The upside of Brexit: key lessons for Switzerland

A researcher at the University of St Gallen believes Switzerland can learn from Brexit when it comes to the EU’s position of power and the risks of delaying a framework agreement.

It has now been more than a thousand days since the British people voted to leave the European Union. With just a few days remaining in March, it remains entirely unclear what the relationship between the United Kingdom and the European Union will look like in the future. It is remarkable, to say the least, that every option is still on the table: a no-deal hard Brexit, a last-minute deal, a postponement, and even a cancellation of the whole Brexit.

Many ask why the EU and the UK cannot reach a deal. The answer is simple: the demands from London and those from Brussels create an empty set of solutions. This is illustrated best by considering the border question. If Brexit ought to have any meaning, the UK must drop out of the EU Single Market and the Customs Union. Among other things, this would allow the UK to design its own trade and immigration policy.

However, the well-known phrase “taking back control” implies that there must be a border between the United Kingdom and the EU. Placing this border between Northern Ireland and the Republic of Ireland would risk igniting a violent conflict. Hence, the EU demands a permanent solution for this (the so-called Irish backstop). But if there cannot be a border within Ireland, one has only two options left: either split the United Kingdom by placing the border in the Irish Sea or leaving the entire UK in the Single Market. Both are impossible to sell in London.

Lesson one: don’t delay

No one can predict how the current impasse will be resolved. Neither option is appealing. If anything good comes out of this debacle, it is that Switzerland – and other countries, including the UK – can learn some lessons.

Stefan Legge is a postdoctoral researcher and lecturer in economics at the SIAW Institute of the University of St.Gallen. He also serves as a Fellow in the World Economic Forum Global Future Council. His interests: international trade, macroeconomics, and political economics. Hannes-thalmann/courtesy

First, the days since the Brexit vote have seen British politicians delaying the process time and again. However, all this postponement has yielded nothing. Domestically, it has absorbed valuable resources and attention from other fields of politics. Internationally, the idea that the EU would become nervous and make last-minute concessions must be all but rejected. British leaders, including Prime Minister Theresa May, have manoeuvred the country into a dreadful position. This should be a warning to those in Switzerland who believe that the framework agreement can be put into the cold storage for years. The default outcome of Brexit is a no-deal, the default outcome of the framework negotiations is that Switzerland’s agreements with the EU become outdated. The Swiss position is markedly better than the British in that regard, but inactivity is not advised in either case.

Lesson two: the EU has clout

Second, the EU is no longer the self-absorbed cacophony it used to be. For a long time, the European Union appeared to be a weak and inward-looking political body, consumed by its own crises. One can argue that this has changed. The EU economy is almost equal in size compared to the American one and about 40% larger than the Chinese at current prices. Treated as a single country, only China and India have a larger population. It is the single largest trading block in the world. Half the world’s rich countries are a member of the EU. Realising the influence that can be derived from these numbers, the EU has hardened its tone towards both the US and China.

Switzerland: an old problem for the EU?

The United Kingdom and Switzerland feel the impact of a reinvigorated European Union. Asking for another delay of Brexit and additional concessions, British politicians had to learn that few concessions will be made and many in the EU will be happy to see the UK leave. Note that a loss for the EU as a whole can be a blessing for some interests within the Union. Brexit reduces the EU gross domestic product by as much the 19 smallest countries, if they left the bloc. Yet, it would open up new possibilities within the Union.

French president Emmanuel Macron will not admit it, but his ambitious plans would fall on more fruitful ground in a post-Brexit EU. Sooner or later, Germany will learn that it will no longer be in a position to veto plans by “Southern member states” and renegotiating the Lisbon treaty’sExternal link double majority rules will be tough. For many forces within the EU, the time is ripe to “get rid of some old problems”. That includes British privileges but also the gaping hole in the EU map marked out by Switzerland.

David and Goliath

The consequences for Switzerland have been visible already. Several Eastern European countries have demanded larger Swiss contributions in the form of so-called “cohesion billions”. French judges fined the largest Swiss bank about $5 billion in a criminal trial over tax evasion, and not too long ago, German authorities felt empowered to encourage breaking Swiss law by buying CDs with tax information. Almost exactly ten years ago, the sacred Swiss bank secrecy laws were abandoned quickly as pressure built up. When push comes to shove, Switzerland will again find itself as David in front of Goliath. Trade statistics illuminate the imbalance: Swiss exports to the EU per person are about CHF16,000 while EU exports to Switzerland per person are just CHF350. It does not come as a surprise that the EU presents Switzerland with two options for the framework agreement: take it or leave it.

A final economic lesson from the Brexit adventure concerns the surprisingly small impact we have seen thus far on the UK economy. Many predictions of an immediate economic downturn after the Brexit vote have turned out wrong. At 3.9%, the British unemployment rate is lower today than at any time since 1975. Nevertheless, the UK economy is growing slower than all other G7 countries and current research by Benjamin Born and co-authorsExternal link suggests a sizeable loss in economic output. One major reason why things have not turned worse is the fact that the British pound was allowed to depreciate by more than 10% against the Euro. If only Greece had possessed that option.

Outlook

The Brexit saga will not have a happy ending. Either way, the United Kingdom will face the consequences of challenging its closest ally and trading partner – at a time when this partner feels and acts increasingly emboldened. Chinese general and strategist Sun Tzu wrote, “He will win who knows when to fight and when not to fight”. The UK picked the wrong time and never fully developed a strategy to manage Brexit. The result will not be catastrophic but a significant loss to the British standard of living.

The Swiss position regarding the EU is notably different. The country never was a member state and has decades of experience negotiating with the EU. Right now, that experience is sorely needed and had better include the lessons from Brexit.

The views expressed in this article are solely those of the authors, and do not necessarily reflect the views of swissinfo.ch. 

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