by Holger Schmieding*
Unless the UK parliament stops draft legislation proposed by the government of Prime Minister Boris Johnson, the UK may soon breach key provisions of its divorce treaty with the EU.
The issue at hand — the details of regulations for commerce in and with Northern Ireland — may sound arcane. However, the fine print for Northern Ireland had been the key stumbling bloc in the Brexit negotiations last year.
Boris Johnson himself had removed the hurdle at the time when he agreed with Ireland’s Leo Varadkar, during a walk through Thornton Manor gardens in Thornton Hough — a village on the Wirral Peninsula, in Merseyside, England — last year that Northern Ireland would remain subject to the EU’s customs code and single market rules.
This was agreed to avoid any need for a post-Brexit hard land border on the Irish isle. In response, the EU dropped its earlier demand for a watertight Irish border “backstop.” Mr. Johnson’s concession cleared the way for a deal acceptable to the UK parliament at the time.
Contrary to UK claims, the issue matters profoundly for the EU for three reasons:
1. The EU itself rests on international treaties concluded between sovereign European countries. The EU cannot shrug its shoulders at a breach of such a treaty.
2. Keeping an open border with Northern Ireland is a top national interest for the Republic of Ireland.
Wherever possible, the EU stands behind the interest of its members, as it has shown throughout the entire Brexit negotiations.
3. The EU cannot allow itself to be taken for a ride by Johnson.
What can the EU actually do?
To a large extent, this is a question for lawyers rather than economists.
As a sovereign country, the UK can of course do as it pleases. It will just have to bear the consequences.
The ways in which the EU can put pressure on a UK that is going rogue are very limited — and potentially vast at the same time.
From a legal and narrow financial point of view, the EU may not be able to do much to impress the UK now.
1. The EU may not grant the UK privileged access to its single market and customs union in the future.
Whether or not the rising risk of a hard UK exit from the EU market on December 31st will have any impact on the discussions at 10 Downing Street remains to be seen.
Having often acted like a gambler, it is unclear whether this will deter Johnson who has called such a potential outcome a “good“ result.
2. The EU may take the UK to court over the breach of treaty. The European Court of Justice would probably order the UK to change its ways and/or pay a fine.
But having ignored its obligations under an international treaty, the UK may well decide to simply ignore this — or any other — non-British court as well.
3. Under the divorce treaty (“Withdrawal Agreement,” the UK owes the EU roughly €35 billion for commitments which the UK signed up to while it was a member. In this narrow sense, the EU has no direct financial leverage over the UK.
EU27: A commercial superpower
However, this is not the end of the story. The EU27 is a commercial superpower. Only the United States comes close to the EU’s clout in global trade.
To a considerable extent, geography is destiny. Geography suggests that the UK and the EU will always need to interact closely on a vast range of issues.
A lack of trust, and of a well-ordered relationship structured by treaties, would be bad for both sides.
Size matters
In addition, size matters. Size suggests that the EU27 will usually have the upper hand in dealings with the medium-sized UK
Ever since David Cameron tabled a Brexit referendum seven years ago, any post-Brexit relationship will be more skewed towards what the bigger EU27 perceives as its interest than to what the UK would like to achieve.
Just ask Canada and Mexico how they feel about some details of their trade arrangements with the United States.
The UK and the short end of the stick
From an EU perspective, the real costs of going rogue for the UK would be twofold:
1. The UK would lose privileged access to its major market. For the EU27, the absence of any deal on future relations would probably be neutral.
The small hit to the EU from reduced access to the UK market would be offset by a diversion of trade, investment and skilled migrants from the UK to the EU.
2. In any future dealings between the EU27 and the UK, the EU could revert to its demands that the UK would need to honor its financial obligations and rectify the breach of contract before it can clinch a deal on any issue the UK may deem important.
In addition, the UK would incur a risk that other countries including the United States would not ratify trade deals with the UK either.
In addition, the damage to the reputation of the UK as a place where international treaties are honored could hurt its exports of legal, financial and other services.
It’s not over yet, but getting worse
Mr. Johnson has a reputation for U-turns and a sometimes cavalier respect for facts rather than for a grasp of detail.
The EU has de facto given the UK until the end of September to abandon the idea of breaching the Northern Ireland protocol of the divorce treaty.
Just like Johnson made a big concession at almost the last minute in October 2019, he may still do so again.
But the current conflict makes it even more difficult for the EU to soften its position on contentious state-aid, fisheries and dispute settlement issues.
In addition, the EU may be less willing to agree to many stopgap measures to soften the blow of a hard exit on December 31st.
As a result, the “semi-managed” hard exit — for which there is a 50% probability now — may be less managed and more disruptive in early 2021 than otherwise.
How the UK’s Brexit games solidify the EU
Ever since the UK decided to leave the EU, the key interest of the EU has been to preserve the internal cohesion of the EU’s 27 remaining members.
Once again, the British shenanigans may — inadvertently — serve this purpose. The chaos in London makes the option of leaving the club look even less unattractive.
For an EU, which would like to preserve close relations with its neighbor across the Channel, this would be no more than a small consolation, though.
*chief economist at Berenberg Bank in London
**first published in: www.theglobalist.com
By: N. Peter Kramer
