Labour’s Brexit trilemma: the least bad outcome? (2)

In the first part of his essay on UK Labour’s Brexit troubles Laurie Macfarlane examined two cases for ‘Lexit”: obviously the option most favoured by Jeremy Corbyn and his entourage but not the party as a whole.

Here he examines two more cases and concludes on the need to get into power on a “remain and reform” platform.

3. The UK’s ability to exert sovereignty in key policy areas as an independent country

The EU has made it clear that alignment on issues such as State Aid is a red line for any free trade agreement with the UK after Brexit. Were the UK to enter into a free trade agreement with the EU, there would be very little wiggle room to bend or break these rules. As a third party, the European Commission would enforce strict compliance, and terminate the agreement if the UK tried to deviate from them. The UK’s bargaining power would be extremely weak. 

Lexit therefore demands a hard form of Brexit, where post-Brexit arrangements with the EU are kept to a bare minimum. Any softer form of Brexit would mean that the UK government would not have control over the various policy levers that the case for Lexit relies on. Under such a scenario, the UK would have more flexibility over areas such as State Aid, although it would still be bound by WTO rules, which are narrower in scope compared with EU state aid rules. It would also be able to introduce capital controls if an elected government so wished. 

However, a Labour government would also find that it has less sovereignty over some areas of policy than it had before. As others have pointed out, in a world where production takes place through global networks and intra-industry trade dominates, so-called ‘non-tariff barriers’ such as regulatory standards play an incredibly important role in everything from the medicines we take, the food we consume and the safety of the flights we board. 

It is here where the EU’s key power lies. As Sir Ivan Rogers has pointed out:

The correct way to think of the EU in economic terms is as a “regulatory union”, with the appetite and ability to extend its rules extraterritorially: the so-called Brussels effect. The EU is a superpower in no other respect. But in this critical one, it is. And the idea that, on its own, the UK, can compete with massive regional trading blocs – the EU, the US, China – as a standard setter, on industrial goods to data, is an illusion.

As Anthony Barnett has noted, there is no way out of the EU’s regulated space for the UK. Even in a Lexit scenario, the UK would have to comply with European regulations and standards if it wants to maintain and expand its global production chains, but will have no say over these rules. For the same reasons, after Brexit the UK will be less able to hold multinational corporations to account compared with being inside the EU. An independent UK is simply not a large enough economic power to exert influence on large foreign-owned corporations. This is why Mark Zuckerberg agreed to appear before the European Parliament, but didn’t bother to respond to the invitation from the UK parliament. 

An independent UK – socialist or not – cannot fully insulate itself from the forces of global capital. The left-wing belief that it can shares a common trait with the right-wing fantasy that Brexit will create the conditions for “Empire 2.0” – both are rooted in a failure to come to terms with the UK’s rapidly diminishing power in the world. When it comes to regulating these forces, the reality is that an independent UK will be reduced to a “rule taker” that has to abide by decisions taken by the EU, China and the USA. So while Lexit might enhance national sovereignty over some policy areas, it will also reduce the amount of influence that the UK has over other policy areas. 

4. The economic and political costs of leaving the EU

Even if all of the above assumptions are met, a Lexit can only be justified if the expected benefits exceed the economic and political costs of leaving the EU. Because by definition a Lexit must resemble a hard Brexit, these costs will be high. There are broadly four issues of importance here. 

The first relates to jobs and trade. Leaving the single market and the customs union without any replacement trade agreement will cause severe disruption to trade and supply chains. In recent weeks, a plethora of analyses have been published which have attempted to estimate the economic impact of different Brexit scenarios. According to the Bank of England’s “disruptive scenario”, where tariffs and other barriers to trade between the UK and EU are introduced and no new trade deals are implemented within a five year period, GDP could fall by 8% relative to the path the economy was on prior to the EU referendum, unemployment could spike to 6% and inflation could rise to 4%. 

According to the Government’s own analysis, a no deal scenario could see GDP fall by 9% compared to today’s arrangements – with the main hit coming from the impact of customs costs, tariffs and non-tariff barriers. Similar estimations were arrived at by the independent National Institute of Economic and Social Research (NIESR). 

While it is right to treat the specific figures contained in these assessments with a degree of scepticism, it would be foolish to ignore their overall message. Moreover, while GDP is far from everything – particularly in a country where GDP growth has become decoupled from most people’s earnings – history shows that it is often the poorest who suffer the most from such severe economic shocks. 

Of course, the ultimate impact of any Brexit deal will depend on how the government decides to respond. In the face of a hard Brexit, it is likely that the government would respond with a programme of fiscal stimulus to offset the loss of demand. But replacing loss of access to continental supply chains and demand from European consumers is not something that can be achieved overnight. Even with an active fiscal response from government, it is likely that a Lexit would involve a painful adjustment process that will hit some parts of the country particularly hard, in the short to medium term at least. Such an outcome would be difficult to reconcile with the “jobs first Brexit” that Labour has promised the country. 

It is also worth considering the potential impact of this on Labour’s electoral fortunes. If Labour did manage to win a general election, there is a risk that the party would assume power during this painful adjustment process. Life was never going to be made easy for an incoming government led by Jeremy Corbyn, even if it were to happen under the most buoyant economic circumstances. But if this was to happen during the fallout of a hard Brexit, there is a significant risk that Labour’s plans for economic transformation would be derailed by short-term firefighting. 

Regardless of the extent to which a Labour government could be held responsible for the economic turmoil brought about by a hard Brexit, the electorate are unlikely to thank them for it if they are the party in power when the going gets tough.

The second issue relates to immigration. While it would be wrong to suggest that everyone who voted to Leave the EU did so because of concerns around immigration, it is clear that anti-immigrant sentiment played a key role in fuelling the Brexit vote. Since the referendum took place, hate crimes have surged, and many migrant communities have been made to feel unwelcome. The risk that a hard Brexit may exacerbate these trends – and help fuel a resurgent far right – must be taken seriously. It is also likely that a hard Brexit will lead to lower levels of overall immigration, even in the unlikely event that a Labour government does not introduce new controls on inward migration. There is already evidence that the UK has become a less attractive destination for migrants. Since migrants are a significant net positive to the economy, this will also impose a significant economic cost. 

Many on the Left are highly critical of the EU’s “fortress Europe” approach to its external borders. However, leaving the EU does nothing to address this, but will only guarantee that the UK has no power to influence the creation of a more humane European border regime in future.

The third area relates to domestic political forces. In order to get the type of hard Brexit required by Lexit through parliament, Labour would very likely need to ally with right-wing Brexiteers, who have their own plan for Brexit. This involves radical re-shaping of the UK economy along free-market lines by dismantling labour and environmental standards, opening up the NHS to global competition, and entering into a comprehensive trade deal with the USA – the conditions of which would make EU membership look like a socialist paradise. This would represent a colossal defeat for the Left, and the risk of this outcome materialising – however small it may be – should be taken very seriously indeed. 

Finally, there are geopolitical factors. The most significant of these relates to the prospect of a hard border on the island of Ireland, which many experts believe would pose a significant risk to the peace process won through the Good Friday Agreement. It is therefore incumbent on Lexiteers to provide a convincing solution for how a hard border can be avoided under a hard Brexit scenario (I have yet to hear one), or acknowledge that a hard border would be erected – and explain why that would be a price worth paying. There are also other geopolitical considerations that ought to be considered, such as the possibility that a hard Brexit may increase support for Scottish independence and accelerate the break-up of the United Kingdom.

Conclusion: towards the least bad outcome

From the very beginning, Brexit has been a process of weighing up a set of deeply unsatisfactory outcomes. The case for Lexit was predicated on being able to regain control over economic levers such as State Aid, competition policy and capital controls. However, doing so would involve sacrificing control over other areas of policy, while generating significant costs and risks. Moreover, given that the UK is not a member of the Eurozone, these levers could be utilised by a Labour government while in the EU – provided that there is the political will to do so. While this would also generate costs and risks, they would not be as high as those associated with a hard Brexit. 

As a democrat, the idea of a second referendum is deeply uncomfortable. It would certainly be preferable to have a general election first. But given how shambolically the Brexit process has been managed from the very beginning, giving the electorate another say is not as unreasonable as it might otherwise have been. In any case, it is difficult to see another way out of the political deadlock if a general election is not forthcoming, as seems likely.

While concerns are legitimate that a second referendum would undermine faith in democracy, they are somewhat alleviated by the fact that demographic trends are so firmly in favour of staying in the EU. It has been estimated that if nothing else changed from the 2016 referendum, Remain would have a majority by 2021, and this would increase steadily thereafter. So even if we leave the EU, we may well end up applying to get back in very soon, albeit on much worse terms than the current status quo.

Perhaps the biggest problem with a second referendum lies with the people who are campaigning for it on our airwaves. The likes of Alastair Campbell, Andrew Adonis and A.C. Grayling appear to have learnt nothing from the disastrous Remain campaign of 2016, and seem determined to simply rewind the clock back to 2016. In many ways, they epitomise what many people were voting against when they voted for Brexit. In this sense they are liabilities to the cause, rather than assets. If the campaign for a second referendum is to be successful, it must be made absolutely clear that the status quo is not an option. Critically, it must be led by figureheads who can clearly articulate the need for radical change – and who have the backing of the Labour leadership, as well as the SNP, Greens, Lib Dems and Plaid Cymru.

One silver lining from the Brexit debacle is that the Tories have been exposed as deeply divided and hopelessly incompetent. If Labour can successfully exploit these divisions, there is a very real opportunity to put the Tories out of power for a generation. Although it would need careful planning, such a strategy could involve painting the Brexit impasse as a crisis engineered by the Tories, highlighting that the only way out of the deadlock is to have another referendum, and then campaigning in the referendum on a radical platform of ‘remain and reform’. With the Tories weakened by internal division and political crises, and Labour’s grass roots membership firmly in favour of Remain, the party would be in a strong position to win the referendum – and ultimately the next general election. As Paul Mason has written:

But the prize is not simply a general election. It is an election in which your opponent, the Tory party, has fallen apart. That would deliver a solid Labour majority and create the possibility of a landslide for the progressive parties in parliament, which could bury free market cruelty forever and bring institutional democratic change to the UK.

Such a strategy is not without its risks. But for me at least, it’s the best route to arriving at the least bad outcome, in what is a deeply unsatisfactory state of affairs. 

This is the second part of a slightly edited version of an article originally published by Open Democracy 

Further reading:

Are the Labour leadership attitudes to Brexit just the austerity story all over again? Simon Wren Lewis, Mainly Macro

Manner in which referenda are held: Citizens Assembly, Ireland