Brexit best for Britain: future opportunities under Theresa May

Prime Minister Theresa May has the task of negotiating the best possible EU exit deal for Britain.

Since the referendum on whether Britain should leave the EU I have received numerous telephone calls and emails from friends and colleagues who are EU nationals as well as from friends in America and Commonwealth countries who are genuinely mystified at the result. The Leave vote has been seen by them as a vote for xenophobia, racism, a “little Englander” mentality, withdrawal from the world stage and a rejection of Europe by Britain. In my judgment nothing could be further from the truth. Let me explain why.

Even for those who campaigned and voted for Leave, the result of the recent referendum was a great shock. It was a response to a single question, “Should the United Kingdom remain a member of the European Union or leave the European Union?” It did not fudge the issue and neither did the result: 48.1 per cent voted to remain, 51.9 per cent voted to leave. No post-Brexit planning had been done by either side, presumably because everyone thought Remain would win.

A number of those who voted Remain called for an immediate second referendum, refusing to accept the result. The decision by the people to leave the EU is more far-reaching than the two great watersheds of postwar British politics, the Attlee government of 1945, which introduced a comprehensive welfare state and the National Health Service, and nationalised whole sections of British industry, and the Thatcher government of 1979, which privatised state-own­ed industries, deregulated other areas of the economy, sold council houses to tenants and gave parents greater choice for their children, including in new kinds of schools.

In my judgment any attempt to undo the result of the referendum will be seen as a betrayal of the democratic process and a disdain by the political establishment of those who voted to leave because they think they know far better. This was a vote of no confidence in the Platonic guardians. As Nigel Lawson and others said in the two-day debate in the House of Lords (July 5), any attempt to undo the result will be political mayhem.

The EU is not working

In the first place the EU is not working. The euro as a common currency was set up because the euro area was what economists judged to be an “optimal currency area”. For the original six members (France, Germany, Italy, Belgium, The Netherlands and Luxembourg) this made sense as one could easily imagine free movement of labour and capital across their borders. Today the euro area is made up of 19 countries including such geographically dispersed and different countries as Finland, Greece, Iceland, Malta and Slovenia. Unemployment is low in Germany (4 per cent), Austria (6 per cent) and The Netherlands (6.5 per cent), but much higher in France (10 per cent), Italy (12 per cent), Portugal (12 per cent), Spain (20 per cent) and Greece (24 per cent). Unemployment in the UK, which is outside the euro, is 5 per cent.

The euro was set up as a monetary union but without a banking union, a fiscal union or a political union. When countries do not have the ability to devalue or revalue their currency because of shocks to their economies, the whole adjustment process is placed on domestic fiscal policy and changes in the level of wages, both of which are difficult to achieve in democracies.

Not only is the euro not working, neither is the Schengen Area, which comprises the 26 countries that have abolished passport and other types of control at their mutual borders. As a result of the migration crisis and terrorist attacks in Paris, seven of them (Austria, Belgium, Denmark, France, Germany, Norway and Sweden) have reintroduced controls on some or all of their borders, with five Schengen states erecting fences to keep out ­migrants. The free movement of labour is one of the EU’s four founding freedoms along with freedom of goods, services and capital.

A further aspect of the EU which is not working are traditional political parties. Because these have failed to respond to the aspirations of the citizens, there has been a growth in minority parties such as Alternative for Germany, UKIP, Front National (France) and Freedom Party (Austria), some of which have very unattractive and extremely right-wing, even fascist, elements.

As a political entity the EU has a weak common identity compared to a sovereign state. In the Lords debate, Norman Lamont, former chancellor of the exchequer, stated that “Europe is an entity without a demos, and thus it is without the potential for real democracy”.

The high unemployment in southern EU countries, the construction of fences by EU member states against other member states and the growth of minority political parties all suggest the EU is not working. These are not the result of peculiar British obsessions but are inherent in a EU driven by ever closer union. As it stands the EU in my judgment is not a sustainable political organisation and continued membership will involve us in fruitless debate.

The EU is a political project for “ever closer union”

Because the EU is not working it is in desperate need of reform. For most of its leaders and officials of the European Commission, reform means “ever closer union” between EU member states. This would result in more fiscal powers over tax and expenditure transferred from individual member-country governments to Brussels, targets set for numbers of migrants for each member state by Brussels rather than by themselves, and the creation of a European army and a defence force, publicised by the German government in a paper conveniently released following the British referendum.

“Ever closer union” requires a little more explanation. The European project started with the six founding member states in 1951 with the creation of the European Coal and Steel Community. Next came the 1957 Treaty of Rome and the Economic Community, then the Maastricht Treaty of 1993, which created the EU.

Through the European Communities Act of 1972, British courts are subject to the rulings of the European Court of Justice based in Luxembourg. The increasingly active court’s decisions have a growing impact on British life. Britain entered the EU in 1973 with a promise from the then prime minister, Edward Heath, that it would have no implications for our national sovereignty. This was patently untrue as history has shown.

The EU is a political project that seeks to create a transnational state with a government, parliament, currency, supreme court, and a common foreign and defence policy. Jean Monnet, one of the founding fathers of the project, said in the late 1940s that “there will be no peace in Europe if the states rebuild themselves on the basis of national sovereignty”.

The key to “ever closer union” is the EU’s acquis communautaire. This refers to the body of European treaties, directives, regulations, legal decisions and court judgments made since 1958 that take precedence over national laws. This must be accepted by all new member countries. No individual nation has the right to pass a law contradicting the acquis communautaire. New laws and regulations made in Brussels expand the acquis communautaire.

The irony, however, is that the recently released Attitudes Survey shows “ever closer union” is rejected by France (60 per cent), Italy (65 per cent), Germany (68 per cent), The Netherlands (73 per cent), Sweden (85 per cent) and Greece (86 per cent).

Regaining control of our affairs

The British choice to leave is a decision to regain the governance, law-making powers and control of our affairs. The greatest example of the benefits to be had from controlling our own affairs is the fact that we retain the pound sterling and are not a member of the euro area. This has allowed the pound to take some of the pressure when we have faced external shocks such as the financial crisis of 2008.

Another area not working for Britain is the Common Agricultural Policy. It consumes a high percentage of the EU budget, distorts trade, is one of the main areas of fraud in EU expenditures and overcompensates some countries, particularly France. Some agricultural subsidies maybe justified but not the CAP.

Regaining greater control of our affairs involves the repeal of the 1972 European Communities Act, which makes UK law subordinate to EU law, and leaving the EU. Not only that but there is a huge amount of detailed law and regulation that need to be assessed. Some of it we will continue with, some of it we will scrap.

By asserting such control we will also be doing a favour to other EU countries. Increasingly over recent years Britain has been seen as a drag on further integration within the EU. We opted out of the euro and the Schengen Agreement. Any attempt to create a European army, navy and air force would encounter huge resistance from Britain. Without us the EU can decide far more quickly to move in the direction in which it wishes to travel.

Our medium-term future is better outside the EU

The way forward requires a new prime minister and a new cabinet, which we now have, to launch a comprehensive set of new policies for the economy.

The first priority is to negotiate an exit from the EU on the best possible terms. This means new trade agreements, a level playing field for financial regulation and control over immigration.

On trade we need to develop the best negotiating team we can. New Zealand has already offered help because we are short of negotiators. Commonwealth countries such as Australia, Canada, New Zealand and India are open to agreements. Former US trade negotiator Robert Zoellick has suggested that the North American Free Trade Area (US, Canada, Mexico) should offer Britain associate status. France, Italy, Germany and Sweden have large firms that export manufactured products to Britain and are desperate for continued access to our markets. There is no reason why this should not be matched by access to the single market for financial and other services.

We are a big player in the single market and there is every reason to think we can negotiate a reasonable outcome. If we are excluded from the single market we will be able to strike new trade deals in the world’s growth markets in the Asia Pacific, Latin America and the Middle East, and with countries such as Indonesia, Mexico and The Philippines.

Given the result of the referendum, we cannot duck the issue of immigration. Continued immigration is essential for the British economy and for our public services. But following the Leave vote it is essential we have control over total numbers entering the UK and the freedom to admit the kind of economic migrants we choose.

We need a debate about criteria for asylum, tackling the problem of overstaying and removing those who are in Britain illegally. Our immigration system is too open to abuse. We need to create a consensus on all these issues. To suggest greater controls over immigration are impossible is an obvious starting negotiating position for the EU. To claim it is final is to rule out many possible trade-offs.

Next we need a coherent economic strategy that provides stability and reinvigorates enterprise economy. We need to boost enterprise. As Luke Johnson, a successful entrepreneur, says, “planning, employment law, environmental and energy legislation — all should be rigorously simplified”. Ex-chancellor George Osborne had already discarded his objective of a budget surplus by 2020, creating an opportunity for lower taxes on companies and increased infrastructure expenditure.

Reaching the Irish rate of 12.5 per cent is attractive; a 10 per cent corporation tax would be even better. Top of the list for increased infrastructure spending is London’s third airport, the Trans-Pennine railway, greater investment in the northern powerhouse and a house building program by local authorities and housing associations.

There are short-term economic costs to exit, with the possibility of uncertainty leading to reduced consumer and investment spending. The government urgently needs to show business that it means business, because business will not wait for the timetables of political parties or legislative assemblies. The fact that less than three weeks after the referendum we already had a new Prime Minister in Theresa May, who appointed her cabinet within days, has certainly helped to reduce uncertainty. It will take time to prove whether or not leaving the EU is successful. Both the Leave and Remain camps will be pushing their stories to show that it is either a success or a disaster. It will take a minimum of five years and probably 10 before a sensible judgment can be made.

The Leave vote and the losers from globalisation

The vote to leave touched a deep nerve in our society — something commented on by the Archbishop of Canterbury in the House of Lords. The vote was a judgment by people about the way that British society has developed over the past few decades: the growing divide between the rich and the rest, between winners and losers from globalisation; the rapid changes in our culture, which have left people confused and without a clear sense of identity; and a sense that modern Britain has become a two-class society with stagnant real incomes for lower-income earners, inadequate housing, high youth unemployment and millions of families without any ownership state in this society.

The vote therefore not only affects Brexit but is a wake-up call for us all. In this context — and most difficult of all — we need to set out how we can create a far more inclusive economy in which each family has a stake in our economic life. We need far more houses being built across all tenures: private ownership, housing associations and local authorities. We also need far more people being able to buy their own homes: 86 per cent would like to own their own home; at present only 62 per cent do so, the lowest level since 1985.

We need far more investment in training people for a digital world. We have 865,000 people between the ages of 16 and 24 who are NEETS — not in education, employment or training. Apprenticeship schemes, technical education and raising standards in schools are essential.

There are many challenges ahead in making Britain an even more dynamic enterprising economy and a fairer society. The Brexit vote has achieved exit from the EU. However the vote is also a wake-up call for all of us to face radical change in 21st-century capitalism.

What about the risks?

The three most serious risks from Brexit are the short-term economic cost, possible exclusion from the single market and Scotland voting for independence so as to rejoin the EU.

Because of the uncertainty and time associated with negotiating new trade agreements there are economic costs over the next 12 to 18 months. In view of the fact that we are consuming more than we are producing by running a balance of payments deficit, some fall in the pound has been a necessary adjustment. Some of the fall may have had a speculative element which may or may not turn out to be revalued. Already British stock markets have recovered.

Continued access to the single market would be the best outcome of the negotiations. If to remain in the single market we have to accept the freedom of EU citizens to live and work in Britain, we shall find ourselves outside. That is an inevitable conclusion of the referendum vote. We would then find ourselves in the same position as China and the US, Australia and India, some of which have increased their exports to the EU faster than we have. Exporters would face a protective tariff of on average 4 per cent; banks may find they can only trade in euro denominated instruments within the euro area.

The reception Scotland’s First Minister Nicola Sturgeon was given following the referendum made it clear that France and Spain would raise objections to Scotland being admitted to the EU because of the pressure they face from separatist movements by Basques and Catalans. Scotland would also lose the considerable net fiscal transfer it receives from Westminster, which, linked to a low and volatile oil price, makes it uncertain whether a vote for independence would in any event be successful.

There should be no risks for the three million or so EU nationals who had already settled in Britain before June 23, the day of the referendum vote. It’s quite outrageous that the government has not already made a clear commitment on the issues. These people should never be thought of as bargaining chips in the negotiations.

“A heart and a soul”

One final comment. The founders of the European movement, Konrad Adenauer, Jean Monnet, Alcide de Gasperi and Robert Schuman had a Christian conviction that underlay their politics. They were predominantly Catholic and their vision of Europe was based on Catholic social teaching, namely the dignity of each human being, the pursuit of the common good, subsidiarity and solidarity.

On November 5, 1990, Jacques Delors, three times president of the European Commission, the driving force for the creation of the euro and a devout Roman Catholic, made an appeal for the European Community to become a “real community” — not just a market but something that required a new “sense of belonging”, a European affectio societatis. We need, he said, for the EU to possess “a heart and soul”.

Just a year later he predicted that Europe could not succeed on the basis of legal expertise and know-how alone, adding: “If in the next 10 years we haven’t managed to give a soul to Europe, to give it spirituality and meaning, the game will be up … Today’s Europe lacks a heart and soul.” It was because Europe was not able to find a collective identity at a spiritual and national level that it was not able to make an appeal to Britain except on the basis of fear and scaremongering.

The Way Forward

1. A vote for Brexit is not a vote of no confidence in Europe. I am proud of my European heritage and voted in the 1975 referendum to remain in the EEC. It is however a vote of no confidence in the EU becoming a superstate. For me Brexit is a platform for the revitalisation of the British economy and the implementation of policies to move us to a fairer society.
2. Delors’s observation that the EU does not have “a heart and a soul” reflects the current reality. I doubt if it ever will. The heart and soul of Europe is to be found in the histories, languages and cultures of different countries and regions, not in concentrating more powers in the institutions of Brussels or in the artificial creation of a new flag, anthem and Europe day.
3. Brexit may open up other possibilities, namely a recognition that Europe as a spiritual heritage is not dependent on political unity any more than the Western cultural heritage requires that all Western countries, from France to Canada to New Zealand, need to be members of one political entity.
4. If the ideals of the founders of the European movement are to be realised, the EU must take a step back. The EU should become an organisation that facilitates “willing and active co-operation between independent sovereign states”. Containing nationalism is a worthy objective. Suppressing nationhood is damaging and counterproductive. Three areas of reform are crucial.
(a) One is the euro. Germany is the anchor state of the euro. Germany, France, Austria, The Netherlands, Belgium, Luxembourg and Denmark look like an optimal currency area in that one can easily imagine free movement of people, goods, services and capital between these countries. Other EU countries should have the freedom to re-establish their currencies and, if so, peg them to the euro, but with an adjustable peg (as happened in the Bretton Woods system), such that under the rules they draw up they are to revalue and devalue their currencies when in disequilibrium. In any event, because of the problems of countries within the euro area that run fiscal and balance-of-payments deficits, the German electorate will not continue footing the bill to bail these countries out.
(b) The EU at present is a protected customs union. It must retreat from its protectionism in agriculture and services and become a genuine free-trade area. Europe must show to the world that it is open for business.
(c) At present EU member states have regained control of their borders in a highly unsatisfactory way. The process whereby countries regain control of their borders should be formalised, with free movement remaining an ideal, but meanwhile subject to appropriate controls to meet local circumstances.

In short, Brexit could prove to be the catalyst for a renewed Britain and a renewed Europe. The task is immense. We cannot determine Europe’s future but we can our own. We in these four countries that comprise the UK need to regain the self-belief that we can strike out on our own in a globalised world, building trade links throughout the world and revitalising our own enterprise economy, which in turn will provide a basis for a fairer and more equitable ­society. I firmly believe we can succeed, which is why I voted to leave the European Union.

Lord Griffiths of Fforestfach is an academic, a politician and a banker. He served as the head of the Downing Street Policy Unit in Margaret Thatcher’s administration, and was dean of the City University Business School prior to entering government. This is an edited extract from Quadrant — www.quadrant.org.au