Pedro da Costa: Hi, I’m Pedro da Costa. I’m joined today by Jacob Kirkegaard and Jeromin Zettelmeyer, both Senior Fellows here at the Institute and Jeromin, thank you for joining us for the first time. Of course, you’ve joined the Institute the recently and you’ve been working for the German government as an economist until recently. But of course, our topic today is going to be Brexit and the implications thereof.
And I wanted to start with you Jacob because you’ve written recently that Theresa May, the new British Prime Minister, and essentially chosen a hard Brexit. I want you to define what a hard Brexit means and why you think she’s made this decision.
Jacob Kirkegaard: I mean, a hard Brexit first of all, in my set of vocabulary means a type of exit from the European Union that basically leaves Britain without any access to the internal market. And essentially trading with the rest of the EU on WTO terms or in other words, just like any other country with whom the EU does not have a specialized relationship or trade agreement.
Pedro da Costa: Was it in her speech or in her remarks that made you think that she was taking that step?
Jacob Kirkegaard: I think the key thing here is that we’re talking about a prime minister who has no public mandate. She never won an election. She was appointed by her own party to become prime minister and she has chosen, at the most recent Conservative Party convention, to stand up in front of all her party grassroots, the vast majority of which voted for Brexit.
And basically, give her definition of what Brexit means. I mean, she famously said Brexit means Brexit but this is when she finally spelled out what that means and it means in her mind that the UK retain or regains control over immigration, as well as essentially eliminating any jurisdiction of the European Court of Justice from the UK.
And, the way I see that, that can only mean one thing and that is a hard Brexit because that essentially makes it impossible. It’s incompatible with being in the internal market for several reasons. It is, in my opinion, also incompatible with paying into the EU budget. All of which basically mean is that they have chosen the root that means first the WTO meaning hard exit and then somewhere down the line potentially they will have a chance to negotiate a free trade agreement with the EU just like Canada has been doing.
Pedro da Costa: Now Jeromin, do you agree that this is--that Britain is kind of heading for a worst-case scenario and is there anything that can slightly stop --
Jeromin Zettelmeyer: Yeah.
Pedro da Costa: So, it seems like a slow motion train wreck.
Jeromin Zettelmeyer: I mean, I agree with Jacob but this is the general direction. Now, I also think that the way Jacob described it at the beginning, which is heading for WTO membership, no privilege access of any kind is certainly not the way that Theresa May meant it at the Conservative Party Conference.
So, I think what she meant or what she desires is she wants to maximize market access subject to two conditions. One is control of immigration. The other one is not submitting to the jurisdiction of the European Court of Justice.
Now, the latter, I think quite correctly, as Jacob points out rules out forcing of market access. It rules out Norway-type solutions because there you do have to submit to a common set of standards. That’s the essence of the single market that you have the same standards and rules within the areas that a government by EU law in the EU as everyone else, that’s what it means. That might enable, for example, the financial sector to stay integrated.
But clearly, in order for that to realistically happen, you will need to submit to the jurisdiction of the European Court of Justice.
Pedro da Costa: Do you think that she is trying to speak to a domestic audience and that message perhaps echoed a little further than she would have liked?
Jeromin Zettelmeyer: She did. I think that two things are going on. One is that the rhetoric might be a little bit harsher than what she intends to do. But more importantly, I think that the logical solution, if you like, for her version of hard Brexit, which is hard but not too hard is indeed a Canada-EU style Free Trade Agreement as various people pointed out in the past and as you just mentioned again.
Now, the problem is that this sort of solution looks increasingly unlikely just because of the EU’s general unwillingness or inability to do any new trade agreement. So, it might be possible to get some sort of single market deal for the UK. If one follows an established template that does not require and negotiating a trade agreement from scratch, how about what the British government has essentially committed to is to negotiate a Free Trade Agreement from scratch.
And, what that really seems to me right now is not being able to negotiate anything at least for a very long time just because Free Trade Agreements are much, much harder for the EU to agree. And I do not think that given the--
Pedro da Costa: Give us what you’re thinking of the American example and the Canadian example.
Jeromin Zettelmeyer: The American and the Canadian example--I mean, the Canadian example is really what--when I was in government, we really focused on making that happen because we thought if we cannot do a Free Trade Agreement with Canada, which is a progressive government, it’s a sort of country that Europeans like. Their preferences are not too different from others. Then we won’t be able to negotiate any Free Trade Agreement. This was politically a very high priority for us and continues to be.
And, if it now turns out that CETA, the Canadian EU Trade Agreement does not go forward in the foreseeable future, it really means the UK government is going to have a very tough time negotiating what they view as their version of hard Brexit. And as a result, they’ll get a much harder version of Brexit.
And, by the way, this is my hope that once they realized that, they may back off a little bit from the hard path.
Pedro da Costa: Now, Jacob, what are the next steps and what are some of the ways in which they might back off? There’s been some talk that Parliament might get to vote on an eventual Brexit plan? Would that make a difference and moderate the plan somehow?
Jacob Kirkegaard: I mean, I think it can make a big difference domestically because I mean, basically right now, they’re arguing in court whether or not the UK government can launch Article 50 in March next year without a vote in Parliament. And then, the question is if it turns out that the court says that you can’t, will the UK Parliament, the majority of the UK Parliament actually vote for this? And the other question is, will the Conservative Party split?
Because obviously, if the Conservative Party sticks together on this and they truly all are Brexiteers as Theresa May likes to say, then it will not be a problem. But if it turns out that maybe she doesn’t quite control all of her MPs, then she doesn’t need to lose that many for a vote to go against the government, which presumably would mean that we will have new elections.
So, we are sort of in this ironic situation that for 30 years almost, we’ve always wondered and worried about sort of right wing anti-European rebellions inside the Conservative Party. And, if there is a vote in Parliament about this, maybe the pro-European wing of the Conservative Party, which actually remember, was 70% of Conservative MPs campaigned in favor of remaining, maybe they will speak up.
Pedro da Costa: But does that mean that if the scenario weren’t developed as you outline it, that Brexit really would not mean Brexit, that there still is [overlapping conversation 00:07:57]?
Jacob Kirkegaard: I mean--
Jeromin Zettelmeyer: Absolutely. We hope so.
Jacob Kirkegaard: No. But this gets into this complicated scenarios because if Theresa May loses a vote in parliament over launching Article 50, I can imagine she can do anything other than call new elections.
Jeromin Zettelmeyer: Exactly. So that would be the path.
Jacob Kirkegaard: And then--
Jeromin Zettelmeyer: We would call them the fact that given that labor representation in Parliament is a lot more pro-European than the labor base that voted in the Brexit vote. If that is combined with the fact that the Brexit implications look actually a lot bleaker than what even the--if you like median voter within the Conservative Party Parliamentary group expected, then we might consider that we get a rebellion against the path that the government is taking, which would then trigger elections would then might change the outcome. But it’s pretty dicey and difficult to predict.
Pedro da Costa: Yeah.
Jacob Kirkegaard: I mean, basically, you will need to have Parliament stand up and say, “You know what, we are sovereign and we actually can overrule this advisory referendum that we just had,” which will be a ballsy political statement. But at the same time as Jeromin said, if it turns out that the economic prospects for the UK is really quite bleak as a result of what looks like a hard Brexit, who knows? Maybe they’ll do it.
Pedro da Costa: So, Jeromin, just to end with you, let’s say if ruling out this rosy very qualified scenario in which everything works out and Brexit is not Brexit. If Britain does continue on the path that it appears to be on, what does the economy look like? We’ve had a severe devaluation of the pound, some people think that that might boost exports. In fact, the pro-Brexit camp has been quick to argue that, look, the data hasn’t fallen off of a cliff and we’re doing just fine.
Jeromin Zettelmeyer: Yeah. I mean, I think there are sort of essentially two stories of why economically the implications for Britain might not be as bad. One is the story that was actually advanced during the campaign by the Brexiteers, which is that by getting rid from the EU, the UK might move towards a more deregulated model that’s more integrated in fact with the rest of the world than it would be within the EU.
Now, given I think the tremendous difficulty of negotiating new Free Trade Agreements, I think that second part of the argument is rather impossible. And also, let’s not forget that in terms of the politics of Brexit, that these sounds coming out of the UK government have not been under the direction of deregulation. They have been rather seminal I would say as say Social Democratic Parties and the European continent had been advocating, which is a fantastic irony. You want to break away from the--if you like centrist, socialist-inspired continental model and you do it, and then we invent that model in the UK five minutes later.
So, that’s sort of one argument, which I think will not work.
So, the other argument is indeed the depreciation of the pound that might do good things for the British manufacturing sector. And I think that’s true. It may do good things for the British manufacturing sector. But the essential plausibility of a more depreciated pound in the longer run I think is linked more or less one for one to the fact that the UK will lose its preeminence in the financial sector. And so, you have to ask, “Is this a good thing or not?” And so, where I’m skeptical of having very large financial sectors in many countries at a global level.
I also think that it may be in the UK’s comparative advantage to be a supplier of financial services to Europe and much of the rest of the world. And so, to make your manufacturing sector strong by using what is arguably your strongest area of comparative advantage doesn’t strike me as a great proposition.
Pedro da Costa: No reason to kill the golden goose as they say.
Jeromin Zettelmeyer: Exactly.
Pedro da Costa: Thank you so much guys. I appreciate your time.