Can Europe Make It?

Single market maze contains clues to complex Brexit puzzle

While political debate over Brexit sidestepped the complexities of the single market, domestic volatility makes replicating trading arrangements much more difficult.

William Davison
11 July 2017

Robotic surgery – state of the art in 2012,at Fort Belvoir Community Hospital, Va. Flickr/US army image. Some rights reserved.In many ways the hi-tech firm just outside Cambridge fits into a vision of an optimistic future for the British economy sketched out by breezy Brexit advocates.

In a leafy business park, highly educated workers dart around a lab fine-tuning the operation of a robot that could soon be performing keyhole surgery across the globe. A technician wearing 3-D goggles grips a surgeon console that looks as if it belongs in a virtual-reality arcade, not an operating theatre, and guides a mechanical arm on his screen so an instrument plucks a suture. Health industry representatives from the UK and Europe are due to arrive later that day to cast their eye over the prototype.

Brexit visionaries like Conservative European parliamentarian Daniel Hannan have argued that when the economy breaks free from the clutches of the European Union's overbearing bureaucracy, many such value-adding innovators will explore global markets from their newly deregulated, low-tax, UK base.

Others, like Chief Executive Officer of Cambridge Medical Robotics (CMR), Martin Frost, have somewhat more mundane views about impending departure from the EU. Those centre on what the separation will mean for the medical devices regulatory system, which ends in products receiving a CE (European Conformity) mark, allowing them to be sold across the European Single Market without further checks.

"We always built our product to be relevant to Europe and the United States. And that's when we get concerned about what that regulatory regime will look like in Europe in 2020," he says.

For a company like CMR, which is developing a complex device, the uncertainty is a problem, as it needs to know, for example, what safety features to design almost a decade in advance. A dramatic change in the regulatory environment could cost the company millions of pounds. Unfortunately for Frost, and thousands of businesses with similar concerns, certainty about what even the outlines of Brexit will amount to is in short supply.

The reason for that is primarily because there has been precious little substantive national debate about the post-separation trade options that the government can pursue. The referendum was fought on political rather than economic grounds and the bitter divisions it exacerbated still very much shape media reporting and public attitudes.            

After the referendum, Prime Minister Theresa May's new government could have decided that, while it had to take the country out of the EU, leaving the Single Market was an unnecessarily daunting and risky challenge. However, May embraced the idea of a clean break in order to focus on controlling immigration and reclaiming sovereignty, which includes ending the jurisdiction of the European Court of Justice (ECJ).

The Single Market

Since the surprise loss of a Conservative majority in the June election, that strategy has come under increased scrutiny. But the discussion of Brexit options in the interests of protecting the economy is poorly defined and ill-informed, partly because of the complexities of the multi-layered single market.

The resulting lack of clarity from a weakened, divided, and distracted political class means even staunch Brexit supporters acknowledge the path to a smooth departure is increasingly strewn with obstacles. And a large proportion of those come from the ending of painstakingly constructed regulatory unions that are key to freeing up trade.

The Single Market has been at the core of the European integration project since its inception. Today's arrangements stem from the creation of the European Economic Community (EEC) in 1957 which aimed to build a common market according to freedom of movement principles. The UK joined France, Germany and four others in the EEC in 1973 after the existing members had completed a Customs Union in 1968 to abolish internal tariffs. Successful efforts to revitalize integration in the 1980s led to the formal declaration of the Single Market in 1993.

Superficially, the Single Market appears straightforward and finite. It facilitates borderless trade between member states by creating an economic zone for Europe as if it is one country. For example, it gives a printing cartridge manufacturer in Leicester as much right to set up an office and do business in Lyon as it has to do so in Liverpool. Crucially, participating countries have to accept in principle the freedom of movement of goods, people, services and capital.

While that overview is accurate, the Single Market is also an evolving, fragmented, labyrinthine process to set rules and standards across almost all sectors in order to regulate economic interactions and thereby try and facilitate cross-border business in the EU and connected trade blocs. Despite considerable progress at harmonisation, the effort is continuous. For example, the EU Commission is trying to improve internal energy, capital and digital markets and is incorporating international plans to reduce corporate tax avoidance. Many EU standards stem from the work of other multinational bodies.

To ensure the market's laws are followed there is an accompanying apparatus of organisations to inspect, verify and certify, while the ECJ is the arbitrator of disputes. Leaving means undoing this work and undertaking a laborious effort to replace it, rather than, for example, pushing ahead to try and establish common markets in significantly non-integrated service sectors like healthcare or construction.

Regulatory union

Although CMR's robot surgeon is indeed at the frontier of technological advances, the market for medical devices is well established, as is the EU regulatory system for them. The barriers to trade erected by leaving that system are just one example among thousands of the costly disruption that will be caused by leaving the Single Market.

For CMR, the path to the CE mark is complying with the UK's Medical Devices Regulations, which stem from EU directives with instructions such as: 'the measurement, monitoring and display scale must be designed in line with ergonomic principles.' As it's a high-risk product, it would then apply to one of five EU 'notified bodies' in the UK who assess compliance and issue the CE mark.

If Brexit occurs as planned, the UK will no longer have EU notified bodies, which means applying to one based in Europe. Frost would therefore like the status quo maintained, even if the UK exits the Single Market, but that appears to be impossible: ending membership means rupturing the regulatory union. There are comparable dilemmas for the valuable chemicals industry and many other heavily regulated sectors.

One of the organisations responsible for medical devices is the British Standards Institute (BSI), which said it is confident a deal can be struck whereby UK assessors would be treated as equivalent to EU notified bodies. After negotiating trade deals, seven non-EU rich nations have similar arrangements for some industries. But despite the BSI's bullishness, which echoes the government's Brexit aspirations, this option has the same downsides as other Single Market alternatives: regardless of the existing convergence, negotiating and then implementing fresh regulatory regimes for all industries simultaneously as part of a UK-EU trade deal will probably take years, and the result will be less smooth trade anyway. It's also currently unclear what transitional arrangements could be set up in the meantime, especially without May relaxing her stance on the ECJ.

While the BSI position elicits queries, Frost's notion that medical device regulations can be dealt with separately from the Single Market, which he sees as primarily about eliminating tariffs, is, at best, optimistic. Such views are symptomatic of a muddled debate about Brexit and the global economy, according to Matthew Bishop, a senior lecturer in international politics at Sheffield University.

Bishop argues that modern trade deals are less about tariffs on finished products – it's estimated, for example, that 80 percent of global trade is within value chains controlled by multinationals – and much more focused on the arcane regulatory arrangements that govern market interactions, including associated issues like labour and environmental rules.

And trade in Europe isn't shaped solely by Single Market rules. Instead it stems from a "fiendishly complicated cornucopia of bilateral and multilateral agreements", including the World Trade Organisation (WTO), Bishop said. The Brexiteer idea that deregulating will boost UK exports is therefore largely a fallacy, he believes, as market access through trade deals always means adhering to detailed rules.

Massive risks

Given this messy, precarious reality, Bishop is bewildered by the blasé approach from nominally pro-business Conservatives to the Single Market, which anchors the UK's position in the global trading system. "I personally just cannot believe that a Conservative government especially is taking such massive risks with the British economy," he said. "I personally just cannot believe that a Conservative government especially is taking such massive risks with the British economy," he said

As the onerous realities of separation loomed after the referendum, there was already uncertainty about the best way forward among Conservatives. Since the election, Treasury minister Philip Hammond has become prominent in stressing the need for a Brexit that protects the economy. But, so far, he has not proposed any tangible deviations from the government's February position paper.

This lack of clarity among Conservatives is matched by Labour under left-wing leader Jeremy Corbyn. In its election manifesto the party supported ending the freedom of movement of people while retaining the benefits of the Single Market. That is against the principles of the EU project, and nobody is suggesting Brussels will make a positive exception for the UK. Indeed, many people think European leaders want the separation deal to serve as a warning for others tempted to follow the UK's path.

Still, the Labour leadership may maintain its fuzzy stance and let the Conservatives grapple with Brexit while it focuses on pressing home its domestic advantage by continuing to oppose austerity. A senior party source said the emphasis will be on opposing Conservatives’ efforts to use the excuse of Brexit to slash taxes and regulations in order to maintain competitiveness.

Although Labour attracted many Remain voters, long-term Eurosceptic Corbyn has concerns about some Single Market rules, such as limiting state aid to industry and banning government procurement favouring local firms, the source said. That makes a change in approach unlikely, despite the growing pressure from other factions in the party. A senior party source said the emphasis will be on opposing Conservatives’ efforts to use the excuse of Brexit to slash taxes and regulations in order to maintain competitiveness.

Gradual decoupling

A long-term EU critic who has a clearer strategy is researcher, author and blogger Richard North. He has been plotting a practical decoupling for over a decade. North, a UK Independence Party candidate in northern England for European elections in 2004, exudes contempt for a London-centric establishment he says is incapable of learning from outsiders.

He believes this elite's lack of detailed understanding of the EU has led to misconceptions surrounding Brexit snowballing. Some of his research illustrating this point is striking. For example, it became received wisdom that staying in the Customs Union was an option and that exiting it would mean the reintroduction of border checks. These claims are misleading, according to North, despite their being underpinned by research from the Treasury.

Instead, while the Customs Union abolished internal tariffs, it was the development of other elements of the Single Market that eliminated border checks as regulations were standardized. So, if the UK left the Single Market, livestock exports, for example, would need inspecting at the border, unless regulatory harmonization was re-established. A Customs Union would not prevent that and, regardless, leaving it is set to occur automatically upon Brexit. US investment bank J.P. Morgan has arrived at similar conclusions, while the EU lead negotiator's comments also support this type of view.

Still, despite such confusion, as the process staggers forward, North has at least planned for it. The thrust of his preferred approach is that because the current level of integration took 44 years to achieve, separation should be incremental. For him, this means leaving the EU, but not immediately exiting the Single Market. That can be done by applying to re-join the European Free Trade Area (EFTA). EFTA members Iceland, Liechtenstein and Norway are part of the Single Market through the Agreement on the European Economic Area. If the EU agreed, the UK could re-join the EEA through EFTA. Some commentators think this option could form the basis of a transitional arrangement, but an EFTA source said that was unlikely.

In North's opinion, other paths are riskier. The government’s plan to negotiate and implement a comprehensive trade deal is likely to take years, despite existing regulatory convergence. Trading on WTO terms means another complex period of haggling as, for example, the UK's duty-free import quotas are cleaved out of the EU's. And it would, again, also mean ending regulatory union, which would stifle access to an EU market that accounts for around 45 percent of UK exports, or £222 billion in 2015. Richard North worries that a failure to follow the EFTA/EEA strategy risks derailing Brexit entirely as the process gets bogged down in years of talks. Richard North worries that a failure to follow the EFTA/EEA strategy risks derailing Brexit entirely as the process gets bogged down in years of talks.

Negotiating pain

However, deciding to pursue that option, which has been lurking somewhere on the national agenda since the referendum campaign, would only be a baby step. The government would still have to sell the deal to Conservatives who want a clean break. That would be tough, as remaining part of the Single Market via EFTA/EEA means abiding by relevant EU regulations, contributing to the union's budget, accepting decisions of a non-British court, and accepting in principle the freedom of movement of people.

Helping the cause would be the fact that once part of the EEA as an EFTA member, the agreement allows the parties to unilaterally take measures that could plausibly be used to control immigration. Uncontrollable movement from the EU, it should not be forgotten, was a significant factor in the referendum.

Amid the fallout from the Grenfell fire tragedy, which highlighted the importance of effective regulation, May's minority government has begun negotiations with Brussels, but trade is not yet on the table.

Instead, the parties are focusing first on the future rights of UK citizens living in the EU and vice-versa, agreeing the financial accounting of the separation, and the plan for the Irish border, which is currently relatively open, but is set to become the EU and single market frontier. If progress is made in these tricky initial discussions, talks on trade could occur this year, but it's unclear how much detail the EU is willing to go into before the UK departs. Meanwhile, a group of Labour parliamentarians have broken ranks with Corbyn to say the UK should stay in the Single Market. Included in that faction was Daniel Zeichner, the member for strongly pro-EU Cambridge, who resigned from the shadow cabinet in late June over the issue.

On the fringes of this wealthy, liberal city, in the weeks after the shock election, Frost, an experienced tech entrepreneur, has been hosting busloads of Chinese health industry types, eager to scrutinize CMR's ground-breaking surgeon-robot. He's planning to tap into financing to get his device to market within a year or so and is confident the globally focused venture will succeed, whatever Brexit brings. Like many in the UK, he hopes that the hung parliament and a chastened government mean a less economically disruptive deal.

But despite the reassuring noises from ministers and their opposition counterparts about seeking a separation that is in the interests of jobs and business, Frost recognizes that there is still a lack of clarity and lots of unhelpful uncertainty around. "Brexit is just a pain for us," he said.

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