Posted by: davidjmarlow | 18/01/2017

Will the EU play hardball in response to May’s declaration of war?

On 17th January 2017 Theresa May delivered a well-trailed speech outlining her Brexit negotiation principles for delivering a ‘stronger, fairer, more united and outward-looking’ United Kingdom.

May’s whole preamble of the referendum as the ‘eyes wide-open choice of citizens to leave the EU and embrace the world’ is a plain lie – and she knows it. 26% of the UK population voted for Brexit – mostly for a mix of little-Englander, racist or opportunist reasons, or to give Cameron/Osborne ‘two fingers’. And she knows too, with absolute certainty, that, however the negotiations pan out, we shall in the foreseeable future be weaker, more divided, less fair, and more inward-looking than hitherto – and she’ll need someone to blame for that (like the NHS, someone other than herself).

May’s ‘principles’ need robust challenge domestically, and a determined response from ‘Europe’.

May’s tactic to use the 3.2m EU residents of the UK as a hostage/bargaining chip in her negotiating strategy is obscene. I am not now sure why I believed this, but I genuinely never thought the UK would stoop to blatant ‘human shield’ strategy in international affairs. This sociopathic depersonalisation will always be one of the most enduring legacies of a former Home Secretary so evidently scarred by her lengthy, messy and dishonourable stewardship of immigration.

Her threat to hit the EU with aggressive tax war and a new offshore tax haven economic model if they dare to frustrate her ambitions, like the human shield strategy, is a potent and all too real intimidation. There is nothing the Tories would love to do more than to replicate our crown dependencies (Jersey, Bermuda etc) at scale – with their deeply embedded conservatism, exclusivity, inequalities, and governments more concerned with global capital than local wellbeing.

These dark undersides are probably the major things we actually learnt from her 17th January speech. She has a ‘Plan B’ if the EU tries to frustrate her Article 50 two year ‘ultimatum’. As this blog suggested in November, Trump and  the UK have declared war on the EU. And, if the EU do not put themselves on a war footing, May will implement Plan B (regardless of how negotiations go). She will ensure the Article 50 ultimatum expires – because Plan B is really her Plan A anyway.

Sadly I doubt the EU has the instinct and single-mindedness to counter Trump and May’s plans. Whatever its faults (and there have been many), the EU has been a civilising bulwark against the intolerant savagery of xenophobic nation states since the 1950s. Its instincts are careful and consensus-building, and I am not sure that is any way to execute the UK’s departure effectively.

However, in the event the EU does get its act together and take on May’s bullying menace, what are the strategies that will genuinely challenge her Plan B ultimatum?

Let’s start with a small 30,000 community at the southern tip of Spain. Gibraltar voted 96% for Remain. Whilst UK and Spain are EU partners Gibraltar is in equilibrium. But if that partnership is to be reset, Spain should offer Gibraltar the Remain option or at least a condominium joint sovereignty arrangement with the UK. Somewhat like Thatcher and the Falklands, the Tories are terrified of losing Gibraltar. But, if the UK plays bully-boy with the EU, the EU can insist on a EU Gibraltar option, and can probably persuade Gibraltarians to choose it over UK isolation.

Moving on, there is Northern Ireland’s relations with the Republic of Ireland. Trump and May have to try and push Ireland out of the EU – because the open border and the Common Travel Area cannot work in US and UK interests otherwise. The EU should offer Northern Ireland citizens continuing EU citizenship – to which they are entitled through their Irish rights. It should reaffirm that they will either have a fully open border – with no immigration control for EU citizens in the Republic, or, if this is rejected by the UK, a hard border. In the event, the UK government rejects the open border, the EU can begin discussions with Northern Ireland politicians on independence and/or merger with the Republic.

Similarly, the EU should open discussions with the Scotland Government bilaterally on their future relationship with the EU – in anticipation of either a future successful Independence referendum, or a separate Scotland chapter to the Brexit agreements. They have the option of making it clear to May that they do not regard the UK Government as a legitimate voice of the Scottish nation, and therefore not negotiate with her at all on Scotland.

They should unilaterally extend EU citizenship to UK residents of other EU member states – currently estimated at 1.2m – and again unilaterally make it clear that future UK residents will have privileged access to EU citizenship and rights of residence. They might even invite other areas of the UK (e.g. London) to enter into negotiations with them on their residents retaining EU citizenship and their areas having a special status within or associated to the Union.

May has placed a great value on science and innovation collaboration. The UK receives up to 15% of EU R&D funding, and might expect to continue these valuable exchanges if they contribute to EU R&D budgets. The EU could take a proactive decision to terminate the UK ‘s position as a R&D partner, pending a successful conclusion of future trade and investment relations (which is a main rationale of this expenditure) AND an agreement on the future rights of EU students to study in the UK.

The threat of the offshore tax haven model is strongly rooted in an assumption that the EU needs the City of London’s financial services more than global capital transactions need the EU. Whilst this may be credible in January 2017, now her intentions are clear, the EU has at least two years to make contingency plans for Frankfurt, Paris, Luxembourg, Dublin and other financial centres to take on London’s roles and functions. IF the UK does not reach a reasonable agreement, the EU should be properly prepared. An immediate withholding tax on financial services for a country that will then have NO agreement with the EU (the US, for instance, may charge 30% on non-compliant ‘FACTA’ Tax Havens) will relatively quickly test whether May’s assumptions have any substance.

May is seeking permissive Free Trade (FTA) and Customs Agreements with the EU. This should be in both parties’ interests. But all FTAs have stringent rules of origin, anti-dumping, pre-shipment inspection regimes, and non tariff measures. In a trade war scenario, it is relatively easy to raise very tricky barriers to UK-EU trade (on both sides).

Brexiteers like to point out the trade surplus (around £70bn) the EU runs with the UK as a reason the EU will feel compelled to agree a deal (beneficial to the UK). But, this is simplistic. Firstly, in a trade war scenario the UK is putting at risk 44% of exports and 13% of the whole economy, whilst the EU is only exposing around 10% of exports and 3% of their economy. Second, in the all-important service sectors, the UK runs a surplus with the EU – hence the attraction of a withholding tax sanction if needed. Who will blink first, and be more resilient, in this scenario?

Which brings us to the second element of May’s trade and investment strategy – the freedom to make agreements with the rest of the world. Personally, I have always found this Brexiteer verbal diarrhoea an odd argument. No sovereign country is going to make an agreement with the UK unless it is in THEIR interests to do so – i.e. that it shifts the balance of trade decisively in their favour from the current position. New agreements will almost always have to be within WTO rules. WTO rules can only be changed by consensus (of the 164 members including the EU 27). The UKs WTO dispensation is as a member of the EU block. Effectively, new FTAs will need to be agreed with EU27, then the WTO, as well as by the UK and the partner country. In a period of consensus and good will, this could happen – but if May has rejected the consensual approach with EU27, one suspects there will be precious little of this going around in 2019 and beyond.

May’s opening shots in the UK(US)-EU war will have pleased the Brexit 26%, the UKIP-lite wing of her party, and Donald Trump. She may even consider they have struck a clever balance between a preliminary salvo of ideas to discuss, with an underlying sinister ‘don’t f*** with me’ subtext.

Ultimately, however, they are an inconsistent, contradictory mishmash of lies and delusion. And we haven’t even had to mention any EU ‘nuclear’ negotiating options yet…(sshhh, don’t raise the UN Security Council permanent seat!).

May has made her bed with the tyranny of the Brexit26%. With hard work and determination, the EU can demonstrate what a grubby squalid bed that is. I hope, however, they will have the generosity and wisdom to reach out to the best of the UK,  and to our (currently rather thin on the ground outside Scotland) pro-Europe and anti-UKIP leaders.

World leadership has never been more under threat from the corrupt, the sociopaths and the plain evil. When May threatens the EU with ‘an act of self-harm’ if they reject her approach, she is partly delusional – projecting the immense, probably existential, self harm she is going to do to the UK. But she is equally informing us, precisely whose side she and her government are on.

If we ever needed the EU to stand up and be counted, it is 2017…

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