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COMMENTARY

The worst is yet to come






Brexit / COMMENTARY
Fabian Zuleeg

Date: 31/10/2019


This blog was first published by Berlin Policy Journal on 31 October 2019.


So far, Britain and the EU have only talked about exit modalities. Negotiating their future relationship will be even more difficult. Brexit creates many risks that the EU27 needs to prepare for.

Every day brings new twists and turns in the Brexit saga that make predictions difficult. But whatever the exact date and form of the United Kingdom’s departure from the European Union, Brexit will have major geostrategic implications for the EU.

Any analysis of the longer-term impact has to go beyond the UK-EU relationship itself and address the broader implications for both the EU and the UK in itself, not only in economic terms but also with regard to geostrategy and security. It is true that there can also be positive aspects to Brexit, especially if the EU reacts by building strategic capability and enhancing policy cohesion. But, in the end, Brexit mainly creates risks, which need to be handled and prepared for.

It is worth recalling that the embittered, tortuous Brexit negotiations so far have only been the beginning of the exit process: the talks have focused only on the exit modalities (Northern Ireland border, financial obligations, citizens rights, and transition). The more substantive negotiations on the long-term relationship, including the economic relationship, are still to come. These will be even more difficult than the exit talks, and chances are high that no deal can be reached. Even though some companies or regions could benefit if competitors for market share or investment are weakened, the economic impact will be negative for the EU overall.


The dangers of “UK First”

Failing to reach a deal on the framework for UK-EU trade would inflict significant economic costs, making integrated, cross-border value chains impossible unless the UK (or parts of it) remains tied to the Single Market, as Northern Ireland now looks likely to. These economic costs are probably higher for the UK in both relative and absolute terms. But the impact on the EU and its member states is far from negligible, especially for countries with close economic ties to the UK, such as Belgium and the Netherlands. No deal would hit Ireland particularly hard, potentially necessitating special assistance from the EU.

But the long-term effect could be even more significant. The EU-27 could be faced with a competitor posing far more fundamental challenges than a UK still closely integrated and conforming to EU rules. The UK could pursue a far more aggressive industrial strategy in an effort to support domestic industries: a “UK First” approach. There could be mercantilistic competition and conflict, including for contested resources and markets in areas such as fishing and energy.

With no deal, the level-playing-field provisions included in the Withdrawal Agreement would not come into force, opening up the possibility of the UK adopting lower standards. It is premature to presume that the UK would not go down this route, given the economic necessities that will arise after Brexit. For example, driven by a necessity to quickly establish new economic relationships, the UK could pursue trade deals around the globe by undercutting the EU. If the UK drives down standards for environmental protection, labour rights, tax and competition, and consumer and data protection to gain a competitive advantage, some EU member states would push for the bloc to follow suit, potentially undermining the EU’s regulatory ambitions.

Risks for the financial sector

With Brexit, the EU is losing a significant part of its economic capability across a wide range of sectors. The strength of some of these sectors is geo-strategically important to the EU. Simply put, the EU must be a significant player in these sectors in order to play a role at the global level. Achieving strategic autonomy in related policy areas will become much more difficult.

The sectors where the UK makes a disproportionately large contribution to the EU economy include defence, aviation/space, research/academia, and business and legal services, as well as parts of the new technologies sector. Thus Brexit will have an impact on the EU’s ability to, for example, maintain industrial competitiveness, expand its services exports, provide security hardware, and boost innovation and technological sovereignty. A particular case in point are financial services and capital markets, where a breaking-away of the UK could well result in the loss of an EU global financial centre, with implications for the availability and cost of financial services and capital.

The impact will depend on how close the economic ties between the UK and the EU will be after Brexit. If the UK were to remain part of the Single Market, these capabilities would stay within the economic structure of the European Economic Area. Conversely, a no-deal outcome would severely impair the economic ties between the UK and the EU. While it is undoubtedly true that the UK would lose significant parts of these industries, this does not necessarily imply that the economic activity would simply shift to the EU, given the global opportunities that exist for example for the financial services sector.

One particular concern is the instability a chaotic Brexit might trigger in the financial sector, for example, if there is significant capital flight or speculative attacks on sterling in the aftermath of an (unexpected) no-deal Brexit. This could affect the stability of UK-based financial institutions and have knock-on effects on the global financial system. At the very least, stabilizing the situation might require a concerted effort of the Bank of England, together with the European Central Bank and other international financial actors.


Neighbours, allies, and rivals

The UK leaving will also profoundly change the EU’s relationship with other countries. The political geography of Europe would change, affecting, for example, Gibraltar and the Channel Islands. The EU’s relationship with countries such as Switzerland, Norway, and Turkey would also be altered, in part depending on the model chosen for the EU-UK relationship. The EU will most likely have to define much more concretely what kind of relationship it wants to have with European countries that have no intention of becoming member states. The current models, such as integration within the Single Market or countries being within the accession process, are unlikely to be applicable, so Brussels will have to develop new models, such as, for example, a permanent strategic partnership or associate membership.

Post-Brexit, there is also a good chance that the UK could become a pawn in global great power rivalries. The UK would need to seek new and separate strategic relationships with key countries around the world, including the United States, Russia, and China—but it would be vulnerable given post-Brexit economic pressures and political instability. Other powers would have an opening to employ divide-and-conquer tactics, to try to push the UK and EU to take divergent positions on crucial global policy issues such as the global multilateral trade system or openness to investment in strategic sectors. The UK could be seen as a Trojan horse to undermine the EU and/or Western liberal democracy, which would, in turn, have consequences for the possible level of ambition in the UK-EU relationship, including in terms of openness for trade and investment.

There are no guarantees that the UK would remain aligned to EU policy priorities after Brexit; indeed, over time, it is likely that the UK will start diverging. The continuation of cooperation on issues such as climate change, development or combatting tax havens cannot be taken for granted. Non-alignment on global issues, for example on pursuing the sustainable development goals, would reduce the effectiveness of EU action and undermine the possibility of achieving global progress on these issues, not least since it would strengthen divergent standpoints. However, Brexit could also have a positive effect if it increases pressure on the EU27 to act jointly, removing the possibility of hiding behind British opposition to further integration in the foreign policy field.


Less influence, more risks

Losing the UK will have certainly a negative impact on the EU’s strategic culture. The UK has—together with France—been the only big power in the EU that has had a more strategic approach to external affairs and a more global strategic culture than that of other member states. In addition, a lack of policy alignment would be a particular challenge in the field of international policy and internal and external security, where UK capacities remain critically important for the EU27, including within the NATO context. If, for example, there was a significant divergence in views on issues such as the Iran nuclear agreement, or if the UK’s departure were to weaken the resolve of the remaining member states, e.g. on Russian sanctions, it would (further) reduce the likelihood that the EU could affect such global policy issues and hinder the ability of the EU to develop further capacity in future.

One area where cooperation will become significantly more difficult, even given goodwill on both sides, is internal security, the fight against organized crime and counterterrorism in particular. European arrest warrants will no longer be available to the UK, implying that extradition will revert back to being a lengthy and uncertain process. This is likely to benefit internationally mobile criminals and terrorists, including UK nationals who might seek refuge from British jurisdiction elsewhere in Europe, reducing security for the UK and for the rest of the EU.

Limitations on cooperation will also affect the ability to share data, again reducing the ability to combat terrorism and crime. The EU will lose the member state that probably still has the greatest access to covert intelligence information, leaving a gap in its capabilities. In the online world, cooperation on cybersecurity is likely to be reduced, mirroring international cooperation on such issues rather than the more closely integrated cooperation within the EU, again reducing effectiveness.

It is not just that the UK’s departure will take one of Europe’s main hard security providers out of the EU—there are also real questions about whether the UK’s capability can be maintained beyond Brexit. Potential territorial fragmentation, fiscal pressures, and overstretch could force the UK to scale back its commitments, for example in relation to peace-keeping, including in Cyprus. And in the longer term, the stress of Brexit might create challenges to the UK’s nuclear capabilities and its seat on the UN security council, reducing European influence as a whole. This might hasten the need for the EU to become a more significant actor in its own right. But in the meantime, it would reduce its capacity to deal with international challenges.


An era of conflict?

Hindering cooperation is one thing, but a no-deal Brexit could also bring about direct EU-UK conflict, for example when it comes to Gibraltar, fishing grounds, resources such as energy, migrants crossing EU territories to get to the UK, or Northern Ireland. Conflict does not necessarily mean physical confrontation, although it might come to that in some instances, similar for example to the “cod wars” between the UK and Iceland. But even in the absence of such an escalation, it will be necessary to find dispute resolution mechanisms for such issues.

Whichever way the Brexit process ends, there is likely to be a significant community in Northern Ireland dissatisfied with the outcome. Re-instituting border controls would be unacceptable to large parts of the population in Northern Ireland, putting into question the constitutional status quo. In fact, a referendum about the reunification of the island could well be back on the agenda. The unionists would resist this. But the Republicans would challenge a hard border. The potential for violence is high under both scenarios.

A re-eruption of violence would also draw the EU27 into the conflict, not only because of the role the Republic of Ireland would have to play but also because a significant part of the Northern Ireland population now has EU passports, making them EU citizens who can demand support. If it becomes necessary to patrol the border in Northern Ireland to keep the peace, the Northern Ireland police service is unlikely to be able to do it alone (if at all). But the involvement of UK armed forces would be highly contentious, raising the question of what role the EU would need to play.


Disintegration and discord

In addition to potential changes to Northern Ireland’s constitutional status, there is a significant chance of territorial disintegration, with Scotland separating from the United Kingdom. No deal would make a second independence referendum in Scotland almost certain. Current opinion polls indicate that a chaotic exit might well be enough to lead to Scottish independence, which would almost certainly be followed by an EU membership application. There are positive aspects of such a possibility, with the EU potentially gaining a committed member, demonstrating the desirability of EU membership, but so far there is little thinking in the EU about how to react to such a scenario.

The dissolution of the UK would, among other impacts, change its capacity as a global actor, for example with regard to its role in NATO and its capacity to maintain a nuclear deterrent, given that the UK’s nuclear submarines are berthed in Scotland with no obvious facilities available elsewhere in the UK.

One of the most remarkable aspects of the Brexit process has been the unity displayed by the EU27. But unity might well fray in a no-deal scenario. In the countries hit hardest by a disorderly Brexit, there will be strong domestic pressure to find quick-fix solutions, even if these go against common EU positions. If the UK reneges on its commitments made in the first phase of the negotiations (on EU citizens’ rights, financial obligations, and the Northern Ireland border), the potential of conflict between member states increases further. Indeed, the hole Brexit is leaving in the EU budget is already creating discord.


Address the strategic issues

But as difficult as no deal would be, the EU doesn’t have to sacrifice its principles simply to ensure an orderly Brexit. It is in the EU’s economic and political interest to remain united on its red lines, which also limits what can be offered to the UK at this point; caving in to British cherry-picking would, in the end, pose an existential threat to the EU itself.

However, the EU needs to tackle the hard strategic questions Brexit poses. It has to address the multifaceted and long-term impact, including questions that an acrimonious divorce would raise, including how to best to mitigate the negative impacts of Brexit and how to manage future conflict with the UK; and perhaps most importantly how to increase the EU’s capacity and capability in areas that are weakened by Brexit.

The EU27 will need to redefine not only its relationship with the UK but also with other neighbours and the rest of the world. Crucially, the EU member states need to maintain unity and agree on a common strategic negotiation position in case it comes to no deal. If the worst-case scenario cannot be averted, the EU27 must be fully prepared.

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Photo credits:
Tolga AKMEN / AFP
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