Blog Post

Beyond hard, soft and no Brexit

There is still a certain degree of fuzziness about what the different degrees of Brexit entail. We attempt to fill this gap by setting out the options for the future EU-UK relationship.

By: Date: October 21, 2016 Topic: European Macroeconomics & Governance

Recent declarations by political leaders suggest that a hard Brexit is the most likely outcome of the negotiation between the European Union and the United Kingdom that will start next spring after the UK government triggers Article 50. In Britain, several cabinet members have made statements pointing in this direction. And in Brussels, Donald Tusk, president of the European Council, declared last week that “it is useless to speculate about ‘soft Brexit’…[T]he only real alternative to a ‘hard Brexit’ is ‘no Brexit’”.

But there is still a certain degree of fuzziness about what the different degrees of Brexit actually entail. Clearly, no Brexit implies that the UK would remain a member of the European Union, presumably on the terms that prevailed before the referendum. There is less clarity, however, on what a hard or soft Brexit would imply.

We attempt to fill this gap by setting out the options for the future EU-UK relationship (see table). In doing this, we have borrowed heavily from the work of three economists at HSBC[1] on the degree of Brexit, going from no Brexit to the hardest possible form of Brexit. We consider:

  • ‘Full EU membership’ (‘no Brexit’);
  • ‘EFTA EEA’: a soft Brexit option, which would be like the situation of the three European Free Trade Area (EFTA) members (Iceland, Liechtenstein and Norway) which belong to the European Economic Area (EEA);
  • ‘EFTA Switzerland’: also a soft Brexit option, which would be equivalent to the situation of Switzerland, an EFTA member which does not belong to the EEA;
  • Continental Partnership: an hybrid between soft and hard Brexit, proposed by Jean Pisani-Ferry, Norbert Röttgen, André Sapir, Paul Tucker and Guntram Wolff (LINK) as a model for the relationship between EU and non-EU European countries (not only the UK, but also the EFTA members, Ukraine, Turkey and others);
  • ‘CU with Turkey’: a hard Brexit option, which would be like the EU-Turkey customs union (CU);
  • ‘FTA with Canada’: another hard Brexit option, which would be like the situation of Canada if the proposed EU-Canada Comprehensive Economic and Trade Agreement (CETA), a sophisticated free-trade area (FTA) agreement, goes ahead;
  • ‘WTO rules’, the hardest version of hard Brexit, which would give the UK access to the EU market (and the EU access to the UK market) on purely WTO terms, with no preferential arrangement.

Implications of various options for the future EU-UK relationship

Source: Adapted from HSBC (2016).

table

For each of these seven options, the table shows whether the UK would participate in 10 different EU policies or processes – some identical to those examined by the HSBC economists and some that are different from theirs. The table asks, for each option, whether the UK would:

  • Have access to the EU single market;
  • Abide by the free mobility of labour;
  • Abide by related single market rules (competition, labour, environment, etc);
  • Have a say in EU rulemaking;
  • Be bound by European Court of Justice (ECJ) rulings on the single market;
  • Have duty-free access to the EU for goods;
  • Have access to the EU market for services;
  • Be part of the EU commercial policy;
  • Be part of the agricultural policy (and the fisheries policy);
  • Contribute to the EU budget.

For ease of reading of the table, the cells where the answer is Yes (implying that the UK would participate in the relevant EU policy or process) are coloured dark green and those where the answer is No (indicating that the UK would not participate in the relevant policy or process) are coloured red; the cells in light green or light red are areas in which the UK would participate partially in the pertinent policy or process.

Close scrutiny of the table and of the colours of its cells suggests the following:

  • ‘No Brexit’ and ‘WTO rules’ are indeed two extreme and opposite cases. The former would imply continued EU membership and therefore full participation in all 10 EU policies or processes. By contrast, an EU-UK relationship based on mere WTO rules would turn the UK into a ‘third country’ with respect to the EU, with zero participation in its policies or processes, the hardest form of Brexit.
  • Participating in a Turkey-like customs union or in a Canada-like free trade agreement with the EU would also qualify as hard Brexit. In both instances the UK would only participate in two of the 10 EU policies or processes considered here: duty-free access for goods plus the EU commercial policy (in the CU case) or (partial) market access for services (in the CETA-like case).
  • Participating in the EEA arrangement would be the softest possible form of Brexit because the UK would still participate in seven of the 10 policies or processes. The three excluded areas fall into two categories. First, some EU policies: the common commercial policy and the common agricultural policy (plus the fisheries policy). Second, single market rules: EEA countries are full participants in the single market, have to abide by all single market rules but have little or no say in the rulemaking process. This form of soft Brexit would certainly be welcomed by the EU27 but most likely rejected by the UK.
  • Participating in a Swiss-type arrangement would also qualify as a soft Brexit, though slightly less soft than the EEA arrangement. Under the Swiss arrangement, as under the EEA arrangement, the UK would not participate in the common commercial policy, in the common agricultural policy (or the fisheries policy) and would have no say in EU rulemaking. In addition, the UK would only partially be bound by ECJ rulings. The price it would pay for this, like Switzerland, is that it would only be a partial member of the single market: it would only have partial access to the EU market for services and in particular it would not enjoy passporting rights for financial services. Whether or not the EU27 would be willing to offer this option to the UK and whether the UK would be interested is a moot question at this stage. An important issue that will need to be resolved first is the fate of the free labour mobility clause between the EU and Switzerland. This clause was rejected by Swiss voters in 2014 and is considered as a ‘sine qua non’ condition by the EU. If no agreement between the two parties can be found soon, this option may simply not be available any more by the time Article 50 is triggered.
  • Finally, the Continental Partnership option is ‘sui generis’: it belongs neither to the hard nor soft Brexit categories. Instead, the Continental Partnership:
    • Shares some important features with soft Brexit: the UK would have full access to the single market for goods, services and capital in exchange for respecting all single market rules, abiding by pertinent ECJ rulings and contributing to the EU budget;
    • Shares an important feature with hard Brexit: the UK would not maintain free labour mobility with the EU, but contrary to hard Brexit which would have no mobility at all, the Continental Partnership would have controlled mobility;
    • Shares two features with both hard and soft Brexit: the UK would have duty-free access to the EU goods market, but it would not participate in the EU agricultural and fisheries policies;[2]
    • Is different from both hard and soft Brexit in one important respect: the UK would have a voice – though not a vote – in the EU’s single-market rulemaking process.

In conclusion, assuming that despite the current mood – which was well encapsulated by President Tusk’s recent speech – there will eventually be some appetite for an arrangement with the UK that is neither hard Brexit nor no Brexit, the Continental Partnership option is likely to prove more attractive than soft Brexit because it combines elements of both soft and hard Brexit while adding an element that exists in neither category. The Continental Partnership option offers another advantage over alternative options under which the UK would maintain a close tie with the EU. Because they are premised on free circulation of workers in order to grant free circulation of goods, services and capital, neither no Brexit (ie EU membership) nor soft Brexit (ie the EEA and Swiss models for non-EU countries) seem realistic templates for dealing with countries like Turkey. By contrast, the Continental Partnership model without free labour mobility could be applied not only to the UK post-Brexit but also to Turkey and to other EU neighbours.

[1] Simon Wells, Liz Martins and Douglas Lippoldt, ‘Brexit getting harder: reassessing the prospects for a complex divorce’, HSBC Global Research, 6 October 2016.

[2] It may, however, participate in the EU commercial policy.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More by this author
 

Opinion

The EU’s Opportunity to Turn Its Markets Toward the Future

Meeting the fiscal demands of COVID-19 will require the European Union to borrow on capital markets more than ever, and for European pension funds and households to look more widely for ways to build their nest eggs safely. The EU should take the challenges of the pandemic and Brexit as a chance to get its financial infrastructure house in order.

By: Rebecca Christie Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: July 16, 2020
Read article More by this author
 

Podcast

Podcast

One rule to ring them all? Europe's financial markets after Brexit

What effect will brexit have on Europe's financial markets?

By: The Sound of Economics Topic: European Macroeconomics & Governance, Global Economics & Governance Date: June 26, 2020
Read article More on this topic More by this author
 

Opinion

How will COVID-19 impact Brexit? The collision of two giant policy imperatives

The United Kingdom left the European Union on Jan. 31, 2020. Now, the U.K. must decide whether and how to extend the transition period, currently set to expire at the end of 2020.

By: Rebecca Christie Topic: European Macroeconomics & Governance Date: May 19, 2020
Read article Download PDF More on this topic
 

Policy Contribution

The European Union’s post-Brexit reckoning with financial markets

In the negotiations between the European Union and the United Kingdom over their future relationship, we see a high probability of a weak contractual outcome, given the dominance of politics over considerations of market efficiency.

By: Rebecca Christie and Thomas Wieser Topic: European Macroeconomics & Governance Date: May 13, 2020
Read about event
 

Past Event

Past Event

ONLINE ROUND TABLE: Future of the EU-UK science cooperation

How do we rebuild and keep the science cooperation between the EU and the UK?

Speakers: Michael Leigh and Beth Thompson Topic: European Macroeconomics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 17, 2020
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live - The Brussels effect: How the European Union rules the world

This was a live recording of an episode of the Sound of Economics, Bruegel's podcast series. The discussion centered around the book of Anu Bradford, The Brussels Effect.

Speakers: Anu Bradford, Ashoka Mody, Giuseppe Porcaro and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 3, 2020
Read article More on this topic More by this author
 

Opinion

Realpolitik of the day after Brexit

Compromises hammered out in the next 11 months, by both British and European negotiators, will dictate the UK’s economic landscape for decades to come

By: Maria Demertzis Topic: European Macroeconomics & Governance Date: January 31, 2020
Read article More on this topic More by this author
 

Opinion

Britain faces a triple contradiction

If Boris Johnson can negotiate agreements that are better than the EU system, it would be a serious challenge for the 27

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: January 30, 2020
Read article More on this topic More by this author
 

Podcast

Podcast

The science of Brexit

On Saturday morning, the United Kingdom will wake up outside the European Union. After 37 years of collaboration, how will Brexit affect research and innovation in Europe and in the UK? What should be the next steps undertaken by both in order to maintain the same level of cooperation? This week, Nicholas Barrett is joined by Maria Demertzis, Guntram Wolff and Michael Leigh, Senior Adjunct Professor of European Studies at the Johns Hopkins University, to discuss a post-Brexit agreement for research and innovation.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: January 29, 2020
Read article Download PDF
 

Book/Special report

A post-Brexit agreement for research and innovation

This report sets out what the Wellcome Trust and Bruegel have learned from a project to simulate a negotiation process between the UK and EU to create a post-Brexit research and innovation agreement. Our negotiating scenario assumed that the UK had left the EU with a withdrawal agreement, and that the negotiation was taking place during a ‘standstill’ transition period.

By: Michael Leigh, Beth Thompson and Reinhilde Veugelers Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: January 28, 2020
Read about event
 

Past Event

Past Event

A post-Brexit agreement for research and innovation

What is the future of EU's and UK's relationship on research and innovation?

Speakers: Gina Dowding, Philippe Lamberts, Michael Leigh, Adrian Hayday, Clare Moody, Martin Muller, Joe Owen, Jaroslaw Pietras, Uta Staiger, André Sapir, Beth Thompson and Guntram B. Wolff Topic: European Macroeconomics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: January 28, 2020
Read article More on this topic More by this author
 

Blog Post

How could net balances change in the next EU budget?

The gap between payments into the EU budget and EU spending in a particular country has importance when EU spending does not constitute European public goods, or there are risks for their improper use. I estimate that the Juncker Commission’s proposal for the next seven-year budget would lead to big reductions (as a share of GNI) in the net payments to most central European countries, while the changes for other countries seem small

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: January 23, 2020
Load more posts