Stephen Booth is Acting Director of Open Europe.
The UK is leaving the EU in two weeks’ time but, as Mark Wallace noted recently on this site, “much of the Government’s policy for life after EU membership is as yet unpublished and unknown.” What we probably can say we know is that this Government will prioritise the ability to diverge from EU rules in the future over securing the best possible EU market access after the transition period ends in January 2021. In other words, its priority will be to “take back control”.
As I have argued in previous columns, the UK-EU trade negotiations over the next 11 months will be important and the specific details will matter for individual sectors and firms. Nevertheless, whatever the exact form our new trade relationship with the EU takes, it will mean greater freedom for the UK to set its own course on matters of trade, regulation and immigration. The question is what the UK should do with this independence.
The Prime Minister yesterday outlined the broad shape of the UK’s new immigration regime. “By putting people before passports, we will be able to attract the best talent from around the world, wherever they may be,” he said. Immigration is arguably the policy area in which it will be easiest to reach a new post-Brexit consensus. There is already evidence to suggest that the prospect of the Government regaining the ability to fully control who can legally work and live in the UK is changing attitudes. According to YouGov, prior to the 2016 referendum “Immigration and Asylum” ranked above “Health”, “Crime”, “Environment” and the “Economy” as the issue voters thought the most important facing the country. It has now completely slipped down the public’s list of priorities.
Theoretically, EU membership did not prevent the UK from attracting the brightest and the best from the rest of the world, but the political reality was that an almost unlimited supply of labour from Europe meant that policy towards the rest of the world became too restrictive. Many UK industries will still be reliant on lower-skilled labour and future governments may differ in their view on the appropriate scale of immigration, and how much of this to leave to the market. But the UK will have far greater flexibility to tailor policy to prefer higher skills, which, all things being equal, is likely to be more economically productive.
Withdrawal from the EU provides a necessity and an opportunity to illustrate that the UK is “open for business”. While some EU regulation has liberalised trade across the single market, the UK must now consider how it might alter existing EU rules it has inherited, diverge from EU rules in the future, and also ensure domestic legislation is geared towards maximising the UK’s competitive position.
Financial services are one of the UK’s natural strengths and a crucial part of the economy, contributing seven per cent of economic output and 23 per cent of UK service exports. There are several examples of financial regulations the UK would have approached differently independently of the EU. For instance, the EU’s Solvency II rules for insurance firms do not adequately reflect a UK market where insurers tend to play a bigger role in providing long-term savings, such as annuities, than in many other EU countries. UK regulators have resorted to cumbersome “workarounds”, but instead the Government should prioritise reforming the rules to allow the sector to more effectively channel funds towards long-term investment, such as the infrastructure projects beloved of the new administration.
The bankers’ bonus cap is another example of how EU policymaking can go awry. The cap was introduced under the EU’s implementation of the global Basel III banking rules on capital requirements. The UK opposed the cap but not for the laissez-faire reasons often assumed. The UK was actually leading the calls to enable national regulators to impose tougher capital requirements on their banks, against resistance from France and Germany, which feared that higher capital thresholds might expose their banks’ fragility in the wake of the eurozone crisis. The result was a fudge, which the European Parliament felt compelled to adorn with the bonus cap. Ultimately, the cap did little to curb the problem it sought to solve: ending excessive remuneration and incentives to take risk. Meanwhile, rival financial hubs, such as Hong Kong, Singapore and New York, do not have a cap on bonuses; the rule therefore acts as a drag on UK competitiveness.
An independent trade policy represents a different challenge and opportunity. It is unlikely that, in and of themselves, new trade deals will radically transform UK GDP in the short-term. However, Brexit or no Brexit, it is vital that the UK diversifies its economic relationships away from Europe. It was Angela Merkel who pointed out that Europe had only seven per cent of the global population and produced only 25 per cent of global GDP, but that it accounted for almost 50 per cent of global social expenditure. We know that the first two figures are only bound to fall, due to demographics, and reducing the third will be incredibly difficult for European politicians already fearful of a populist wave. The UK will lose the EU’s mass but will gain flexibility with new and old trade partners. It must ensure that it uses its new-found suppleness in order to give itself a head start on positioning itself for the global economy of the future.
Ultimately, what I am describing are examples of the choices the UK can make as a self-governing national democracy. I suspect that the increased scrutiny, accountability and responsibility that flows from this change of circumstances will be the greatest benefit of Brexit, although this is of course unquantifiable.
With greater freedom and independence comes opportunity but also greater risks. Elections will be higher stakes, as any government with a majority can steer the country on a radically different course, for good or bad. But no longer can the EU be blamed, rightly or wrongly, for the nation’s ills. We will all be forced to up our game.