Britain after Brexit: Lionel Barber’s lecture in Tokyo

The FT editor looks back on the referendum and forward to the possible outcomes
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This is an edited version of the text of the Daiwa Ichiban lecture delivered by the editor of the Financial Times at the Daiwa Anglo-Japanese Foundation on September 27 2016

In the early hours of June 24, the British people woke up to a revolution. There was no storming of Buckingham Palace or Downing Street. But the referendum vote in favour of Brexit was a popular revolt, a gut-wrenching defeat for the “establishment”. The UK government, the Bank of England, the International Monetary Fund, the OECD, a number of world leaders including President Barack Obama of the US and Prime Minister Shinzo Abe of Japan and, yes, the Financial Times, all argued that a vote to leave the EU made no economic sense. We lost. They won.

They, the Brexiters, now face any number of awkward questions. What will Britain’s future relationship be with the EU? What will Brexit mean for the territorial integrity of the UK, especially vis-à-vis an independence-minded but pro-EU Scotland, and the soft border in Ireland? How far can the UK prosper outside the EU single market? How will vital foreign investors such as Japan react? Are we a middle-ranking power on the edge of Europe doomed to relative decline or does Brexit offer Britain new opportunities as an agile trading nation, a sort of Venice of the 21st century or a giant Singapore?

Brexit is the biggest demerger in postwar history. Plenty of countries have joined the EU — 28, to be precise — but none has actually left. No one knows the date when the UK will withdraw from the EU or the terms of divorce. We are sailing into uncharted territory.

And we are embarking on that journey at a moment of great peril. The international order of the past 70 years is fraying, maybe even breaking down. The Middle East offers the most obvious example of a shattered system. Further east, in the Pacific, the strategic question is whether China will seek, and achieve, a dominant position in the western Pacific, and how others, especially Japan, would react to such moves. Finally, the world watches with trepidation the US presidential election, a contest between the familiar (too familiar?) establishment candidate Hillary Clinton and the Muslim-baiting tycoon Donald Trump, who disdains traditional alliances and has a soft spot for strongmen like Vladimir Putin.

Between 1992 and 1998, I served as the FT’s bureau chief in Brussels. I visited many European capitals, made life-long friends and reacquainted myself with European history and culture after six years in America. From my perch there, I had a bird’s-eye view of the halting but successful march to economic and monetary union.

For the British, the European Community, as it was then known, was a bigger and better version of the European Free Trade Area, which we had co-founded in 1960. Unlike the French and Germans, scarred by three wars inside a century, we always saw Europe as an economic transaction rather than a political project.

In fact, the Maastricht treaty of 1992 fell well short of a federal Europe. It produced a hybrid political entity, which balanced greater supranational powers against looser intergovernmental co-operation. (The signatories promised “an ever-closer union”; but while the European spirit might have been willing, the flesh was not.)

Thus, Prime Minister John Major’s government cannily secured several treaty opt-outs: from monetary union, justice and home affairs and the social chapter on the labour market. Britain along with France halted the federalists’ ambitions in foreign and security policy. Germany was torn over surrendering the Deutschmark and resisted a full-blown political union, insisting on a Bundesbank design for the single currency with full central bank independence and no common fiscal policy.

Boris Johnson, then the charming and permanently dishevelled Brussels correspondent for the Daily Telegraph, pronounced Maastricht “game, set and match to John Major”. But the press and a growing number of Eurosceptics continued to campaign against an all-powerful, centralised Europe. The later decision to invite 10 new members from central and eastern Europe further enhanced the concept of a multi-speed, multi-tiered union rather than a unitary or near-unitary federal set-up. Successive British governments did little to counter this chimera, still less to defend the importance of Britain’s role in the EU, which on financial discipline, free trade and foreign policy was far more influential than imagined.

Fast forward to David Cameron’s fateful decision in January 2013 to include a pledge to call a referendum on Brexit in the Conservative party manifesto ahead of the 2015 election. Many viewed this as an exercise in party management: the UK Independence party was gaining ground in the polls. Two Tory MPs (one appropriately named Reckless) had defected to Ukip. Mr Cameron was anxious to protect his right flank.

In fact, the referendum pledge owed much to a strategic repositioning of Britain within the EU, one little discussed or debated at the time. Essentially, Mr Cameron and George Osborne, then chancellor, took the view that the eurozone crisis which followed the financial crisis of 2008 would force members to integrate more closely. The UK, outside the single currency and with no intention of joining, would maintain a respectful distance: still an EU member but outside the core grouping.

As long as the UK could protect itself against discrimination, the government was relatively relaxed about a tighter continental club. True, Mr Osborne was heard to say, that while Britain would never again get a top job in Brussels, it would maintain influence in EU foreign and security matters. At the same time it would use its economic strength to go its own way in the world. Britain, it appeared, could have its cake and eat it in Europe.

History turned out very differently. In response to the financial crisis, there was no Great Leap Forward to political union in Europe. The eurozone group strengthened its own powers of crisis management but German-led resistance to further centralisation prevailed. There would be no common bond issuance or other measures to mutualise sovereign debt which were anathema to northern European creditor nations. After many stand-offs and much soul-searching, Greece was allowed to remain inside the monetary union, albeit on excruciating probationary terms.

This halfway house left the euro at risk, which is why the European Central Bank led by Mario Draghi stepped in with a pledge to do “whatever it takes” to support the single currency area via unconventional monetary policy. In effect, this was an insurance policy intended to buy time for Europe’s political leaders while they took steps to revive their domestic economies.

Yet after seven years of crisis, the EU is left with a suboptimal currency area with staggeringly high unemployment, especially among the young, and terminally tepid growth. It is easy to blame Germany’s insistence on imposing a fiscal straitjacket on its fellow euro members, but with the notable exceptions of Spain and Ireland, many countries have simply lacked the political will to reform their economies.

At the same time, almost all European countries have witnessed a rise in populist and anti-establishment parties at the expense of centrist and social democrat parties. We see radical leftism such as Podemos in Spain and Syriza in Greece, and hard-to-place insurgent movements such as Five Star in Italy, plus classic far-right parties that have rebranded themselves by downplaying anti-Semitism and playing up anti-immigration themes, such as Geert Wilders’ Freedom Party in the Netherlands, the Front National in France led by Marine Le Pen, and Austria’s Freedom Party.

To some degree, this can be explained in terms of the “squeezed middle,” where globalisation and technological change have cut into the livelihoods of blue-collar workers and others in manufacturing.

More important is the migration crisis — the most serious the continent has faced since the late 1940s — which has gripped Europe these past three years. The flow of refugees, not just from the civil war in Syria but also from north Africa via the failed state of Libya, has almost overwhelmed the EU. And it has coincided with an outbreak of terrorist attacks by radical Islamists, notably in Belgium, France and latterly in Germany.

Angela Merkel's decision to welcome 1m refugees has triggered a backlash © Bloomberg

These twin crises have weakened, perhaps terminally, the authority of the most powerful leader in Europe: Angela Merkel. The German chancellor’s uncharacteristically bold decision to welcome 1m refugees has triggered a political backlash at home and abroad. More broadly, migration has risen to a level where governments and the EU appear to have lost the ability to control their borders, a basic function of the nation state. Against this backdrop, Britons went to the polls on June 23.

The referendum on EU membership was an exercise in scaremongering by both sides. The Remain camp exaggerated the short-term economic costs of leaving and had nothing much else to say. The Leave campaign was mendacious — from the real net cost to the UK of EU membership to the false claim that Turkey would probably become a member by 2020.

Leave came up with a seductive slogan: take back control. It resonated with voters fearful about immigration, jobs and services. Mr Cameron, who headed the Remain campaign, had no answer. Identity politics trumped economics.

Crucially, Mr Cameron insouciantly agreed to an up or down, all or nothing vote. He had pulled off a similar feat in 2014 in the referendum on Scottish independence. In retrospect, he should have borrowed from an earlier Scottish referendum in 1979 when the government insisted that 40 per cent of the electorate had to vote for a Scottish assembly before such devolution could go ahead.

So where does the June 23 vote leave Britain and its relationship with EU? Brexit means Brexit, declares Theresa May. But this does not take us very far. The Cameroons had no Plan B; even the Japanese government was better prepared for Brexit. Mrs May appears to have put controlling immigration and regaining national sovereignty at the top of her wishlist, ahead of defending the City of London and British business’s access to the single market. She wants to trigger Article 50 to begin divorce proceedings by next March, putting Britain on course to exit the EU by 2019.

In the meantime, the government is trying to figure out the parameters for a new deal with Europe, a deal that will shape Britain’s role in the world more profoundly than at any time since 1945.

I can think at least three plausible scenarios for Britain leaving the EU. None is appealing.

The first is an amicable divorce. All parties come to recognise the risks of things going badly wrong and make rational choices, bearing in mind economic interdependence and the weight of the UK economy. In the best of all possible worlds, the UK obtains some control over (but does not block) EU immigration — essentially putting in place safeguard mechanisms in light of the most serious migration and refugee crisis in decades. In return, Britain gets something approaching “equivalence” and can continue to access the single market as long as it complies with EU regulations.

Now I recognise that this is extraordinarily difficult to pull off given the interests of 27 other countries. The east Europeans will not take kindly to restrictions on the movement of labour, and continuing to comply with thousands of pages of EU regulations without input into new regulations may prove more difficult than at first glance. Moreover, many other west European countries may balk at Britain receiving terms that could be construed as an à la carte Europe.

Second, a quickie divorce: Brussels is not the new Las Vegas, but there is a view in London which argues that the UK should move early and decisively towards exit. Under this short, sharp scenario, now said to be favoured by Mr Johnson, the UK foreign secretary, and Liam Fox, the trade minister, Britain would reject post-exit deals with the EU. Mr Fox says he wants the UK to leave the EU customs union and negotiate bilateral trade deals with other nations, independent of EU terms and conditions.

The Brexit minister David Davis, the foreign secretary Boris Johnson, and Liam Fox, the international trade secretary

Economists for Brexit admit this option would involve tariffs on UK manufacturing exports but it would have the advantage of clarity, albeit a somewhat brutal clarity. In the medium-term, the UK economy would end up specialising in services and lose manufacturing. Yet as my colleague Martin Wolf argued in the run-up to Brexit, to eliminate all bargaining chips seems wildly implausible. We are not Hong Kong or Singapore — small entities that lack competitive democratic politics. “It is far more likely,” wrote Mr Wolf, “that a supposedly autonomous UK would be more protectionist and interventionist than it is in the EU.”

The third scenario is a hostile or sloppy divorce. This is undesirable but eminently possible. Negotiations between the UK and EU soon become acrimonious. Every country has a pet cause to protect or advance, and the negotiations prove fiendishly complex — enlargement in reverse, as it were. A stand-off ensues: financial markets are spooked, bond yields start to spike, consumer sentiment crashes. The UK and European economies slip into recession.

At this point, Mrs May has a choice: does she tough it out and walk out of the EU with an imperfect deal or does she acknowledge that Brexit has delivered an outcome that is manifestly not in the interests of the UK and resubmit the matter to the British people, not necessarily in a referendum but in a general election?

We should also consider that the EU itself may look rather different than it does today. In the next two years, a host of national elections could usher in a new guard. I am not suggesting Ms Le Pen will win next spring and bring about Frexit, or that Ms Merkel will lose in the German election in a year’s time. But the political dynamic in Europe is more fluid than first appears.

My colleague Gideon Rachman has raised another possibility: a two-tier Europe with a core around Germany, Belgium, Italy, Spain and, most likely but not absolutely certainly, France. Other countries, not just the Visegrad Four of central Europe but also the Nordics and possibly the Netherlands, would have a somewhat looser relationship with access to the single market and co-operation on foreign policy. Yet another scenario is that one or several EU countries may simply choose to leave along with the UK.

Yet none of this is certain. And if the EU does change, precedent suggests it will do so slowly. In my view, it would be infinitely preferable if all sides took decisions that would have direct benefits for their citizens. In the case of the EU, this means boosting job creation, regaining control of borders and winning back public confidence.

Back in 1877, Lord Salisbury, then UK prime minister, wrote a letter to Lord Lytton, then viceroy of India, in which he said: “English policy is to float lazily downstream, occasionally putting out a diplomatic boathook to avoid collisions.”

This lazy mantra will not do for Britain in 2016. The next five years will undoubtedly be bumpy. There are no easy answers to our European dilemma. The EU may adapt in response to Brexit and its own manifest failings but that change will come slowly. We cannot afford to pursue the politics of inertia.

The big question is: Are we sliding toward being a middle-ranking power on the edge of Europe doomed to relative prosperity and gradual decline, or does Brexit offer Britain new opportunities as an agile trading nation, a sort of Venice of the 21st century or a giant Atlantic Singapore?

Since the end of the Cold War, many fine minds have tried to conceptualise the UK’s place in the world. Tony Blair, former prime minister, described Britain as a “transatlantic bridge” which worked well until Iraq when the UK sided with the US against an antiwar coalition led by France, Germany and Russia. David Miliband, former foreign secretary, cast Britain as a “global hub”, a magnet for commerce, culture, education and finance. Most recently, Mr Cameron talked about the UK as an island nation adapting to a new “networked world”.

Britain, along with France, has the most serious military fighting force in western Europe © MoD

Yet even assuming that Britain leaves the EU, it surely cannot stand aside from Europe. The UK remains a member of Nato and the G8; along with France, it has the most serious military fighting force in western Europe.

Brexit offers an opportunity to redefine our role in a new world where the economic centre of gravity is shifting away from the old European continent eastward to Asia. Britain must look to its comparative advantages in a new world. It has a world-class economy, which, with its flexible labour market, has performed better than most in Europe in terms of growth and job creation — more than 2m since 2010.

Britain is a world-class financial centre. The City has also thrived because London, despite its sky-high house prices, is a cool place to live, work and, yes, eat in restaurants. That’s why tens of thousands of EU citizens — French, Italian, German, Spanish — live there.

Britain is developing world-class technologies. The country boasts a vibrant research community where science and technology thrive. It has world-class universities, cultural institutions and creative industries; a world-class workforce drawn to the opportunities of an innovative, multicultural society.

The UK also has world-class defence and intelligence capabilities. Of course, on internal security matters such as tackling crime and terrorism, it benefits from co-operation and intelligence-sharing with its European counterparts.

These strengths derive from native brainpower but they also benefit from the free flow of talented individuals from overseas. Our universities have benefited financially from overseas students, even more so from academics coming to work from abroad, from China, India, the US and Europe.

Our choice is stark: do we shrink into Little England turning inward and becoming poorer in every sense of the word, or do we look outward, drawing on our innate resourcefulness and engaging positively in the world as a medium-sized power with a sound economy, an Atlantic Singapore?

I vote for the second option. A strong, open UK — with a close relationship with Europe and the US — acting as a powerful magnet for business and commerce and a voice for a reinvigorated liberal order against the forces of anti-globalisation and nationalism. This will require patience, political will and leadership — but can we do it? Yes, we can.

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