame but ourselves.