The UK Labour Party is being assailed from all sides over its stance on Brexit – and ridiculed for its on-off efforts to bring the government of Theresa May down and force a General Election. What are its real attitudes and options?
Up until now Jeremy Corbyn’s team have played a careful balancing act – respecting the result of the referendum on the one hand, while making occasional gestures to those who want a second referendum on the other. But now it’s decision time: with the political calculus in parliament balanced on a knife-edge, the decisions taken by the Labour Party leadership over the coming weeks could have huge repercussions for the party, and for the country.
There is no easy route forward. The European Union has long been a source of division on the Left, and the Brexit vote has brought these divisions to the fore. One of the reasons Brexit is so difficult is that it bundles together various complex issues – trade, regulation, migration, democracy, etc – into a single, binary choice. Many of the issues at stake are mutually exclusive, therefore arriving at a Leave/Remain position involves making a series of difficult trade-offs. By attaching slightly different weightings to different priorities, it is possible for two people who otherwise agree on most political issues to arrive at opposing views on the EU.
A helpful framework for untangling these issues is Dani Rodrik’s impossibility trilemma. This states that democracy, national sovereignty and cross border economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full. In the context of Brexit, it means that we can do any two of the following:
a) Retain the benefits of economic integration that come via membership of the EU’s single market and customs union;
b) Reclaim national sovereignty by returning powers to the British parliament that currently lie with the European institutions;
c) Uphold democratic principles by ensuring that we have a say over all the laws we are subjected to.
May’s plan partially achieves a) and b), while sacrificing c). Her strategy has been to retain some of the benefits of economic integration to avoid the damage resulting from a cliff edge, while reclaiming national sovereignty over certain key areas (immigration, agriculture, fisheries etc). However, the price is that EU institutions will still have considerable influence over our laws and regulations.
The Labour Party’s position has become clearer over time. In a speechdelivered earlier this year, Corbyn stated that Labour’s priorities were as follows:
– Negotiate a deal that gives full “tariff-free access” to the single market;
– Negotiate a new customs union with the EU, while ensuring that the UK has a say in future trade deals;
– Not accept any situation where the UK is subject to all EU rules and EU law, yet has no say in making those laws;
– Negotiate protections or exemptions from current rules and directives “where necessary” that push privatisation and public service competition or restrict the government’s ability to intervene to support domestic industry.
The first two of these seek to keep the benefits of economic integration that come via the single market and customs union. The third is about maintaining democracy, while the fourth is about reclaiming national sovereignty. Labour is trying to have all three ends served at once. This is an internally contradictory position that falls foul of the Brexit trilemma, meaning that trade-offs will likely have to be made.
Labour’s official line is that May should “step aside” and let a Labour government negotiate an improvement on her deal. While this might be a savvy political move, the chances of Labour being able to significantly improve on May’s deeply unsatisfactory deal are extremely slim – as the EU have already made clear.
EU red lines
The EU’s red lines have been clear from the beginning, and there is little reason to expect any more concessions – particularly if the general strategy adopted is similar to that of May’s (i.e. attempt to retain some of the benefits of economic integration, while reclaiming national sovereignty over certain areas such as immigration and agriculture). In order to strike a deal along these lines, Labour would inevitably have to compromise, which would most likely involve accepting a situation where the UK will be subject to some EU rules and EU laws while having no say in making those laws, and accepting EU State Aid and competition directives.
Importantly, it is not clear if such an approach would win the backing of parliament. Given the significant criticism that May’s deal has received, including from the Labour benches, it would be difficult for the leadership to successfully sell anything that looks remotely like May’s deal.
Some MPs have backed a so-called ‘Norway plus’ option, which would see the UK remaining in the European Economic Area (EEA) and joining a customs union with the EU. However, with the exception of a car-crash Brexit, this represents the worst of all worlds – sacrificing both democracy and national sovereignty in order to maintain the benefits of economic integration. It amounts to “all pay, no say” – accepting all EU laws and regulations while sacrificing any democratic say over them, while also contributing to EU budgets.
It is hard to imagine a world where our politicians and electorate – who voted for Brexit in order to “take back control” – would stomach such an outcome. In any case, Norwegian leaders have made it clear that they would oppose Britain’s application to join such an arrangement.
This leaves two possible options which, on the face of it at least, do not involve a significant loss of democracy and sovereignty. Firstly, Labour could favour a harder Brexit which seeks to reclaim national sovereignty and take back control of our rules and laws, while sacrificing economic integration – and incurring whatever economic cost that might carry (hereafter referred to as the ‘Lexit’ option). This effectively combines options b) and c) in the list above, while sacrificing a).
Secondly, Labour could favour a second referendum and campaign to remain in the EU and seek to transform it from within – and incur whatever political cost this might carry (hereafter referred to as the ‘Remain’ option). This effectively combines options a) and c) in the list above, while sacrificing b).
These are not black and white options – there is some room for nuance between them. But they represent two important strands of debate that are currently jostling to influence the Party. As the ‘Lexit’ option represents a radical break with the status quo, it is important to consider its implications carefully, and assess these against the case for remaining in the EU.
The case for Lexit
The case for Lexit relies heavily on four key assumptions. The first is that EU membership places significant constraints on key levers of domestic policy that would prevent a left-wing government from implementing its agenda. The second assumption is that these constraints can only be escaped by leaving the EU (i.e. reform within the EU is impossible). The third assumption is that once outside the EU, the UK will be able to exert sovereignty over these areas of policy as an independent country. The fourth assumption is that the benefits of this will more than offset the economic and political costs of leaving the EU. In the following sections, each of these will be examined in turn.
1. The constraints placed on domestic policy by EU membership
Few would dispute that EU membership places constraints on domestic policy, or that some areas of these constraints are problematic.
For the Left, two of the most contentious areas are State Aid and competition policy, which have been the subject of intense debate. While some argue that these rules would prevent a Labour government from being able to implement certain policies, such as taking industries into public ownership and intervening to support domestic industry, others argue that these claims are highly exaggerated. As is often the case, both positions contain elements of truth.
EU rules do not prohibit public ownership per se. Article 345 of the Treaty on the Functioning of the European Union (TFEU) states that “This Treaty shall in no way prejudice the rules in Member States governing the system of property ownership.” However, over time new liberalisation directives have required governments to open certain sectors to market competition, such as gas, electricity, postal services, telecommunications, and (more recently) railways. In these cases, public sector companies are allowed to exist, but must compete alongside private firms (or the public sector companies of other countries) in a market on a “level playing field”.
Similarly, while EU rules do not prevent states from providing support to domestic industry, they do prevent forms of support that are likely to ‘distort’ market competition. Where states wish to provide support to firms, they must do so on a commercial basis (i.e. on the same terms and with the same risks and rewards that a commercial private investor or lender would invest or lend at). Importantly, however, there are a number of exemptions to this which do allow states to provide support to industry on a sub-commercial, or ‘promotional’, basis.
The first of these is the ‘De Minimis Regulation’, which sets a threshold figure below which State Aid will not apply because it will be assumed that the aid will not distort competition. The current De Minimis threshold for aid granted to any one organisation is €200,000 – meaning that the European Commission does not need to be notified of any support that is below this limit.
State Aid support is also permitted in areas that fall within the scope of the General Block Exemption Regulation (GBER). These are activities that have been exempted from State Aid rules due to certain social, development or environmental objectives, and include things like regional aid, support for SMEs and start-ups, support for environmental protection and aid for research and development. There are also exemptions for social services such as education and healthcare.
For any interventions that do not fall within De Minimis limits or a block exemption regulation, states must provide the Commission with an ex-ante analysis of the ‘market failure’ that is being addressed – which can be a difficult and laborious task.
Whether or not these rules are a barrier to Labour’s economic agenda depends on the scope of the Party’s aspirations. Labour’s 2017 manifesto was very much in the vein of moderate European social democracy. Nearly all of the flagship policies already exist in other northern European countries such as Germany and the Nordic countries, and it would be possible to implement most of these within the EU’s State Aid and competition regimes. The reason these policies have not been implemented in the UK so far is not because of any EU rules – it is because successive UK governments, including Labour governments, have been ideologically opposed to them. As the chart below shows, the UK has consistently spent significantly less on State Aid expenditure relative to other Northern European economies.
However, while the EU’s State Aid and competition regime is relatively accommodating of social democracy, it is less accommodating of democratic socialism. At a basic level, the EU’s State Aid and competition regime is fundamentally rooted in the idea that goods and services are most efficiently produced by private firms operating in a competitive market, and that the state should only intervene in markets to ‘level the playing field’ or to correct certain identifiable market failures.
If Labour plans to mount a serious challenge to this logic and move beyond the moderate social democracy implied by its 2017 manifesto, then it is likely that this would place a Labour government on a collision course with the EU’s State Aid and competition authorities.
A final area of concern for many of the Left is around capital mobility. Some have argued – rightly in my view – that allowing capital to flow seamlessly across borders has imposed many costs on society while generating few benefits for ordinary people. As Grace Blakely explained in a recent article:
“Since the crisis, there has been a growing recognition amongst economists that capital inflows and outflows affect both the structure of the economy and the risk of financial crises. As such, capital controls are now recognised as an important macroprudential tool for promoting financial stability.”
However, because the free movement of capital is one of the “four freedoms” that is codified in TFEU, introducing any controls on capital mobility would again probably place the government on a collision course with European authorities (although so far Labour has not expressed support for introducing capital controls).
For the most part, however, the key source of division on the Left is not whether there are areas of EU policy that are problematic. Instead, the division is over what the best strategy for overcoming these problems should be.
2. The impossibility of reform within the EU
For Remainers, the best way to overcome the problems with the EU is not to leave it, but to reform it from within. For Lexiteers, the problem with this strategy is that the EU lacks the democratic structures to achieve meaningful reform: the Commission is unelected, while the European Parliament lacks teeth. According to many Lexiteers, the entire EU architecture has been set up in such a way as to make it impervious to democratic pressures. The tragic events in Greece are often held up as an example of why a ‘remain and reform’ strategy is destined to fail.
The lack of democracy across the EU institutions is certainly a legitimate cause for consternation, and the EU’s actions towards Greece deserve universal condemnation. But Greece is very different to the UK, in two key respects. The first is that Greece is a small peripheral state, whereas the UK is one of the most influential member states that is predicted to have the largest economy by the 2030s.
This is important, because the EU is not the rigid and uncompromising bureaucracy that it is often portrayed to be. In reality, it is a young and fluid institution that is constantly being remoulded and reformed around its internal power dynamics. EU laws and regulations are not permanent lines in the sand, but social constructions that are constantly being bent, broken, contested and revised over time – especially by the larger, more powerful states.
Recent statistics on enforcement actions against member states show that Germany is by far the biggest breaker of EU rules, and that the Germans have also been incredibly successful at shaping EU rules to suit their own interests. The UK has also been successful at influencing EU policy to suit its own interests, particularly in the areas of competition policy and financial services – two areas now being cited by Lexiteers as evidence of why we need to leave. But we should not underestimate the UK’s power to reshape EU policy in these areas once again.
The second reason why the UK is not like Greece is that the UK is not a member of the eurozone. The importance of this cannot be emphasised enough. In the event of a confrontation between a country that uses the euro and the EU, the bargaining power will always be firmly in the EU’s favour. This is because if push comes to shove, the European Central Bank can suffocate disobedient governments by letting bond vigilantes punish them on financial markets, and by failing to provide the banking sector with liquidity. This is why SYRIZA’s strategy failed in Greece, and it is also why the Italian government’s current confrontation with the European Commission will probably end in failure too.
But this is not the case with the UK. It is one of the few countries in the world that is in the privileged position of having its own currency, its own central bank, a freely floating exchange rate, and the ability to borrow fully in its own currency. This means that the worst that could happen in the event of a confrontation with the EU would be a fine and diplomatic row. Similarly, while eurozone countries face legal sanctions if they breach the deficit and debt limits contained within the EU’s Stability and Growth Pact, the UK is exempt from such sanctions. It is perhaps ironic that among all member states, it is the best placed to weather the consequences of non-compliance with EU policies and spearhead a campaign of ‘remain and reform’ – and yet it is the one state that has unilaterally decided to leave.
The story is similar with regard to capital controls: while it is true that the free movement of capital is a fundamental principle codified in the TFEU, again the picture is more nuanced. The treaty states that non-euro countries can “take the necessary protective measures” including introducing capital controls, for example if a sudden balance of payments crisis occurs. Iceland, which is not a member of the EU but is a member of the EEA, imposed capital controls in 2008 and kept them in place for nearly 10 years.
Eurozone countries do not have such legal leeway on capital controls. However, in practice two eurozone countries – Greece and Cyprus – have imposed capital controls in contravention of European treaties, again highlighting how EU rules are often bent and broken.
This highlights a wider point, which is that many arguments for Lexit are often rooted in a critique of the eurozone. Often these critiques, such as that offered by Costas Lapavitsas in his recent book ‘The Left Case Against the EU’, are clear and convincing. But many of these arguments do not apply to the UK, and therefore they do not amount to an argument for Brexit.
To make a convincing case for Brexit, it is also necessary to substantiate the third and fourth assumptions – that the UK will be able to exert sovereignty over new areas of policy as an independent country, and that the benefits of this will more than offset the economic costs of leaving. This is where we turn next.
Part One of a slightly edited/abridged version of an essay first published by Open Democracy
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