November 19, 2020

I hate to admit it, but the Remainiacs were right. Everything that they said would happen, has happened. The traumatised economy. The emergency budgets. The empty shelves. The closed borders.

Of course, the cause of these misfortunes is Covid-19, not Brexit. And thus the main event of the last few years has become a sideshow in 2020. As a result, the anti-Brexiteers have struggled to promote their narrative. However, with the Brexit negotiations coming to a head, one of their talking points is now bound to be heard — which is that, deal or no deal, we’re leaving the EU at the worst possible time. Who needs an extra set of complications when we’ve got a pandemic to deal with?

It’s a reasonable argument, but one that overlooks the counterfactual. Had the referendum gone the other way our continuing membership of the EU would have caused a different set of complications. Indeed, we’d be in a worse situation than we are now.

If Remain had won in 2016, it’s hard to say who’d be Prime Minister in 2020, but whoever the lucky person, he or she would have had a European nightmare to deal with. Not Brexit, but Britain’s involvement in the EU’s Covid rescue plan.

Consider what actually happened in Europe this year. While every country has suffered, some have suffered more than others. Those trapped by the constraints of the eurozone are in a particular bind — because they can’t devalue their currency or print money. Therefore they need help from their fellow member states.

Just what sort of help (and how much) was the subject of a high-stakes drama back in the spring and summer. Though we barely paid attention to it on this side of the Channel, it was a showdown between the “frugal four” nations (the Netherlands, Austria, Denmark and Sweden) and the Covid-racked countries of Southern Europe, especially Italy.

Even before the virus, Italy was in dire straits, condemned to stagnation thanks to the eurozone. Covid turned that crisis into an emergency, so something had to be done. The Dutch and their allies, however, were not happy about having to bail out the southerners again — and certainly not in the midst of their own national emergencies. In the end, the French and Germans forced a compromise, but not before Mark Rutte — the Dutch PM — was painted as the cold-hearted villain of the piece.

Now, let’s replay these events — only this time with Britain still in the EU. The frugal four would have been a frugal five — and the chief villain would have been the British PM. Indeed, if we’d been part of these negotiations, an already bitter dispute would have become something much worse — because the Franco-German proposal would have been impossible for Britain to accept.

The actual rescue package consists of €750 billion in grants and loans. The necessary funds are to be borrowed by the European Commission from the money markets, with the liability shared among all EU member states. Thus, assuming a similar package in the no-Brexit scenario, there’d have been two poison pills for the UK.

Firstly, money: we’d be paying tens of billions towards a “recovery fund” whose ultimate purpose is to bail out the eurozone. British eurosceptics have long warned that monetary union is inherently fragile to asymmetric shocks; that’s why everyone from Gordon Brown to Nigel Farage fought so hard to keep us out of the single currency. Yet, without Brexit, there we’d be, paying to prop it up anyway.

The second poison pill is about power: allowing the Commission to borrow hundreds of billions of Euros is a massive step towards fiscal integration, and hence a fully-fledged superstate. Of course, because of Brexit, that’s the EU’s business, not ours. But what if Brexit hadn’t happened and it was our business?

Back in 2016, the Government promised us that the “UK will not be part of a further European political integration” and that no “UK powers can be transferred to the EU in the future without a referendum”. Well, giving Brussels the ability to borrow vast sums of money is about as political as it gets, involving the transfer of national powers to the EU because agreeing to underwrite someone else’s borrowing reduces how much you can borrow in your own name. Thus, had we stayed in, the promise would have been broken — a nation of reluctant Remainers betrayed.

A Conservative Prime Minister would have faced a full-scale party revolt — including Cabinet resignations and backbench defections. Therefore, he or she would have no choice but to block the deal. There’d also be overwhelming pressure from the EU to let the deal through, and as the Greeks can tell you, the masters of the eurozone will do “whatever it takes” to save the single currency. All blackmail options would have been on the table — including an end to Britain’s budgetary rebate.

In other words, an irresistible force would have met an immovable object. And whenever that happens, something breaks — most likely the British Government. In the middle of a pandemic.

Back in the real world, we need to ask whether the rescue package is enough to keep the Italians and others afloat through the brutal recovery period that lies ahead. The answer is probably not — and, in fact, the cracks are beginning to show. In the run-up to this week’s EU summit, Poland and Hungary are threatening to veto the recovery fund and the entire EU budget. Even if that’s just brinksmanship, there’s a deeper problem.

While the recipient countries are happy to help themselves to the grant component of the fund, they’re not so keen on the loans — because these come with onerous conditions. Instead, the recipients have been borrowing the money they need on the open market, thus circumventing the conditions they object to. They’re able to do this at a low interest rate because of the European Central Bank buying up debt issued by eurozone member states. And so the weaker economies have been filling their boots, which is the sort of thing that got the eurozone into trouble before. The ECB could crack down by cutting off bond purchases. However, this could trigger the sovereign debt crisis the Bank is so desperate to avoid.

It would be easier for Brussels and Frankfurt to keep things under control if any extra money required over-and-above the €750 billion were also to be borrowed and doled out by the European Commission. There’s no immediate proposal for this to happen, but having crossed the fiscal Rubicon once already, the next trip to the money markets will be much easier — and the trip after that. I wouldn’t want to bet my house on this summer’s rescue package being a one-time deal.

Covid has taken all the old imbalances and fragilities in the eurozone and made them worse. Further bail-outs are all but inevitable. Given the new model for raising emergency funds, it’s just as well we’re no longer on the hook.

Suggested reading
Who will pay for this Covid catastrophe?

By Peter Franklin

The words “post-Brexit Britain” conjure up an unfamiliar environment fraught with danger. By voting to leave, we’ve supposedly condemned ourselves to a future full of uncertainty, while our neighbours remain secure within the European Union. But as we’ve seen, the post-Covid world means risk and uncertainty for all.

The only way that any nation can prevail in such circumstances is to stay adaptable. We must react with speed and agility to the risks that we can manage, while reducing our exposure to those that we can’t. Remaining in the EU would have compromised our freedom of action on both counts.

It is not that the EU is completely paralysed. As the recovery fund demonstrates, it is capable of changes of direction — albeit after a protracted period of wrangling. However, when the breakthrough does come it is always in the direction of further integration, of further compromises to national sovereignty. In voting to leave we did not just leave the EU as it was in 2016, but also the EU as it is now becoming.

As a result, we still have the opportunity to make the wise and timely decisions on which our future depends. Of course, that does not mean that we will — because that requires a competent, visionary government.

But at least we will be responsible for our own failings, instead of being made responsible for those of others.

Join the discussion


  • December 3, 2020
    So true!! Read more

  • November 29, 2020
    The UK is indeed a significant market for the EU as well as being a significant, albeit now departing, net contributor to its budget. A hole which needs to be filled somehow. The beauty of the WTO, if that's the right word, as it's certainly flawed within itself, is that over the decades it has... Read more

  • November 29, 2020
    Thanks for confirming that the trade agreement has a cartel or Mafia-like undertone to achieve either political conquest or ruination or emasculation of one's foe at the other end of a tunnel. I presume it therefore follows that if the UK pursues WT rules the EU will play hardball in money-wasting... Read more

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