Forward to the past: can Britain return to the EU
New British Prime Minister Andy Burnham has stated his desire to see Britain return to the European Union during his lifetime (making a reservation that this will not happen during his current term). Although the idea looks attractive to certain sectors of the economy on both sides of the English Channel, both Britain and the continent have changed a lot over the past 10 years. Is a "Brenter" possible after Brexit, who will win and who will lose in the event of the reunification of the island and the continent, and how events may develop — in the Izvestia article.
The city won't like it
The majority of voters in Britain would now support a return to negotiations with the EU on membership. But it is impossible to enter the same river twice. When London launched the withdrawal procedure under Article 50 of the EU Treaty in the late 2010s, the terms of the "divorce" were formulated on the basis of the status quo. The potential return will be governed by article 49, which transforms the United Kingdom from a former co-founder of the single market into an ordinary applicant without the right to special privileges. This will pose three problems for the British economy at once.
British Prime Minister Andy Burnham
The first of them will be on a budget. Historically, London has used a unique financial compensation mechanism (the "Thatcher discount"), which was agreed back in 1984 and returned to Britain about two thirds of its net contribution to the general budget. Before leaving the EU, the country's net contribution was about 9-11 billion pounds per year. Upon return, no discounts will be applied on a general basis. Taking into account the increased budget of the European Union in recent years, including the cost of servicing post-pandemic loans, a direct transfer from the UK Treasury to Brussels would amount to at least £18-22 billion annually. At a time when the public debt of the United Kingdom is very close to the volume of national GDP, and the government is running a budget deficit of more than 4%, the withdrawal of such amounts will require a sharp increase in the fiscal burden or spending cuts (which already have to be cut).
The second problem is monetary sovereignty and the status of the City of London. Any new member of the European Union is legally obliged to commit to joining the euro area as soon as the Maastricht criteria are reached. No one will grant the UK an unconditional legal exception, which only Denmark currently has. In theory, London could have delayed this process for years according to the Swedish model, refusing to voluntarily enter the ERM II exchange rate mechanism. However, the very existence of such a clause in the agreement creates long-term regulatory risks for the Bank of England. The London financial center will lose the opportunity to pursue an independent monetary policy to protect national interests in the event of pan-European problems.
The third challenge is regulatory divergence. Over the years of autonomy, Great Britain has built parallel economic management systems. The UKCA's own standards regime has been introduced to replace the pan-European CE, the norms of state subsidies for businesses have been revised, the insurance sector has been reformed, and its own approach to regulating artificial intelligence and biotechnologies has been formed. Returning to the EU legal framework will require the dismantling of new bodies and the forced reconfiguration of production standards under the dictates of Brussels. Such a step would entail direct costs for the British corporate sector in the tens of billions of pounds for updating compliance systems.
The advantages are on the surface...
Assuming that the institutional barriers are miraculously overcome, the macroeconomic effect of the merger for both sides may be very significant. According to estimates by the British Bureau of Budget Responsibility, being outside the single market has cost London about 4% of its lost GDP over 10 years, and foreign trade volumes have decreased by about 15% compared to the scenario of maintaining membership.
The British economy, which consists of 80% of the service sector, would receive a serious boost. The current trade agreement has practically eliminated the service sector. The return would restore the right of the City's banks and investment funds to operate throughout the EU without opening expensive subsidiaries on the continent. The British car industry and the aerospace sector would return to a just-in-time logistics model (that is, operational work without inventory accumulation). Border checks, phytosanitary controls and the need to issue certificates of origin, which annually drain the working capital of exporters, would disappear. And restoring access to the European workforce would remove structural imbalances in logistics, the agricultural sector, and construction, allowing for cost pressures to be suppressed and underlying inflation to decrease.
The EU would also benefit from some benefits. The main chronic disease of the unification economy in recent decades is the weakness of domestic capital markets. European technology startups are forced to migrate to the US stock exchanges due to a lack of venture financing. The integration of the London financial ecosystem into the European Union's project to unite capital markets would instantly compensate for the lack of liquidity on the continent. In addition, the removal of mutual barriers would return a premium, solvent market to exporters from Germany, France and the Netherlands. At the same time, injections of British funds into the European budget would significantly reduce the financial burden on Berlin and Paris in terms of financing the green transition.
..But the risks are higher
A harmonious picture of the free market will not work anyway. Over the years of their separate existence, new hubs of economic gravity have formed, which will suffer direct losses during reintegration.
The financial centers in Paris, Frankfurt and Amsterdam will strongly oppose the return of London. After Brexit, they managed to win back part of the euro clearing market, derivatives trading, and poached part of the headquarters of investment banks. No one will want to give these positions back. British negotiators will have to forcibly terminate independent free trade agreements, including the pact with the countries of the Pacific region, Australia and New Zealand.
European manufacturers will face increased competition from British high-tech machinery and pharmaceuticals in the domestic market. And the coastal regions of the United Kingdom will protest against the return to a Unified Fisheries Policy that opens the country's exclusive economic zone to the fleets of France and Spain. The financial authorities of the eurozone, in turn, will fear the transfer of the UK's debt instability to the union's single market, bearing in mind the collapse of the British bond market in the fall of 2022.
The EU is no longer a "cake"
Well, it is impossible not to mention the difficult economic condition of the European Union itself. Germany is showing near-zero growth and is experiencing something similar to deindustrialization. The loss of access to low-cost pipeline gas has made the country's energy-intensive industries uncompetitive. The flagship German car industry has come under the double pressure of Brussels' carbon regulations and the technological expansion of Asian companies in the electric vehicle segment. Under these conditions, the import of British components or the opening of the market to London will become an additional factor of pressure on German domestic production.
France is facing a serious fiscal crisis. The budget deficit steadily exceeds 5.5% of GDP, and the national debt has exceeded 110%. Spreads between French and German government bonds have risen to levels since the eurozone crisis, reflecting investors' growing skepticism about the sustainability of French finances. The northern flank is also stagnating — the Finnish economy has gone into a protracted recession amid the severance of foreign trade relations.
According to estimates by former ECB President Mario Draghi, the EU economy lags behind the United States by half in terms of productivity growth. The Union requires additional annual investments of up to €800 billion just to maintain its position in the global race. There are no sources of these investments within the European Union, and attempts to launch new joint borrowings are encountering resistance from the Nordic countries.
The UK, therefore, will have to pay an entry fee for access to a market that is losing momentum, burdened with debt and suffering from regulatory oversupply. In many ways, this negates the obvious economic benefits.
The current state of both economies makes the idea of Britain's full-fledged return to the jurisdiction of the Lisbon Treaty unrealizable. For London, integration under the standard rules would mean voluntarily assuming joint responsibility for the debt problems of Southern European countries without guarantees of long-term growth. But there is another option that does not provide for the return of membership.
It is quite possible to create something like a military-industrial pact, where joint arms purchases will become the engine for the gradual abolition of non-tariff barriers for dual-use products. The conclusion of a comprehensive agreement on veterinary and sanitary standards according to the Swiss type will eliminate most customs frictions in the food trade. Synchronizing the British emissions trading system with the European one will allow London to avoid a cross-border carbon tax from Brussels. A mechanism for the equivalence of rules will be formed in the financial sector.
All this will allow the parties to get at least some benefits from rapprochement, without incurring obvious costs. But such a development is possible in the case of political stability both on the island and on the continent. And there are huge doubts about this, given the growing tensions within the EU itself. Even a possible victory for Marine Le Pen in the French presidential election could completely turn the board around and paralyze the work of the EU — and then there's Germany, and debt and political problems that continue to grow almost everywhere.
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