02 December 2019

Project Syndicate: The UK and the EU should prevent mutual assured damage

Assuming Brexit happens, future historians will probably remember 2020 as the year when an enfeebled and vulnerable Europe chose to make itself feebler and more vulnerable. The task for its leaders now is to avoid making matters even worse.

[...] the big casualty of Brexit risks being economic integration with the European single market.

A screw is a screw, and a bolt is a bolt. But the UK no longer produces screws and bolts. It is a major exporter of banking, insurance, accounting, communication, and professional services, half of which go to the EU. Moreover, most of these services are regulated.

If the Brexiteers’ “take back control” slogan means anything, it implies substituting UK laws for EU legislation. On the day after Brexit, Britain’s regulatory regime will be identical to that of its EU trading partners, because the UK’s 2018 Repeal Bill copy-pasted all EU laws into domestic legislation. But as the UK Parliament gradually amends these laws, and the EU introduces new laws of its own, the two legal systems will start diverging. The question is: how far can they diverge without endangering economic linkages and destroying prosperity?

There are two possibilities. One is that the UK adopts laws that differ from those in the EU but are based on the same core principles. For example, there can be different ways to guarantee that insurance contracts offer the same degree of consumer protection, or to uphold bioethics standards. In that case, UK national laws would embody different approaches to regulation, and yet create only limited obstacles to trade in services.

The second possibility, however, is that the UK attempts to undercut EU legislation. In this scenario – often dubbed “Singapore-upon-Thames” – Britain would impose less stringent standards for financial stability, be softer on data protection and, or perhaps relax its labor laws, in the hope of attracting more investors and selling cheaper services. Such a move would rightly be regarded as uncooperative by the UK’s European partners, and would result in the EU cutting off market access for British services exporters (most of which currently supply their continental clients directly from their UK base).

Which route will Britain follow? Ideally, it would agree with the EU on common principles and credibly commit to sticking to them. But because some of the most adamant Brexit supporters openly dream of completing the Thatcher revolution and turning the UK into a low-regulation paradise, the EU is understandably wary. There is a serious risk of a negative spiral of aggressive British deregulation and forceful EU tightening, with damaging consequences for services trade.

The EU should not ask the UK to copy slavishly its legislation. But it should make clear that aggressive regulatory competition is unacceptable and present the UK government with a black-and-white choice: either it agrees to commit to common principles and exercise regulatory self-restraint in order to maintain good access to the European market, or it refuses – and exposes British firms to a severe, across-the-board curb on their ability to export to Europe.

Assuming Brexit happens, future historians will probably remember 2020 as the year when an enfeebled and vulnerable Europe chose to make itself feebler and more vulnerable. The task for its leaders now is to avoid making matters even worse.

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