Macron and Merkel get the least bad Brexit option

The defining image of Britain’s Christmas Eve trade deal with the European Union was a beaming Boris Johnson with his thumbs up in the air. There were no celebratory pictures from any of his continental counterparts.

Getting to this point is a win in itself for the U.K. An end to Brexit’s drama should let the Brits reenter a more breathable political atmosphere after almost five years talking about nothing else — other than Covid-19. Avoiding a messy “no deal” will save the economy from a long-term shock that might have cost 3% of gross domestic product. Even Nigel Farage is pleased.

The EU, with comparatively less to lose, has less cause to rejoice. The costs of no deal for the bloc would have been relatively manageable, at about 0.5% of potential output. It’s also hard to sell the departure of a big member state as a victory, however rocky the historical relationship. European Commission boss Ursula von der Leyen expressed “relief” and “quiet satisfaction” when announcing the treaty, while her top negotiator Michel Barnier reiterated his view of Brexit as a “lose-lose” for both sides.

Yet as officials in Paris, Berlin and elsewhere comb through the fine print of the trade agreement’s 1,250 pages, the EU’s capitals should feel they’ve been handed the least bad way to bring Brexit’s opening chapter to a close. The deal enshrines tariff-free, quota-free trade in goods, which will make a big difference to several member nations. New agricultural levies would hit Ireland hard, given that 40% of its agri-food exports go to the U.K., its biggest trading partner. Tariffs would cost Germany 8.2 billion euros ($10 billion) of its exports to Britain, and France 3.6 billion euros, according to Euler Hermes.

While the level of access being offered to the EU’s single market of 450 million people is unprecedented for a non-member, the bloc has hardly opened the floodgates. Trade won’t be frictionless. There will be customs forms, regulatory checks and other non-tariff barriers. The deal doesn’t cover services, meaning financial trade and data flows are in the gift of Brussels. France’s Emmanuel Macron, for whom fish became a symbolic Brexit red line, will be happy that U.K. fleets will take only 25% of the current EU catch in British waters, rather than the 80% first demanded by Johnson. The Brits have had to give things up.

Ensuring the deal has teeth will now be the priority for Von der Leyen. Protecting the single market was key for the EU, and a rallying point for its 27 members against the British threat to compete head-on with a “Singapore-on-Thames” deregulatory drive. An analysis of the provisional treaty by my Bloomberg News colleagues outlines how the U.K. and EU have agreed to uphold their environmental, social, labor and tax transparency standards to make sure they don’t undercut each other. The punishment is tariffs, subject to arbitration by an independent panel. This sounds rather like being nibbled to death by ducks — as is the case in existing long-running EU trade spats, such as the one between Airbus and Boeing — but if upheld it does offer a sensible deterrent.

Tough geopolitical and strategic questions lie ahead for Brussels and the member states. Brexit redraws the map of European power, halving the number of permanent EU seats on the United Nations Security Council and cutting 40% of the bloc’s military capability. It removes 14% of the EU’s GDP, making it smaller as a single market, and deprives it of more than $100 billion in budgetary resources.

At the same time, the departure of one of the EU’s least enthusiastic integrators — a country instinctively opposed to deeper union — is an opportunity to create a more ambitious and assertive bloc, one deserving of a seat at the superpower table alongside the U.S. and China. It’s hard to believe that the EU’s new $859 billion Covid-19 emergency fund, a historic agreement for fiscal transfers from wealthier member states to their less fortunate partner nations, would have been possible with the Brits in tow.

It’s not just Johnson and his fellow Brexiters who want to “take back control.” The EU, too, wants to create a more “sovereign” bloc that’s less dependent on others (namely the U.S.) for its security and prosperity. How it asserts itself with its U.K. neighbor, whose own vision of sovereignty seems to be the freedom to escape pesky EU rules, will be an important test. Johnson’s previous threat to tear up the terms of Brexit withdrawal, including the agreement for a soft Irish border, shows the potential pitfalls. Having a trade deal in place won’t restore trust overnight, but it helps.

Nobody expects a sudden new dawn in EU-U.K. relations. But the 11th-hour agreement avoids a worse and messier outcome, while allowing the bloc to monitor and limit unfair competition from the Brits and providing a path to more cooperation. Sometimes the least bad option is all there is.

Bloomberg

Tags: Brexit, Macron and Merkel