Brexit, the UK and the EU

BREXIT, THE UK & THE EU

 

Speech by Sir Brian Unwin KCB, former President of the European Investment Bank, at the Norwegian Parliament  in Oslo

19 June 2017

 

Thank you for inviting me to speak in this distinguished  forum – the heart of Norwegian democracy. It is a great honour and a great pleasure.

I find my task extraordinarily difficult. Firstly, my track record in Norway is not very good. The last time I made a public speech in Oslo was in November 1994, just before your referendum on membership of the EU.  As President of the European Investment Bank (EIB), I was sent to impress on you the advantages of joining the  EU. I thought I made a very persuasive speech, with convincing arguments that no rational person could disagree with.  But what happened? A few days later you voted not to join!  So I have no expectation that you will be convinced by what I say today.

Secondly, less than a fortnight ago, I had drafted an excellent speech, covering all the main aspects of my subject. But then came the disastrous British election, which was supposed to establish stability and certainty, but has destroyed the credibility of the Prime Minister, and thrown everything up in the air again. There is complete confusion in London and I hardly know where to start, but I will do my best.

My subject is ”Brexit, the UK and the EU”. It is most appropriate that it should be, since today is the official  opening of the negotiations between the UK and the EU in Brussels – one of the most important negotiations  ever for Britain in peace time. Before I tackle it, however, I must make a few further preliminary remarks.

First, Brexit is an amazingly complicated issue, involving  the potential unravelling of over forty years of legislation and regulation deeply woven into British law and society. Someone compared it to trying to unravel a bowl of congealed spaghetti!  I cannot hope to untangle it all, but I will try.

Second, although I spent much of my life as a loyal civil servant trying to give impartial and objective advice to different ministers and governments – a tradition to which you rightly attach great importance here – today I shall not be impartial. I must tell you frankly at the start that I am biased. I regard Brexit as a disaster – an extraordinary case of self-harm –  and I shall seek to explain why in as reasonable terms as I can.

I should also justify  speaking to you on this subject. As a senior official in H M Treasury in London I spent many years involved in European affairs,  leading the Treasury team in the negotiations on our budget contribution in the mid- 1980s, and preparing for the single market in the years thereafter. I  hope you will not misunderstand me when I say that I spent the night at Fontainebleau  with Margaret Thatcher in June 1984 when she won the British budget rebate and “got our money back”. I also, of course, spent seven years in Luxembourg as President of the  EIB, the EU’s long term lending institution and the biggest multilateral lender in the world. So I hope you will give me credit for wide EU experience and also for emerging unscathed from several years of working closely for Margaret Thatcher. That was not always easy; she did not suffer fools gladly and some weaker souls fell by the wayside.

Let me now at last turn to Brexit. I shall divide my remarks into three main sections: the June 2016 referendum; the policy of the UK government so far and its economic consequences;  and the prospects for the coming negotiations. I shall then end with some broader considerations.

June 2016 Referendum

The referendum was called by the then Prime Minister, David Cameron,  for party political reasons –  to placate the euro-sceptics in his own party, and to see off the United Kingdom Independence Party (UKIP), whose central policy, exit from the EU, was attracting Conservative voters. Referendums have no formal place in the British constitution, which is one of representative Parliamentary democracy, and it was made clear that this one was purely advisory  and not legally binding on the government.  In the event, the outcome was very close – 51.9% for leaving, and 48.1% for remaining.  The former  represented only 37% of the electorate eligible to vote – far too small to determine such a momentous constitutional  change. You may respond that this outcome was very similar to that in your referendum on joining the EU in November 1994 – 52.2% to 47.8%. But there are significant differences. Your turn out was much bigger –  nearly 89% compared with our 72%.  Moreover  you voted to retain the status quo, whereas our vote was for a massive  change, which  should  have required a significantly higher percentage of the votes cast – possibly as much as two thirds.

The result was not expected by the government, which meant that no planning was done for the unprecedented  situation  it created. In my view this was tantamount to criminal negligence. Equally, the “leavers”, apart from chauvinistic rhetoric about “regaining control”, “restoring sovereignty” and reducing immigration, gave no indication of what kind of deal for Britain they envisaged after Brexit had taken place.

Why did the vote go this way?   In part it reflected a protest by many ordinary people who believed  they  had been ignored and left out by successive governments in London and that the so called fruits of globalisation had landed in the laps of  the fat-cat bankers and financiers, rather than theirs – the sort of populist sentiment that has gained support in some other countries and brought Mr Trump to power in the USA. Concern about immigration  also played a significant part, fed by largely misinformed or distorted propaganda – some of it racist – by UKIP and the right wing and anti EU popular press. The campaign was marked generally by false claims and downright lies, notably  that leaving the EU would release £350 million a week for the hard pressed National Health Service (NHS).   I suspect that very few people, certainly on the Brexit side, voted for informed reasons related to the subject of the referendum, UK membership of the EU.  This was put very well recently by a former British deputy prime minister, Michael (now Lord) Heseltine, who said “Referendums seldom reflect the issue under discussion. People were looking for a scapegoat and Europe was the convenient candidate”.

My firm view, therefore, is that although the outcome of the referendum clearly had to be taken seriously as an indication of popular opinion at the time,  both Parliament and the British people should have an opportunity – if necessary in a second referendum –  to consider whether to accept whatever deal does or does not emerge from the forthcoming negotiations between the  government and the rest of the EU. In other words, to consider again whether they really want to leave the EU.

Present Policy and Economic Consequences.

I can only discuss this on the basis of the British government’s  declared policy. Although  prior to the referendum  Mrs May supported remaining in the EU, she reversed  her position – did a “U-Turn”  – and so far has  favoured a very “hard” Brexit.  By this I mean that she has ruled out continuing membership of the single market and the customs union – which by the same token excludes anything like the so-called Norwegian  option; excluded also any role in Britain for the European Court of Justice (ECJ); and committed herself to reducing net annual immigration from the present total of around 250,000 to an unspecified “tens of thousands”.  Assuming the EU 27 will swallow  all this, she says blithely that she will then seek favourable low tariff trade agreements  both with the EU and other countries round the world.  She has also foolishly  and meaninglessly declared that she regards no deal as better than a bad deal.

This position, and the uncertainty it is creating, is already causing great damage to many parts of the UK economy, not least  finance and services, which account for over three quarters of GDP. Economic growth is slowing down. In the first quarter of this year the economy grew by only 0.2%, putting the UK at the bottom of both the EU and the G7 advanced economies’  league tables. Living standards are being squeezed as prices , affected by the sharp decline in the value of sterling,  grow faster than earnings. Together with scheduled cuts in social benefits, this will reduce household incomes and force even greater  reliance on borrowing in the form of credit cards, car loans, second mortgages and so on.  Even if this does not lead to a new credit crisis, it will accelerate the decline in savings, already at a low level, with consequent implications for investment and productivity, in which we lag well behind our main competitors.

The possibility of failing to reach a favourable trade deal with the EU, and in particular preferential access (the so-called  “passport”) for finance and services to the European market, is a particularly alarming one and could well cause a significant exodus of banks and financial institutions from the UK, entailing the loss of thousands of jobs and threatening London’s primacy as a financial centre. A number of banks are already making plans to move their headquarters to elsewhere in Europe.  Ernst and Young, a leading accountancy firm, have also estimated that the threat to euro-clearing from London, which the European Commission are proposing, could alone cost the City 83,000 jobs.

Finally, there is universal concern in business and elsewhere at the serious economic damage that the threatened curb on immigration will cause. So many of our industries and institutions in both the public and private sectors depend on it for both skilled and unskilled labour – agriculture, tourism, hospitality,  hotels, science, universities, health and so on. Anyone who has sought treatment in a NHS hospital in Britain will realise how utterly dependant it is on immigrant workers, both from the EU and elsewhere.  Already there is great alarm in the health service as the stream of nurses from the EU applying to work in Britain has almost dried up.

As its former President I should note also that if the UK leaves the EU it will cease to be a member of the EIB and, unless special concessions are granted, will lose its automatic entitlement to the billions of investment finance for infrastructure and other projects that the EIB has put into the UK. The same applies to the European Investment Fund (EIF),  the largest  provider of venture capital in Europe, of which about a third currently goes to companies in the UK  This will add to the problems of financing the large current account deficit from which the UK chronically suffers.

Please note that these developments are occurring even before Brexit has taken place. The worst may not happen but the situation is gravely worrying and all will depend on the negotiations with the EU to come. So what are the prospects of success?

Prospects for the Negotiations

The political situation in Britain is so fluid that it is difficult for me to speculate. Mrs May had hoped that a resounding victory in the election would strengthen her hand in the Brexit negotiations and give her a mandate to maintain her hard line policy. Her failure has on the contrary  seriously weakened her position and damaged her credibility, perhaps fatally. Whether this, as many now hope, will cause her to take a softer  line on Brexit, or remain a hostage to her party’s Eurosceptic right, remains to be seen. So far she says there will be no change. For their part, the EU negotiators are obviously aware that Mrs May’s authority has been  weakened, and they may not now take her very seriously. But for them a government is a government and they can only wait to see what the British government wants and deal with whoever faces them across the table.

As of now, therefore, the two sides are far apart. EU leaders have made it clear that they cannot discuss any future commercial relationship with the UK until  “sufficient progress” has been made on the immediate Article 50 “divorce” settlement. The key issues in this are the exit bill – the settlement of the UK’s outstanding liabilities and debts, which could total more than €50 billion;   the status of the border between Northern Ireland  and the Republic of Ireland;  the guarantee of the rights of EU citizens currently residing in the UK; and the arbitration and resolution arrangements for any future UK/EU agreements.  More generally, EU heads of government have also stated that they will not accept any outcome which leaves the UK in a more favourable situation than if it remained in the EU. Their own confidence has probably also been boosted by an upturn in growth in the Eurozone economy which in the first quarter of this year, at 0.7%, registered a six-year high.

Without a significant softening in British policy  it is difficult to see how any agreement can be reached –  and time is very short. The clock is ticking fast – the Article 50 negotiation period expires  in March 2019. So far the British government is nowhere near meeting the key EU points. For example, the minister in charge of the UK negotiating team has repeatedly said that Britain will refuse to acknowledge any exit bill;  the Prime Minister has ruled out any future role for the ECJ, and declined to guarantee the position of EU residents in the UK; and the problem of the Irish border is  a delicate one with serious economic and security implications, which could be exacerbated by the government’s reliance for a Parliamentary majority on the Northern Ireland Democratic Unionist Party. Finally, the British commitment to impose entry controls on EU citizens is, of course, quite incompatible with the EU’s fundamental principle of freedom of movement of people, goods, capital, services and so on. As EU spokesmen have said, the UK cannot have its cake and eat it.

On present policies, therefore,  I believe that there is a serious risk of an early breakdown and no deal. As I have mentioned, Mrs May has said that in such circumstances she will be prepared to walk away and seek  low tariff trade agreements (FTAs) with the EU and with other countries.  But this presents enormous challenges and there is little sign that the government appreciates or has faced up to them. The EU has trade agreements with over 50 separate countries or groups of countries, all of which the UK  would have to renegotiate.  Even if the necessary expertise can be assembled in London  – it does not at present exist, as all trade negotiations have been conducted  for so many years on behalf of the member states by the European  Commission – it is bound to be a very lengthy process and the UK cannot assume that it will achieve the same favourable terms as under the current regimes. Equally, If the UK is forced for a transitional  period  to fall back on World Trade Organisation (WTO) rules, it will find itself subject to substantial tariffs on its exports to and imports from the EU and possibly no deal for finance and services at all. The Global Policy Institute in London have estimated that this could over time lead to a drop in national output of over 10%. In order to implement the tariffs  the UK would also have to restore customs controls and documentation at the border – most of which I removed as Chairman of Customs and Excise in the late 1980s on the introduction of the single market – involving even greater cost, queues  and delay. A recent estimate claims that this could quadruple the number of documents needing to be processed  – from some ninety to three hundred and ninety million.

There are numerous other problems that I do not have the time to go into today. Several hundred other  international agreements, to which the UK is currently  a party by virtue of its EU membership (more than 750, according to a Financial Times study), would  have to be renegotiated in a wide variety of fields. In aviation, for example, failure to assure continuing membership of the Open Skies Agreement with the USA, or the European Common Aviation Agreement, could see the UK losing business, including the right to fly between EU airports. At home there is also, of course, the constitutional question of the future of Scotland, which voted in favour of remaining in the EU and is threatening to hold a second independence referendum in order to break from the UK and by some means retain or regain EU membership. In the worst case, therefore, exit of the UK from the EU could also see the break- up of the UK itself – not something that Mr Cameron envisaged when he organised the ill-conceived June 2016 referendum.

Wider Considerations

I am sure that convinced “Brexiteers” will challenge  the arguments and figures that I have presented to you today and we could go on indefinitely arguing about  the precise details and numbers. But my fundamental opposition to Brexit rests not simply on the specific points I have made, but also on a set of wider considerations.

The world is self-evidently in a terrible mess. Islam is in flames, with the horrors of war in Iraq, Syria, Libya, Lebanon, Afghanistan and elsewhere; terrorist outrages are spreading in western Europe; we face the biggest refugee problem since World War II; Putin continues to flex his aggressive expansionist muscles, seeking to emulate the lawless autocracy of the Tsars; ambitious China grows in economic and military might and we are never sure where it will turn; Kim Jong-un in North Korea  plays with ballistic missiles as if they were children’s  toys: and in the United States we have an ignorant, bullying, narcissistic , climate- change denying and unpredictable President, whose  commitment to Europe and NATO, despite the diplomacy of your former Prime Minister and NATO Secretary General, Jens Stoltenberg, is still not assured – as became clear at the recent NATO and G7 meetings. In these circumstances, it seems to me madness from a wider geopolitical perspective and a complete self-delusion for the UK to be trying to go it alone –  tearing itself away from the EU in a manner that could lead not only to the break-up of the UK itself but also serious  damage to the EU and the Western alliance. If this happens, the one who will laugh most will be Mr Putin.

Of course there are many problems within Europe that need to be tackled, and further reform of the EU is necessary. But I believe it is much better to try to do this from the inside, and the election of M. Macron and re-election of Angela Merkel  and the revival of the Eurozone economy should give it new impetus. But  we still by and large share the same fundamental values, such as the rule of law, liberal parliamentary democracy and respect for human rights. These are being increasingly challenged and It is vital for us all to stick as closely as possible together so that we can collective  proclaim and try to maintain these values  in such a dangerous world.

Conclusion.

I am in a dilemma. Following our election, the future is more uncertain than ever. If Brexit really is inevitable, I  must hope as a patriotic British subject  that somehow an outcome satisfactory to both sides will emerge from the forthcoming negotiations – perhaps on the Norwegian model after all. But at heart I do not believe there can be such a thing as a “good” Brexit, and I fervently hope that, for the reasons I have outlined, and as the damaging economic consequences of Brexit become more apparent to the British people,  there will be a change of opinion and a reopening of the entire Brexit decision.  I am not hopeful, but it is possible and you must never give in!