Bruegel Institute

October 28, 2020 Souwie

As the 31st of December Brexit deadline looms ever closer, we look back at over 4 years and 9 rounds of UK/EU negotiations on Britain’s withdrawal from the Union. The EU is Britain’s biggest trading partner, the UK is the EU’s second biggest trading partner after the US. Thus far, the Withdrawal Agreement, effective as of February 2020, is the most tangible evidence of the future EU/UK relationship. But if one ignores the politics and ideological chest thumping for a moment, does the answer lie in approaching Brexit simply as one of the largest, most ambitious trade deals in history.

‘If we don’t achieve some sort of deal, history will not look kindly upon us’ says Director of the Bruegel Institute, Guntram Wolff. Although it might seem that little progress has been made on Brexit besides increasing levels of acrimony between the divorcees, one should not overlook the remarkably united and hence relatively rapid response from the EU. Composed of 27 member states, all of which have varied trading relations with the UK, most agree that credit goes to Michel Barnier and his team for ensuring a united EU stance.

André Sapir also credits the Trump presidency with helping the EU ‘to maintain cohesion on Brexit’. Perhaps more importantly, he predicts that a change of president in the US, will have a significant impact on EU/UK relations. This remains to be seen but Democratic candidate, Joe Biden, has made it clear that the Good Friday agreement must be respected. Sapir admits that Westminster’s recent amendment to the Withdrawal Agreement with regards to the Irish question, ‘was like a bomb’ that ‘very nearly derailed negotiations’.

No to the European Court of Justice

Aside from this apparently intractable issue, two others remain. The need for a so-called ‘level playing field’, meaning agreement on a common dispute settlement mechanism that is not the European Court of Justice. And, the somewhat erroneous issue of fisheries. The latter has caused concern on both sides. It is more symbolic than real in terms of its economic importance to a Brexit trade deal. The contribution of the fishing sectors to the economies of both the EU and the UK are negligible.

However, fishing agreements affect coastal communities in France and Scotland as well as the Netherlands and Denmark, to a lesser degree. So politically, it is a highly charged issue. The EU has previously tied access to financial markets to fishing rights but commentators agree that this may prove counter-productive to a Brexit trade deal. As Deputy Director of Bruegel, Maria Demertzis, asks, ‘why are we spending all our dry gun power on an issue that is less important than other things?’

‘I’m not frightened at all by the fisheries issue’ – André Sapir.

But Sapir is more optimistic. ‘Personally, I’m not frightened at all by the fisheries’ he says. Pointing out that the fish which are taken out of British waters, are consumed on the plates of the EU27. This is the essence of a trade deal he insists. The Senior Bruegel Fellow also notes that the three major sticking points in Brexit negotiations have remained largely unchanged. He sees this as positive. With regards to the level playing field issue, Sapir suggests that both sides would have to agree on a set of trading rules, ‘almost identical to what we have now’. They would then have to find an alternative to the European Court of Justice, to ensure enforcement. Clearly it would have to be ‘something that both sides can trust’ in order for a Brexit trade deal to work.

‘Trust based on mutual interests is really what lies at the core of this agreement’ he says. But the issue of trust is a delicate one. Although most agree that European and British interests lie close together, trust between the two sides has been stretched over the past 4 years of rocky negotiations. Demertzis points to the ‘symbolic significance’ of the UK’s recent decision to ignore previous agreements and go against international law. Such actions highlight the fact that trust alone is not enough. Guntram Wolff agrees, emphasising the importance of clear rules that can be effectively enforced. Essentially, it is about ‘finding the right balance between access to the market and ensuring a level playing field’. Deputy Director, Demertizis agrees that financial markets and access to them is a key issue. She also raises the issue of defence. Noting that this too is an important element for the EU to try and secure.

The time for game playing is over’ – Guntram Wolff

But it is Guntram Wolff’s comment that, ‘the time for game playing is over’, which echoes the sentiment of many EU negotiators. Will there be a Brexit trade deal, at the very last minute? Maria Demertzis and André Sapir are optimistic that some sort of agreement will be reached. Wolff is less optimistic, insisting that there will be no more extensions. ‘We are in the tunnel and everyone will have to find a way to agree’ he says. As the economic realities of Brexit, made worse by the global pandemic, become increasingly clear, it is hoped that pragmatism triumphs over misplaced idealism. Trade has formed the foundation for many a peace treaty. Brexit, one hopes, will prove no different.

May 13, 2020 Souwie

This EU budget will include an economic recovery plan for the pandemic. Traditional divisions between north and south, east and west may prove even more stark than usual. Many also question whether Von der Leyen’s much publicised Green Deal will survive a post-corona world. But what if the Green Deal could be re-purposed to drive economic recovery in Europe and bridge political divides? Many wealthy northern European nations are deeply committed to going green and may well be more willing to fund a Green corona recovery plan.

EU Commission president, Ursula Von der Leyen has spoken of a one trillion euro corona recovery fund. As yet, however, it is unclear where this money is coming from. The EU has a variety of so-called instruments or economic tools at its disposal. It uses them to collect and re-distribute funds to countries and industries most in need. However, it is not able to collect taxes like a nation state. So its revenue is entirely dependent on donations from Member States. At present, each Member State transfers approximately 1% of its national budget to the EU. The EU in turn allocates this money in the form of grants to selected Member States, foreign countries, farmers, researchers etc. The EU budget must balance each year, this means that the EU cannot borrow money. If it wants to make more grants, it needs more revenue.

The question of loans versus grants has been a vexed one. In general, the Northern member states led by the Netherlands and Austria, have pushed for loans, which will require repayment, with interest. The more hard hit southern member states, including Spain and Italy, have called for more grants or money transfers which will not require repayment. Italy even raised the idea of issuing coronabonds – mutualized debt, provided through the European Stability Mechanism (ESM). These differences are not new.

European Stability Mechanism credit lines to come with minimal strings attached.

The financial crisis of 2008 raised similar divisions between the more frugal, debt-wary north and the less stringent south. It took much wrangling and negotiation last month to reach agreement on the terms of the credit lines associated with the ESM. All member states will now have access to 2% of their GDP for corona related costs including prevention. The loans will come at very low cost, around 0.1% with maturities of 10 years. This €240 billion package should be available from 15^th May. The Commission has proposed that these loans be free of normal conditions such as debt sustainability. Brussels will simply check that the funds are used for coronavirus related health spending and no more.

But what of post-corona economic recovery measures? Eurozone economies are expected to shrink by 7.4% this year – the worst recession in the Union’s history. National politicians will come under increasing pressure from their respective electorates to deliver, as unemployment rises and businesses close. Whatever the final amount and mix of the EU corona recovery plan, the issue of how exactly this money will be spent is crucial.

No discussion thus far about how exactly corona recovery funds will be spent.

Director of the Bruegel Institute, Guntram B. Wolff, points out that there has been little discussion and no agreement thus far on which companies and industries will benefit from EU support in the recovery period. Wolff worries that member states will support different companies and industries based on political rather than economic concerns. The result, could be fragmentation of the single market. This in turn will weaken the EU economy, just when it needs all the strength it can muster. Belgian economist, Andre Sapir, agrees that ‘coordination is absolutely central to all economic solutions to this crisis.’

The EU Green Deal is Von der Leyen’s flagship initiative. Upon launch in December last year she described it as ‘Europe’s man-on-the-moon moment’. Described by some as ambitious and others as merely a set of targets, nothing similar has been attempted before. Economic progress since the industrial revolution has been heavily reliant on fossil fuels. It is as Jeffrey Sachs says, ‘the first comprehensive plan to achieve sustainable development in any major world region.’

‘Going green might be less painfully done now’ – Guntram B. Wolff.

The New Green Deal will involve an overhaul of nearly every major aspect of the EU economy, including energy, food, transport and manufacturing. Clearly this is not going to be easy. But a comprehensive response to the economic effects of the pandemic will require similar attention to all aspects of the economy. Under the circumstances, ‘going green might be less painfully done now’ says Wolff, as switching costs may be lower.

The Green Deal is going to cost money. The plan involves allocating 25% of the EU budget to climate action. In order to pay for this, the EU wants to reallocate funds from the Common Agricultural Policy (CAP) and infrastructure toward environmental protection. The plan also makes mention of various initiatives designed to make future EU financing for Member States dependent on compliance with Green practices.

The European economic governance framework, for example, may be strengthened in order to incentivise green public investment. Further, the European Investment Bank will be supported in its efforts to become a climatebank. A Just Transition Fund has also been proposed to provide assistance to companies and regions to go green. Countries like Poland, Hungary and the Czech Republic have thus far pushed back against the plan. They are all heavily dependent on fossil fuels and their economies less developed than those of Western Europe.

Why not make it Green?

Tying the corona recovery package to the Green Deal would not be easy. But given that large amounts of EU funding is going to have to be distributed and accounted for in the wake of the pandemic, why not make it Green? So far discussions have been largely economic, but the EU suffers from a lack of political unity. The real question then is, could a Green corona recovery plan, provide that much needed unity? A goal behind which the majority of Europeans and their Member States could get behind?

Would Northern states be more willing to put their hard earned money into the communal pot, knowing that it would be used to help further Europe’s green transition? Would this idea be one that national politicians could sell to their voters? This time last year Greek economist and politician, Yanis Varouvakis, suggested that a radical Green New Deal has the potential to unite progressives across Europe. Could a green corona recovery plan prove to be the great leveller across north and south, east and west?