Brexit Update

ATKINSON: Thank you very much. Hello, everybody. Thank you very much for joining us for this Council on Foreign Relations call. Very timely. And we are pleased this morning to have CFR Fellows Charlie Kupchan and Sebastian Mallaby with us to discuss “Brexit Update.”

I’d like to remind you all that this call is on the record, and in addition to CFR members there are invited members of the press present.

So let me turn first to Sebastian. You’re in the middle of everything in London, and I know that you’ve been speaking to many who are even more in the middle of policymaking. Tell us, what is this deal? There’s a tremendous political crisis, maybe, political fuss. Is this the deal to end all deals? Does this fix everything?

MALLABY: No, Caroline, it’s not the deal to end all deals. It’s really phase one. Phase one, although it runs to more than five hundred pages, only covers four things, really.

It establishes, first of all, the rights of European citizens already living in Britain, about three million of them, and they will be allowed to stay on the same legal basis. So there’s not going to be a mass eviction of residents, and vice versa. So there are maybe one million Britons living in the European Union, and their ability to stay is safeguarded.

The second is it settles the divorce bill, so-called, where Britain is going to pay into the European Union budget for years to come to make good on things like the pension obligations to European Union civil servants and so forth. That amounts to something like $50 billion over multiple years. So that’s number two.

Number three, it lays out the transition agreement. Which is to say that although the clock runs out on leaving the European Union on March the 29^th next year, there’s going to be a transition period after that running from the beginning of April 2019 through the end of 2020 where Britain will remain in—effectively in the European Union as it is now, but without a seat at the table for policymaking. So it will have what’s called the Norway option, where you’re in the single market but not part of the decision about the design of the single market. That, therefore, is supposed to last twenty-one months. But there is a rather strange provision where it can be extended once, and it can be extended—in the document it says—until 20XX. In other words, they haven’t yet filled in the latest possible moment at which Britain were to end this transition phase. So that’s still an unknown, and it may be ironed out in the next week or so.

And then, fourthly, and most controversially, this agreement sets out what’s known as the Irish backstop. This is one of those odd things which during the referendum campaign in 2016 was a bit discussed, but not really focused on, and it’s turned out to be the unexpected tail that wags the dog—how to deal with the question of Northern Ireland bordering on the Republic of Ireland, and do that without having a hard border with checks on the frontier, which would disrupt people who are used to crossing that border every day to get to their work, to go shopping, and so forth. To avoid that hard border, it’s been first of all necessary to guarantee that there won’t be checks on the border. So, therefore, Northern Ireland has to remain in the same economic area as southern Ireland. So Northern Ireland is going to remain effectively in the single market. And then the next question came up, which was, OK, so Northern Ireland is in the single market; what about the rest of Britain? I mean, goods could flow from Birmingham to Belfast, and wouldn’t that be a leak in the single market?

So the compromise that’s been hashed out—and this was the thing that took a long time—is that essentially Britain would—mainland Britain would be in the customs union. So that’s not quite as full of a coordination as Northern Ireland would have with the European Union, but Britain—mainland Britain would have the same tariff-free access for merchandise goods into the rest of Europe. It would not be quite so on the same page as Europe when it comes to things like health standards for food and a few other things.

And this is—this is called the Irish backstop. And therefore, what it means is that the politicians say it’s not going to come into force; but if we end that transition period in the year 20XX, as I was saying earlier, and there is no sufficiently deep trade agreement to guarantee frictionless movement across the intra-Irish border, then this backstop will kick in. And it’s actually rather likely that there won’t be a deep enough agreement on trade otherwise, therefore this Irish backstop will turn out to be the front stop; it will be actually the final trade basis for the Europeans and Britain.

So what has not been negotiated yet is sort of the future broader relationship between Britain and Europe. So the idea is Britain leaves in March, uses this transition period to talk about things like the common arrest warrants by which you can extradite criminal suspects from each other’s countries, share intelligence for policing, and a whole lot of other important practical collaborations which, you know, having got out of the existing deals that govern those collaborations, a whole lot of negotiating will have to be done to set out new collaborations to replace them.

ATKINSON: Thanks very much. Well, a brilliantly clear description of something that certainly sounds a bit arcane.

Charlie, it’s very British or European—I shouldn’t just say British because of the Irish thing being so important. If you speak to, as I did recently, to German policymakers and others, they’ve got other things on their mind than Brexit. Do you see it as just a peculiar British blip, I think Sebastian called it in a—in a piece that he wrote this week in The Washington Post, or is it a canary in the mine about deep political problems more broadly?

KUPCHAN: You know, what’s going on in the—in the U.K. is its own political mess that Sebastian just described. But I do think that it’s important to see it as part of a systemic dysfunction and a systemic set of acts of self-harm that seem to be sweeping across the Atlantic democracies. And the vote to move toward Brexit, the election of Donald Trump, what’s happening in Italy, in Poland, in Hungary, in Turkey, the rise of the Alternative for Germany as a—as a right-wing populist party, this is all part of the same—of the same fabric. And it has to do with, in my mind, the onset of the digital age and the dislocation to industrial society that has been caused by automation and AI.

It has to do with immigration. And I think it’s very difficult to untangle economic insecurity and identity politics. The two are being run together.

And in my mind, the Anglo-Saxon countries—the United States and the U.K.—are being the hardest hit for a couple of different reasons. One is that the U.K. and the U.S. generally have two-party democracies. The U.K. has more than two parties, but other than Conservative and Labour the parties are not very strong. And here we’ve got Democrats and Republicans, with some very smaller, weaker other parties. But what that means is that the angry voters really only have two places to go. You can go Republican/Democrat, you can go Conservative/Labour. And it pulls the main parties to the left and right extremes, and it has depopulated the political center.

That is starting to happen in continental Europe, but there the multiparty systems have essentially given other places for angry voters to go. The one exception to that is Italy, where the center has not held. And I think the other reason that the Anglo-Saxon countries are being particularly hard hit is that they less capable welfare states. The Brits used to have a more expansive welfare state, but it has been progressively dismantled. And so I do think it’s important to see Brexit and the political contortions that the U.K. is going through right now in that light. And it—you know, we don’t know where this is going to go. We don’t know when the pendulum is going to swing back in the right direction. But it is—it is, I think, a sign that we are going through—in some ways, an unrecognizable political moment in the—in the Atlantic world.

ATKINSON: Thanks very much. That’s quite grim. And, Sebastian, one of the things that looks a bit odd is that, as Charlie says, there are political contortions. We’re in a very different moment politically in the U.K. than any other time that we can remember. And yet, what you described is the agreement seems rather modest, and it’s changing. Maybe the U.K. is going to be like Norway, taking rules but not making them. And it seems, you know, as if the mountain labored and labored and has brought forth a mouse. Why is that? What have been the constraints that have made this deal so difficult? And, by the way, is it a good deal or a bad deal?

MALLABY: OK. So on the constraints first. I think there are two key drivers of the outcome that we have, which, first of all, that one absolute condition that Prime Minister Theresa May insisted upon was the ability to control immigration from the European Union. And when you demand the right to stop letting all Europeans in who want to come, you are, you know, going against one of what the Europeans call the four freedoms. And if you do that, you can’t also be in the single market. That was the kind of counter-redline from Brussels.

And therefore, Britain is ending up with a deal which is actually not like Norway, because Norway does accept free movement of people into Norway and, in exchange, gets the full benefit of the single market, including things like the passporting of financial services across borders. So in other words, deep access in service trade, as well as tariff-free access in merchandise trade. So that’s the first thing, that if you want to control immigration from Europe, you can’t have access to the single market. So that’s why although Northern Ireland will look a little bit like Norway, mainland Britain won’t, because it won’t have the service side of the trade access.

The second driver of this outcome in the document is Ireland. As I was saying earlier, because it was an absolute condition on the European side that there should not be a hard border within the island of Ireland—you know, the southern Irish, the Republic of Ireland were not going to tolerate that, and the rest of Europe backed the Republic of Ireland. So once that became an absolute essential negotiating objective, then it forced this domino effect where therefore Northern Ireland had to be economically very close to the EU in order to avoid a hard border, and mainland Britain couldn’t be too far from that. And so that’s why we end up with Britain in the customs union, although not in the single market.

So is that good or is it bad? Well, I think there’s a distinction between one’s economic judgement and one’s political judgement. Economically, it’s quite good in a sense that, you know, Britain’s main trade partner is, indeed, the European Union, something like forty-three percent of British exports go to the European Union. So maintaining tariff-free access by staying in the customs union is a good thing. It’s not as good as staying in the single market, which is what Britain has had up till now, but it’s much better than some of the alternative Brexits that one could have imagined. So economically it’s not bad.

Now, politically though is where the problem lies. And that’s because what Britain has had to agree to is being in a customs union, which means that Britain cannot go out and negotiate other free trade deals with Japan, or the United States, or whatever, because being in the customs union means you have to be kind of negotiated for by the trade negotiators at—in Brussels. So no separate British trade deals. Now, in my view, Britain probably wouldn’t have been able to negotiate great separate trade deals, but that is not the view or the perception of large chunks of the pro-Brexit British public. So politically that’s causing a lot of anger at Prime Minister Theresa May, because people do think they wish they had the ability to negotiate separate deals.

And it gets worse than that, because in addition to not being able to negotiate freely other trade deals, Britain is a position where it cannot leave the customs union without the rest of Europe approving the departure. So whereas right now, you know, Britain has been in the European Union, but always had the option of doing what it’s now done, which is to invoke the so-called Article 50, which says, you now, we’re giving you notice that we’re leaving—at least Britain had the—you know, in terms of—if you cared about sovereignty, at least Britain had the ability to leave. In this future envisaged Irish backstop, Britain loses that ability to get out. So it really becomes, you know, Hotel California, you check-in but you never leave. And I think for people, again, who care about sovereignty—which was a big issue in the referendum campaign—that just doesn’t go down well at all. So the verdict is really economically quite good, but politically, you know, highly unpopular.

ATKINSON: Thanks. So, Charlie, how much—there’s nothing much that the U.S. can do from here to affect this outcome. How much do you think it makes a difference for the United States’ interests, both economic, and political, and geopolitical—if the United Kingdom is in Europe or not in Europe? And I certainly—you and I when we were in the White House together certainly worked very closely with the U.K. And they, I would say, tended to punch up their weight in a lot of international discussions. But how do you see that question? Is this a—is this a blow to the United States? Or are we administering enough own-goals at the moment that this is not so large?

KUPCHAN: Just a quick follow up to what Sebastian said, and then I’ll address that.

ATKINSON: Yeah, please.

KUPCHAN: I agree very much with Sebastian that economically this is about as good as one could have hoped for, because it avoids the doomsday scenarios of ten-mile truck lines trying to get across the English Channel. And there’s also, I think, a certain sleight of hand here in the sense that even though mainland U.K. leaves the single market, they can still decide unilaterally in favor or regulatory convergence, even though they would be doing so without being told to do so by Brussels. And so effectively, the economic dislocation is minimized in this plan.

But I completely agree with Sebastian that precisely because of that it leaves Theresa May extremely exposed, and not just on the pro-Brexit side but also on the remain side, because folks are going to say: So we’re going to all this trouble, and we’re more or less sort of staying where we were, almost standstill, except we’ve lost our voice in the EU and, as Sebastian said, we no longer have the ability to get out, because the EU has to approve it. So I think she’s quite exposed. And maybe later we’ll talk about next steps.

On your question, Caroline, I do think that overall this is a setback for the United States. You’ll recall that President Obama flew to London in April 2016 and tried to convince the British electorate not to go for Brexit. And that’s because he felt very strongly that it was not in the United States’ interest to see the U.K. leave the European Union. And, you know, I think one of the—one of the downside effects here will be that the U.K. will no longer exercise its voice in the EU. And there is no country in Europe with more similar interests and outlooks—geopolitically and economically—than the U.K. And in that respect, the United States will miss London’s voice in European councils.

Secondly, I do think that we will see an overall diminution in the U.K.’s place in the world. That has—that was already, to some extent, priced in before the Brits got to the edge of Brexit. And that’s because what we’re witnessing here is a—is a stunning act of self-isolation. And I think there may be an effort to compensate by trying to punch above their weight in NATO or in the United Nations and other places. But this really does take Britain out, a step back from its role.

And I—you know, and I do think it’s important to put what’s happening in a broader historical context, in the sense that since 1815, you know, the end of the Napoleonic wars, either the U.K. or the United States have been the main architects and defenders of a globalized liberal international order based upon liberal principles. And the United States is now in a position in which it is saying: We’re not sure we like this order anymore. The U.K. hasn’t really backed away from the liberal order in the sense that it’s backed away from the EU, but it is still a supporter of the rules-based system more generally. But in this broader historical perspective, it really is stunning and quite worrisome that the two Anglo-Saxon countries that have built modernity as we know it are now in a situation in which they have stated quite clearly that they’re not so clear that they want to be the main supporters of this order anymore.

ATKINSON: Thanks very much for that.

I think it would be good to open up for questions now. And I’m going to go to the operator in a moment. I just wanted to remind all the participants that the call is on the record. And I’m—so remember that when you’re asking your questions. And as usual, please do try to keep your questions crisp and as questions.

Operator, please give the instructions.

OPERATOR: Thank you.

(Gives queuing instructions.)

ATKINSON: Thanks. And while you’re getting ready to ask questions—and I hope that many of you will ask them—let me ask actually both, but particularly Sebastian perhaps, what’s next? There were twists and turns. Is Theresa May going to hang on? Is this deal going to get through Parliament? Is it going to be the one that governs the exit? Is the exit going to happen? Just what—give us a bit of a sense of that.

MALLABY: Well, I was at a very heated, argumentative dinner last night with lots of people at the center of all this. And it was agreed we should stipulate as a kind of ground rule that any sentence anybody uttered implicitly had the word “probably” in it, at least twice, because things are in such flux that it’s incredibly difficult to know. But, I mean, the best sense of what’s going to happen next is as follows: Theresa May has, you know, got this long document, as I said, governing the first four items. It will be approved by the European Union leadership on—next week, I think on Thursday. It then goes to a vote in Parliament in Britain sometime in December.

As the thing stands now, there is extremely low chance that it gets passed, at least on first attempt. You know, the Conservative government led by Theresa May has a very slim majority, which is propped up by ten members of the Northern Irish DUP party. And the DUP has already stated that it will vote against the deal. Now, they could be bluffing, but probably not—they’re not going to probably climb down straight away. So you’ve lost the majority right there.

On top of that, you’ve probably got—you’ve got a block of, say, seventy or eighty hardline pro-Brexit Conservative members of Parliament who have been very critical of the deal. And a reasonable estimate is that something like thirty-five, i.e., maybe just under half, are actually going to go through with their threat and vote against the deal. And so now you’ve really lost a lot of the votes you need to get this thing through. If you had a lot of defections from the Labour Party, the opposition, that might be OK. But it seems like the defections there will be minimal.

So on first attempt it will fail. Now, what happens after that? You know, it could be that Theresa May goes back and negotiates a few more concessions and has another shot at convincing members of Parliament to vote for her deal. She might be assisted if the markets were crashing in the meantime and we had a kind of TARP-style situation where, if you remember, you know, the administration failed the first time to get the bank bailout plan through Congress after Lehman Brothers went down, and on the second attempt—because the markets were screaming very loudly—it did go through. So probably a second attempt, it might squeeze through. But it’s not certain.

If it fails, you’re then in a world where either Britain would crash out without a deal, and that’s the kind of chaotic scenario with the ten-mile backups of trucks trying to get across the border which Charlie was mentioning earlier. Or you pull some final trick to delay that. And, you know, the three tricks would be, number one, call an election. But the problem with the election idea is that the Labour Party might win it, and therefore the Conservatives are unlikely to risk that. Option two is you have a referendum again. People don’t like that thought either. There’s referendum fatigue in the country. It’s hard to think how you would actually phrase the questions. But that’s a possibility.

And then the third option would be to try to just get more time either by revoking Article 50 which set the clock ticking for Britain to leave—in other words, Britain would unilaterally say, sorry, we’re actually not leaving. And we’re still thinking about it, but this March 29 deadline is now inoperative. There’s a court case pending at the European Court of Justice which will test—which will rule on whether that unilateral revocation of Article 50 is actually legal. But if that were to be decided in favor of legality in the next three or four weeks, that could be very important in clarifying.

And just briefly, one last wildcard in all this is, of course, there are lots of rumors of a leadership challenge within the Conservative Party to Theresa May. These have been endemic in the last few months. You know, almost every Sunday there’s another, you know, breathless newspaper headline about how she’s only got twenty-four hours to save her prime ministership. She’s survived until now. This time the rumors are more intense. She’s faced a spate of resignations from her Cabinet. We’ll see what happens there, whether there’s a leadership shift. I think that’s a sort of fifty-fifty.

ATKINSON: Great. Thanks very much. We’ll—

KUPCHAN: I would just add quickly, Caroline, the last point that Sebastian made is, I think, very important because this is a situation where people are not just saying: What’s the right thing to do. It’s, what is in the interests of my party or my political future. And so everybody has the knives out. Other Tories are saying, you know, how can I—when should I put the knife in? Labour is saying, what’s the best way to get a new election. The pro-remain people are saying how can we orchestrate a second referendum? And so there’s just an enormous amount of political maneuvering going on as this—as this agreement moves forward.

ATKINSON: Right. Thanks for that.

Operator, do we have any questions on the line?

OPERATOR: Yes, ma’am.

ATKINSON: Please go ahead.

OPERATOR: Our first question—thank you. Our first question will come from Peter Galbraith with the Center for Arms Control.

Q: Hi. Caroline, you asked my question. But there was another part of it I wanted to—a part of it. First, what strategies might be adopted by people who wanted to have a second referendum, and whether there’s any real prospect—that is, revisiting the leave or remain decision? And secondly, how is this going to play out with Scotland, and the SNP, and Scottish independence? I know it’s been in abeyance for a while, but surely the chaos that seems to be there could revive the independence movement there, and demand for a new referendum.

ATKINSON: Thanks. Sebastian, do you want to have a go?

MALLABY: On the Scottish thing, I mean, one angle is that, you know, if under the Irish backstop Northern Ireland has a sort of specially close relationship with Europe, the Scottish are going to say: Can’t we have that too? Because obviously Scotland voted heavily to remain in the European Union and resents the whole exit idea. So that does, you know, reopen tensions between Scotland and England, because England won’t want to allow that and I think that becomes another irritant in the relationship between Scotland and England.

On the sort of how they get to referendum, you know, there are significant obstacles to getting there. I am sympathetic to the idea of a second referendum, but first of all you have to get a bill through Parliament. And doing that without the prime minister actively supporting that is procedurally difficult if the parliamentary system that we have. And secondly, you have to think about how to phrase the questions. I think any referendum would have to give those who want a clean break with Europe a chance to vote for something that they like, because otherwise that group of voters will view the whole thing as totally illegitimate. But how would you offer, as it were, a hard Brexit? You couldn’t just say you vote for just crashing out, because that is such a cataclysmic thing to invite people to vote for that it would be irresponsible to put that on the ballot. But you can’t articulate what hard Brexit means in any details, because there’s no such deal that’s been negotiated.

So I think it is difficult in the near term to see precisely how that works. What I think, though, is that if it was possible to buy more time by extending the Article 50 deadline, changing leadership maybe in the Conservative Party, giving a true believer Brexiter a chance to try to get a different deal, that would probably fail, you might then at least get to a point where those who feel they voted to leave and feel as if they’re being betrayed by, you know, the pointed-headed elites in London, the bureaucrats, the eurocrats, the elites generally, that kind of populist narrative, people need to see that a real, true believer Brexiter tried to get a good deal and couldn’t. And then if you got to there, then maybe it’s easier to envisage a referendum without crashing out being on the ballot.

ATKINSON: Thanks very much, Sebastian. Let’s go to the next question. That was a very good one. It’s amazing.

OPERATOR: Thank you. Our next question will come from Hari Hariharan with NWI.

ATKINSON: Go ahead, Hari.

OPERATOR: It looks like he disconnected. Our next question will come from Rick Niu with Starr Companies.

ATKINSON: Go ahead.

OPERATOR: Sir, your line is open. Please make sure you phone’s not on mute.

Q: Oh, sorry about that. Well, I wonder what the implication is about the standing of the U.K. in the World Trade Organization, and also its pending conversation with the United States, China, and a few other trading partners for either bilateral or multilateral trade negotiations.

ATKINSON Let me turn to Charlie for the U.K. standing more generally, you know, in the system, as you described it, of the liberal world order.

KUPCHAN: Well, I mean, I do think that watching this happen, looking at a U.K. political system that has effectively melted down, is not going to do great things for the U.K.’s standing anywhere. You know, I do think that there’s some confusing within the U.K., and maybe this is simply a talking point that the May government uses, but since the very beginning, since May first took office, the government has said, well, we can go out and we can negotiate trade deals with other parties, but maybe we can’t implement them until we’re ready to go. So we’re going to do a free trade deal with the U.S., we’re going to—you know, Great Britain out there in the world.

Well, that’s not going to happen while the U.K. is in the customs union. And I think other countries will shy away from engaging in that conversation until it’s clear where the U.K. is going to end up. So I do think that this is a kind of limbo which leaves the U.K. in a very sticky place, because the May government did promise that they were going to go out and negotiate new, wonderful trade deals with the rest of the world. And at least for now, that’s simply not going to happen. I’ll defer to Sebastian on an assessment of the U.K. and the WTO.

ATKINSON: OK. Sebastian, do you want to respond quickly on that, and then we’ll go to the next question?

MALLABY: Just very quickly. I mean, you know, I would put it—you know, I agree with Charlie. I’d just put it even more forcefully that, you know, the U.K. has taken itself out of trade politics, period, because it no longer has a voice as a part of the EU negotiating position, because it’s not going to be in the political councils of the EU. And it doesn’t have a voice individually as just Britain, because it’s still in the EU customs union. So it can’t have a separate position to the EU. So I think it’s basically, you know, neutered itself on trade politics.

ATKINSON: Thanks. (Laughs.) Operator, do we have another question?

OPERATOR: Yes, ma’am. Our next question will come from Ronnie Goldberg with USCIB.

Q: Thank you. My question actually was about the prospects for a new referendum. So it’s been answered.

ATKINSON: OK. Thanks very much. And just to remind, I think the operator did say, if you want to take yourself out of the queue you press star and then two.

So, Operator, who is next?

OPERATOR: We have Doug Rediker with Brookings.

ATKINSON: Ah, Doug.

Q: Hey, everybody. Hey, question, Sebastian, on your Article 50 reversal scenario, if the ECJ approves it. I’m curious, if you extend, how does that comport with the European Parliamentary election schedule of May of next year? Obviously that’s going ahead on the assumption that the U.K. is not putting up a slate of members to be elected to parliament—commissioners, et cetera, et cetera. Isn’t that sort of a wrench in the overall European parliamentary election schedule? And how receptive would the Europeans be to that scenario?

MALLABY: Doug, that’s a great question. I haven’t thought about that. But, you know, this court case would kind of get past your question, because if the U.K. has the unilateral ability to revoke Article 50, it could just do it. And it might mess up Europe’s plans for how they’re going to parcel out jobs in Brussels, but tough. So I think that’s one kind of answer. What you’re raising, though, actually does get to an additional point, which is that the part of the—part of the vision of extending and, you know, revoking Article 50, or playing for more time somehow, is the notion that perhaps after the European election next spring, the European Union may be in the mood to address stuff around free movement of people. Because, as you know, it’s unpopular not just in Britain, but also in Hungary, and Poland, and so forth, and in Italy.

And I think that, you know, the British hope—and this may be far-fetched—but the British hope is that if you allow the whole situation to ripen over time, the EU will be less purist in its embrace of free movement of people. It would therefore be easier for a remain camp to persuade the British public to vote in favor or remaining.

ATKINSON: Thanks. Charlie, do you want to add anything to that, on Doug’s question?

KUPCHAN: No. Just a comment on what Sebastian just said, and that’s that I don’t know that the timing works very well there, in the sense that, you know, once March—the end of March comes around, and the U.K. is out—assuming we get a deal—I think it’s irreversible. I think it’s goodbye and good luck.

ATKINSON: Right. (Laughs.) Operator, do we have another question?

OPERATOR: Yes, ma’am. Our next question will come from Lyric Hale with EconVue.

Q: Hi. Yes, thank you. I’m wondering if looking at the long view of history, and looking more the view from forty thousand feet, the EU itself, does this episode really maybe say less about Britain and more about the lack of flexibility or resilience of the European Union? How do you see this as part of the history? And, Sebastian, to your point about Hotel California, in terms of expansion, who would ever join, given Britain’s experience and the recent issues with Italy and Greece? So is this something that maybe we should look at from a different point of view?

ATKINSON: I want to turn this question to Charlie, for the broader European view. And of course, the Italy, and Greece, and Spain, Portugal, Ireland, those issues were very much around the single currency, the euro. But is the EU too inflexible to survive, Charlie?

KUPCHAN: Yeah. I mean, I’ll pick up on the previous comment from Sebastian that on the free movement of people—you know, there are those that say that if the EU had shown more flexibility with Cameron during the negotiation and cut him some slack on this issue, he would have had enough room for maneuver to avoid the fiasco that we confront now. And I think that’s a reasonable argument. And I agree with Sebastian that given that immigration is right now, you know, the real potential death knell of European integration, there may be movement on that front moving forward.

But I do think that at least for now the EU continues to exercise magnetism that has not yet significantly diminished, in the sense that—I mean, let’s look at Greece, right? Greece elects Tsipras. Tsipras says he’s going to do A, B, and C, and free Greece from the constraints of austerity. And the bottom line is he became a centrist pro-European. And he did what he was asked to do by the creditors. Italy has stepped back from its campaign promise to, you know, get out of the euro. We now are in a very difficult place on the budget issue and no one knows where that’s going to go. And that is a very dangerous issue because Italy is much, much bigger than Greece economically, and if there’s a financial crisis with Italy as ground zero it’s a much more—it’s a much more dangerous scenario.

But at least for now, I would say that we’re not looking at a situation in which, you know, the EU is kind of passed through some precipice and is on the way down. I would say that we don’t know, right? This is an important holding moment. The Italian elections, the fact that Merkel is stepping down, the fact that Macron is very pro-European but is sagging in popularity—these are—these are worrying signs. But I do think we need to kind of wait and see which way the political winds blow in the coming months.

ATKINSON: OK. Thanks for that.

Next question, Operator.

OPERATOR: Thank you. Our next question will come from Joel Meyer with Predata.

Q: Thank you. Regarding the dynamics in Parliament, I’m wondering if you think, with the People’s Vote campaign having the momentum it does, whether it makes it more difficult for Labour and Peace to back a government and to vote for May’s deal especially given that, you know, may Labour MPs would otherwise want to avoid crashing out of the EU with no deal. So what effect does that campaign have for them? Thank you.

ATKINSON: Sebastian, I think this is for you.

MALLABY: No, I don’t think the People’s Vote campaign has much impact on how Labour MPs are thinking about this vote. What does have an impact is what Charlie was saying earlier, is that people are split between sort of a substantive view of the best thing for the country on the relationship with Europe, and on the other hand their own political interests. And, you know, the Labour Party’s goal right now is to trigger an election, because they actually might win, despite the fact that their leader is the most left-wing leader that the party has had in memory.

So, you know, this is a chance to be seized, from their perspective. The Labour leadership is going to impose whatever it is that the government puts down, because they want to embarrass the election and try to have an election. And that’s—so when I talk to pro-European Labour MPs, and I say, come on, surely you’re going to vote in favor of this deal, because it’s better than crashing out, they don’t really—I mean, they kind of evade the question. But they’re not going to agree to that, because they’re going to vote with their party leadership, which is all about trying to just embarrass the government.

ATKINSON: Right. Poor Theresa May, at this point. (Laughs.) Operator.

OPERATOR: Thank you. Our next question will come from Jim Dingman with Pacifica Radio.

Q: Yes. Yes, hi. Thank you. What is your analysis of the promises of Brexit? Who’s going to benefit concretely with Brexit? And what is your analysis of that in terms of gross GDP, parts of the population job loss. What is your take on that?

ATKINSON: Sebastian, do you want to have a go on that one? So without outside—of course, it must depend what the Brexit deal looks like, I would think, who will be affected since the less drastic it is, the less anyone will be affected. But maybe you’d like to take that up? And perhaps also cover what we touched on briefly, which is the city of London.

MALLABY: Yeah. I mean, one potential winner is Paris, to the extent that there are, you know, whatever it is, one million or something French citizens working in London. Many of them are working in finance. You have the oddity in France that you have a highly excellent technical education system that generates lots of mathematicians, but a business environment and a tax system that encourages these very clever people to leave and go to London and create derivatives in the financial markets in London.

So all those people have been aggressively wooed to return to Paris. And the companies they work for have been wooed aggressively to return to Paris. And that’s been the game plan to kind of reclaim a chunk of the financial sector back to front. And there’s been similar efforts by Frankfurt and other—you know, Luxembourg, Dublin. And so I think some amount of the city’s business is going to move to those other capitals, which are within the European Union. So those are some winners.

I think one interesting debate within the U.K. about the economic effect is that, you know, there’s been a standard line that says: Listen, a customs union which protects merchandised trade with Europe is missing the point, because the U.K. economy is something like eighty percent services. So if we can’t have free access for our service exports, whether that’s insurance, or banking, or fund management, or architecture, or whatever it is, you know, we’re not—we don’t have a good deal.

But there’s a counter view, actually, which I find somewhat persuasive, which is that really, you know, the gravity model that economists use to think about trade flows, which basically tells you that the closer the other country the more you’re going to trade with it. So the U.S. relationship with Canada or with Mexico is not just close because of NAFTA. It’s close because of geography. That really applies to the weight of the stuff you are trading. So if you are doing cars, it really, really, really matters to be in a tariff-free situation with your neighbors. And Britain would get that under this Irish backstop deal.

What it won’t get is the free trade in services. But services don’t weigh anything. So you can actually trade with the U.S., with Australia, with other English-speaking countries—Canada, New Zealand, India, whatever. And maybe, you know, the British service sector will be somewhat affected by the shifts of finance into the EU. Maybe that’s OK because Britain has been excessively weighted towards financial services. And maybe in fact the loss of that stuff won’t be too bad, because of the fact that, you know, service kind of can be conducted globally, essentially, over the internet, and it doesn’t matter if you’re trading with distant countries or nearby ones.

ATKINSON: OK.

KUPCHAN: Let me just add that I think the—well, Britain will not be the winner for leaving the EU, even though there may be a few sectors and businesses that benefit. But—and this was a debate and a development that really—that turns on questions of national identity and narrative, and not on that assessment of the benefits. And one of the mistakes that the remain camp made is that they played to an intellectual argument. They showed pie charts. They showed trade. The leave campaign had the emotions. And so basically this is, I think, a situation that’s very similar to what’s happened in the United States, where voters in Iowa are watching their soybeans rots because they can’t sell them to China, but they’re still voting for Trump because they identify with the broader message that he’s offering. I think that is an important factor in why Britain is about to leave the EU.

ATKINSON: Yeah. Yeah, no, that’s an important point.

Operator.

OPERATOR: Thank you. Our next question will come from Michelle Egan (sp) with York University.

Q: Thank you. Picking up on the sort of narrative and emotions aspect here, Theresa May said law, borders, and money would return back. And you’ve mentioned borders, and the fact that there will be an open border and there will be people still residing in the U.K. You’ve mentioned money and how much Britain will be paying. But the withdrawal agreement talks a lot about the jurisdiction of the court. In some ways, the Brexiteers got it right. They’re not getting their sovereignty right. And it goes beyond 2020. So what do you make of the idea that Britain will be subject to an international court in its domestic politics?

ATKINSON: Charlie, do you want to respond to that on the—this issue of emotion around sovereignty and the practicality of it?

KUPCHAN: Yeah, I mean, I think the issue that Michelle raised is going to be very important in this—in this debate, in the sense that the leave campaign was about reclaiming British sovereignty. It was about freeing the U.K. from the dictates of Brussels. It was about repatriating jurisprudence to the U.K. And the more ambiguity there is when it comes to the reclamation of sovereignty, the more knives are going to come out as this debate moves forward. And, you know, we already talked about the question of the U.K. leaving the customs union only with the permission of the EU. When it comes to dispute settlement and courts that my understanding, and Sebastian may want to comment on this, is that the U.K. has not freed itself from the jurisdiction of European courts. And so this is—this is part of the reason that I think I would agree with Sebastian, that the likelihood that this agreement makes it—makes it through Parliament is low.

ATKINSON: Sebastian, do you want—

MALLABY: Yeah, that’s correct. And I mean, it’s emphatically the case that part of staying in the customs union, which by the way includes that Britain has to sign up for a bunch of European regulation on the environment and on protections for workers and so forth, because otherwise it would be accused of either environmental dumping or social dumping. And so Britain has to sign up for these rules. And these will be adjudicated by the European Court of Justice ultimately. So this was a Brexiteer redline. And Theresa May, as I recall, explicitly endorsed that redline. And she has now explicitly erased that redline. And exactly as Charlie says, this isn’t a matter that will come up in the debate in the year forward; this has already come up, and it’s completely toxic politically for Theresa May.

ATKINSON: Thanks.

Operator, do we have—we probably have time for one more question.

OPERATOR: Yes, ma’am. We have one more question left. Our last question will come from Christopher Wall with Pillsbury.

Q: Yes. Thanks very much. I would like to return a little bit to the topic before having to do with the Labour Party. Yes, their primary objective is to win an election, but what I’m wondering is if either of you, or perhaps Sebastian in particular, could speculate on what would happen next? It’s a little bit, perhaps, like the dog catching the fire truck. You know, where do they go from here in terms of the kind of negotiations that they would embark on, what sort of deal they would strike? And assuming they are not able to, what would that mean in terms of the prospects for perhaps another referendum, by having a new party embark on that process?

ATKINSON: Yeah. Let’s go to Sebastian, and then I think it would be interesting if Charlie gave a view from, well, this is all very well but what would the Europeans say to a new government, still the same Britain. So, Sebastian first.

MALLABY: Yeah. I mean, the Labour Party position on Europe has been very fuzzy. And that’s part of this, you know, politically driven game of trying to essentially force an election. He—on the one hand, a lot of Labour MPs are in favor of staying in Europe. Labour is strong in urban centers, which tended to vote for remain. On the other hand, it has some working-class constituencies which are more in favor of Brexit. And it’s kind of therefore tried to just alienate neither side by failing to articulate a clear position. You know, Jeremy Corbyn, the leader of the Labour Party, is himself historically a skeptic about the EU, even though his party has historically been sympathetic towards the EU. So there are all these splits and ambiguities about where Labour stands.

They might want to go into a general election campaigning with the explicit promise of a second referendum as a tactic to capture all the remain voters. But they would do it more out of political expediency than out of pure policy convictions. I actually don’t think we’re going to get another election, because I think the Conservatives wouldn’t risk that. I think it’s much more likely you’d get a change in leadership within the Conservative Party without another election. If there were to be an election, and if Labour were to, you know, win, the consequences for Europe, as I say, are unclear, but the consequences for the U.K. economy would be very negative. I know lots of people who are, you know, in business in Britain who say, you know, Brexit was not good, but they’re staying. But that a Labour Party government under Jeremy Corbyn would be the final straw and they would emigrate.

ATKINSON: Gosh. Charlie, you have a minute. (Laughs.)

KUPCHAN: Yeah. The only thing I would add is that I think the Labour Party faces the same dilemma that center-left across North American and Europe face, in the sense that they’re trying to figure out whether to tact to the hard left or to try to move to the center and reclaim their working-class consistency. Corbyn has made a decision, but the party as a whole, especially at the elite level not so much the grassroots level, isn’t with him. And so when you look at Labour, the social democrats in Germany, the socialists in France, the Democratic Party here—which although did well in the midterms has to figure out where it wants to position itself in the presidential 2020—you know, I think where Labour is right now is part and parcel of this much broader ideological search for where the center-left in Europe and the United States is going to locate itself ideologically.

ATKINSON: OK. Well, thanks very much, both Sebastian and Charlie, for a terrific presentation of their thoughts. Very, very interesting situation. And thank you very much to all of our participants. And that’s—we’ll draw our conference call to an end. You may all disconnect. Thank you.

KUPCHAN: Thank you, Caroline. Bye.

ATKINSON: Bye-bye.

(END)