Brexit: A game of bluff

Size does not necessarily equal strength, and the European Union has holes in its strategy.

When you are dealt a bad hand in a poker game, there remains the option to keep your cards close to the chest. Another player may mistakenly surrender. Bluffing is what Theresa May resorted to in her Conservative Party speech. In fact, she may have just revealed some of her play when she quipped about Boris Johnson perhaps “being able to stay on message for four days”. For if you do not blink, you do stand a chance.

Let’s walk the argument. On the surface, the UK is done in by Brexit. A deadline for negotiating the exit, the impossibility to ink other trade treaties while inside the EU, and EU parties for whom a successful Brexit means political suicide. Indeed, if it was proven one can enjoy single market benefits without freedom of movement, not to mention financial  “passporting” into the EU, the tide against migration would become a tsunami. A successful Brexit is contagious.

But with a martial sounding speech, Ms. May is commandeering the resource that is most cruelly absent inside the rest of the EU: unity of purpose and boldness. Division inside the remaining EU and doubts about its sustainability are her best allies. Then too, she may garner indirect support from outside partners. These days, mega-trade treaties – TTIP and TPP – are falling apart. The EU’s trade strategy with countries as important as India and Japan seems deadlocked. With China, a quarrel is looming over market economy status and trade defence instruments. Whoever is elected in the United States will not be a great friend of free trade. The next few years seem to herald more horse trading among trade partners. Theresa May may have little competition as a free trade champion.

Size does not equal with strength. The European Union has holes in its strategy. Free movement of goods is mutually advantageous, and in fact competitive devaluation of the British pound would be highly damaging to other EU exports, including to third countries. British retirees and vacationers are a resource to all Club Med countries and France. Not all of the UK’s other trade partners believe in the “global UK” when it is only a fraction of the EU. But when it comes to services and capital markets, the UK already has its chances. Were the EU to adopt more regulations and restrictions, these chances would increase, as they will if political turmoil increases. The EU’s toughest trade partner, China, has already signalled its willingness to talk free trade, and will surely leverage the UK to counter more resolute EU trade and investment policies. And what about the US, already up in arms to protect its web giants’ tax privileges?

It is not a pretty game. If the UK wins, the risks of political contagion inside the EU are tremendous.  And a failed hard Brexit, implying a recessive UK in the doghouse of Europe, is a lose-lose proposition. A compromise has to emerge, but not without several tests. The first is how the UK can pre-negotiate the terms of future trade deals with partners outside the EU. Since these partners will not commit in the dark, the early recourse to Article 50 was indeed a pre-requisite. The second hurdle, failing an EFTA status that is politically inconceivable for Europeans, is attaining membership or external participation in the Customs Union, or external participation. Crucially, this would not include services and capital markets, so that European are not faced with a “winning” Brexit. The UK would not need to renegotiate agreements on goods with all of EU’s external partners. Meanwhile, services, regulatory agreements and capital markets are the stuff of the future, and the UK could easily demonstrate to others that it unwinds some of the EU’s regulatory excesses.

The EU is under much pressure. It needs to overcome its divisions in external trade and investment policies, with more federal action. Contradictorily, it must stem its own regulatory tide. It must create effective external borders or face those who, egged on by Britain’s example, want to end Schengen. In short, it needs an “ever closer union” in key areas, and a curtailing of EU ambitions in others.

Above all, it needs a collective will. Theresa May’s bluff on the strength of a global UK has one thing going for it – the current weakness of integrative and outward looking parties inside much of the EU. Her speech should be a wake up call for them.

The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of their individual authors.


ECFR Alumni · Director, Asia and China Programme
Senior Policy Fellow

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