First published by Ambrose Evans-Pritchard in the Daily Telegraph
Sir Nick Clegg is right. The terms of the Brexit transition are intolerable. They were bad for one year. The arrangement becomes progressively more dangerous over time.
Britain must accept and implement any new law or regulation foisted upon it by the EU machinery, without democratic consent. It is denied even the collegial "consultation" accorded to EEA satellites, an added twist that reportedly caused much satisfaction at Task Force 50 in Brussels. "I think it is the most undignified act of humiliation that I can remember in my lifetime," he said two years ago. The verdict holds equally true today and it is equally applicable to any extension.
Under the terms, Britain must accept all rulings of the European Court (ECJ) – the same court deemed on Tuesday to be acting capriciously, ultra vires, and in breach of the Treaties, by the German Verfassungsgericht. The German judges refused to be bound by the rulings of the ECJ. They warned majestically that member states are "Masters of the Treaties". They said assaults against "the principles of democracy" by EU institutions acting beyond their powers will not be tolerated.
So we have the spectacle of a German court sweeping aside the ECJ's assertion of supremacy yet Britain's Supreme Court must obediently uphold all rulings in this strange neo-colonial limbo. It has become surreal. I can understand why many – including Brexiteers – think the economic storm of Covid-19 renders a swift exit too risky. But there is no mechanical linkage. Indeed, there are powerful financial and diplomatic reasons to conclude otherwise. Few are aware of the machinations under way in Brussels to bail-out the now insolvent southern half of monetary union. Italy will emerge from this pandemic with a debt ratio near 155pc of GDP if all goes well. Various banks have tried to crunch the consequences of a botched lockdown exit and a second wave. Consensus lands around 175pc. Portugal winds up near 160pc, and Greece at 220pc. The European banking system buckles.
Markets and ministers had been assuming that the European Central Bank would continue to mop up the vast volumes of debt issuance indefinitely, bringing about a de facto fiscal union by the back door (illegally, but with the ECJ connivance).
The Verfassungsgericht has exploded that fond notion. The Bundesbank will not be allowed to participate unless the ECB cleans up its legal act. Further QE bond purchases will be subject to limits – not necessarily the 33pc rule and the "capital key", but not massively far from it – and it must not take on the character of a fiscal rescue. In other words, Germany has just blocked the Great Monetary Bail-Out.
The EU will have to switch to a genuine fiscal bail-out. Who will pay for that? Any country stupid enough to lock itself into a transition trap with no veto power. The EU's €1.6 trillion Recovery Fund will be financed by seed money from the EU's internal budget. This will be "front-loaded" by a special call on national treasuries in 2021 and 2022, effectively a surtax during the first part of next seven-year budget plan. The UK risks being sucked into this. It will lose the Thatcher rebate. Normal EU funding will not be recycled in our direction.
This becomes a one-way transfer of very large sums. Hence the zealous efforts by EU politicians to bounce the UK into requesting an extension, accompanied by faux consternation that Boris Johnson could dream of doing otherwise in these circumstances.
Hence too the urgent demands for a delay by the European Parliament's centre-Right bloc (EPP), couched as solicitation for Britain's welfare. "I cannot see how the UK Government would choose to expose itself to the double whammy of the Coronavirus and the exit from the EU Single Market. I can only hope that common sense and substance will prevail over ideology," says Christophe Hansen MEP, the group's Brexit negotiator.
The EU is trying to conjure a sense of inevitability – without admitting that Brussels is now the demandeur. Some British politicians are willing to go along with this, either because they are gullible, or because the extension mantra is really the same old effort to derail Brexit. Is the Government's policy down to "dogma, vanity, or paranoia?" asked Labour's Wes Streeting this week in Parliament.
A year ago it was the UK that was divided and in constitutional chaos. Today the tables are turned. The pandemic has ripped up open the eurozone's North-South fissures, and indeed other West-East fissures. European solidarity is "a fairy tale" said Serbia's premier after kissing the Chinese flag (the fool).
The refusal to help Italy with PPE medical kit in those first desperate days in February has had enormous emotional resonance. But it is the slower, more corrosive effects of the Covid aftershock that ultimately matters more.
Germany can borrow for 10 years at minus 0.52pc. It can splash €1 trillion euros to keep its productive system whole and to pay for reconstruction. Italy must pay a risk spread of 250 basis points to fight the same shared shock. The southern states dare not spend enough to avert lasting structural damage. They will be left behind by the recovery. Italians accepted a decade of EU-imposed austerity and surveillance on the implicit understanding that fiscal solidarity and a banking union would come later. Now that solidarity is desperately needed. It has not come. So what is the fundamental EU trade-off? It is no surprise that 53pc of Italians want to leave the EU or the euro or both in the latest CISE survey.
The EU-27 were superficially unified during the Article 50 saga. In this phase of the talks they have competing commercial objectives. The fissures could widen much further. A trade rupture and loss of a €94bn goods surplus with the UK would have asymmetric consequences and compound a crisis that is already existential. It would be an economic shock for the UK as well but the political calculus is different. The country is not in a structural currency crisis. It is in an artificially-induced economic coma and will come out of that coma. Nor is it self-evident that "kitchen sinking" Brexit costs along with Covid disruption would hit GDP harder than two more years of uncertainty followed by a fresh negotiating cliff-edge.
The US, Japan, and other trading powers would down pens and stop talking seriously to Britain the moment the Government agreed to extend the transition, and again locked into the EU's trade and tariff system. The EU would have no incentive to agree anything quickly since the status quo suits it perfectly.
The British negotiating request is simple. As Michael Gove told the Commons, it is an "off-the-peg" free trade agreement along the lines of the EU deal with Canada, Korea, or Japan. It is a "skinny FTA" with no tariffs or quotas but nothing special. This could be agreed quickly if the EU wants to agree. The complexity objection is a smokescreen.
The EU's "future arrangements" proposal is not a trade deal at all. It is an attempt to lock the UK into its legal structure under the ECJ. Michel Barnier insists that the UK must swallow the acquis on competition, state aid, labour, and the environment – and future acquis through "dynamic alignment" – demanding "level playing-field' clauses of a character quite different from normal FTAs.
In other words, the EU is still refusing to treat Britain as an independent sovereign state. Since our proposal is not so far removed from an "Australian" or WTO settlement that Europe cannot deny, it would be craven to accept these terms. Craven, Boris is not. Note the recent inversion of Mr Barnier's rhetoric. "The clock is ticking", he taunted us all through the Theresa May saga. The EU's method was to run down that clock, ratcheting up pressure as deadlines approached. Now he accuses this country of doing the same thing. This is revealing. It is the EU side that is increasingly unnerved by Borisian brinkmanship.
For weeks there have been planted leaks from alleged British officials claiming that Downing Street is preparing to climb down and accept an extension. Yet it keeps not happening. Mr Gove's tone this week was defiant and for good reason. The EU is trying to impose terms appropriate only for a country defeated in war. My presumption is that it cannot take the diplomatic and economic risk of pushing this ideological agenda much further.
Should I be wrong – should the EU refuse a skinny FTA unless we leave behind half our sovereignty – then this country should pivot harder to the Anglosphere. It should rearrange its 21st Century future as an economic and regulatory ally of the American bloc. Your choice, Europe.
