26 January 2016

Open Europe yesterday hosted its ‘EU Wargames’, which, in the morning, simulated the Prime Minister’s EU renegotiation and, in the afternoon, turned to the possible negotiations that would take place should the British electorate opt for Brexit. The assembled ‘players’, including former prime ministers and cabinet ministers, represented their countries or the EU institutions and, gathered in front of a live audience rather than behind closed doors, they gave us a pretty good approximation of how events might unfold in the real world.

The work of many months of reform negotiations, and potentially years in the case of Brexit, was boiled down to three hours apiece and therefore neither scenario came to a definitive conclusion.

Sir Malcolm Rifkind, who played the UK in the morning’s reform session, noted:

If this was the real European negotiation this would have been the first meeting of the heads of government and it would have gone exactly as its gone this morning, with all the concerns, legitimate criticisms, anxieties, national positions being put forward. In the last 20 minutes, last 30 minutes people have started focussing on ‘right, where do we go from here?’…I think there is a basis on which we can accommodate the United Kingdom position.

Sir Malcolm Rifkind, Open Europe ‘EU Wargames’, 25 January 2016

This qualification could be applied to both the ‘reform’ and the ‘Brexit’ sessions. So what did our wargame – described by one observer as a hybrid of Question Time and Dr Strangelove – tell us?

None of the UK’s reform demands are considered easy

With nearly all of the press coverage of the UK-EU negotiations focused on the demands to restrict EU migrants’ access to welfare, there is a perception that the other demands are comparatively easy. However, our negotiations suggested this is to underestimate the complexity and political sensitivity of other key issues. Reaching a UK-EU deal in February may not be as straightforward as some assume.

The UK’s demand  to establish principles and mechanisms by which non-euro states are insured against the in-built majority of Eurozone countries under EU single market voting rules – the most significant structural reform being proposed – is not simply technically complex but was variously viewed by our Eurozone players as both unnecessary and a potential threat to future integration. Sir Malcolm Rifkind argued that the Eurozone’s decision to involve the UK in the recent bridge loan to the Greek government, and the European Central Bank’s hostility to London as an offshore centre for Eurozone trading illustrated the need for greater protections. However, former French Europe Minister Noëlle Lenoir dismissed the UK’s concerns, saying, “It has never been considered that the Eurozone would prevent the UK from having access to the single market.” The Spanish player, former Foreign Minister Ana Palacio said, “[We] cannot make it that the UK stops integration.”

In Britain, the debate about whether all member states should be subject to a centralising interpretation of ‘ever closer union’ is often seen as anachronistic, symbolic and abstract. However, the emotional commitment of others to the integrationist ideal should not be taken lightly. As former Irish Taoiseach John Bruton noted, “Small countries like Ireland see the EU as community of law and mutual solidarity…Removing the commitment to ever closer union would be like removing EU’s emotional cement.”

Meanwhile, former German Deputy Finance Minister Steffen Kampeter described the idea of a ‘red card’ for national parliaments to block EU legislation as “crazy”, pleading with Britain to “please take that off the table.”

Perhaps predictably, the UK’s demand for greater EU ‘competitiveness’ was the least controversial, although even this prompted a fierce debate about why the EU was seen to overregulate – is it the fault of EU institutions such as the European Commission or that of the member states who often demand greater regulation?

Some states are ready to discuss fundamental structural reform, but others are not

It is tempting to see the negotiations as a battle between the UK and a cohesive EU bloc, and as the UK is the demandeur in these negotiations, there is much truth to this. However, our simulation highlighted that other member states have very different views of how the EU should develop in the coming years. Enrico Letta, the former Prime Minister playing Italy, saw the UK’s reform drive as an opportunity to establish a ‘two-circle’ EU with different rights and responsibilities for those countries that want to integrate further and more flexibility for those such as the UK that do not. He hoped Switzerland might be tempted to join an ‘outer circle’ and that the ‘inner circle’ would make progress on wholesale reform of the Eurozone. But others – notably Germany, the Netherlands, and (for now) France – were for various reasons unwilling to countenance such a radical shakeup of the status quo.

UK ideas lost in translation?

In the reform session, our continental negotiators all stressed their willingness to be helpful and make concessions to keep the UK in. However, certain topics (migration and welfare in particular) revealed how differently the British see things to their EU partners. To understand the opposition that many EU states have to any form of ‘discrimination’ between UK and EU nationals on access to welfare, you just had to witness how many around the table were shocked that the UK considers the free movement of EU citizens as ‘immigration’ at all. However, for the British, as Sir Malcolm said, this is a political issue where pragmatism should prevail. He noted that EU states and recent EU court rulings had established that it was perfectly possible to discriminate between your own and EU nationals when it comes to accessing out of work benefits and that Denmark had been granted special dispensation to apply restrictions on (predominantly Germans’) purchase of holiday homes on its territory. He noted that the UK’s universal welfare system and the political salience of migration in the referendum campaign required a pragmatic extension of these exceptions to the EU’s ‘Four Freedoms’.

Member states hiding behind the Commission and the EU Treaty

In the game as in life, there seemed to be a significant number of member states using the European Commission as a defence mechanism and hiding behind bureaucracy to avoid some difficult political decisions. This was particularly true on the issue of EU migrants’ access to benefits where the Commission insisted no discrimination is possible, despite the UK player highlighting that law and treaties can be changed if there is the political will – it is in the end a political decision, EU law is not holy writ.

Some states hope this renegotiation will settle the issue

During the reform session the Irish player asked, “Can we be sure that you won’t be coming back looking for more in ten years’ time?” He went on to add that he hoped the matter “would not be reopened again…we can’t live with this sort of uncertainty.” Given the nature of the negotiations during the game and in reality, as well as the tight result expected, it seems unlikely this referendum will settle the issue. Furthermore, as was noted by others during the session, Europe is changing and the issue of reform is not a one shot deal. Therefore, demands by other states for this to be the end of the UK’s reform push or the end of questions around the EU’s structure are likely to be sorely disappointed.

Public relations matter at home and abroad

In both sessions, an issue that shone through was the constraints within which politicians will be working. In the end, whatever reform deal is secured or whatever deal is offered to the UK post-Brexit, it must be sellable to the electorates in other member states as well as to the UK electorate. Not only does this establish ‘red lines’, it also leads to political opportunism – as the German player pointed out, it is unlikely he could explain away giving the UK access to the single market in financial services post-Brexit, thereby depriving his Frankfurt electorate of their “one and only chance” to compete with London as the EU’s financial centre.

160126_MailChimp itemprop=Credits: Claire Greenway, Getty Images

This is going to be emotional either way

Both the reform and the Brexit sessions roused passionate exchanges. “You were our best friend, and we had a marriage. Now we are divorced,” was how former Swedish Trade Minister Ewa Björling reacted to Brexit, lamenting the loss of a liberal, free-trading ally. We lost count of the number of times that Brexit was likened to a messy divorce.  The Netherlands’ representative, former Social Affairs Minister Aart Jan de Geus, noted that while the Dutch public might expect its politicians to be rational about Brexit, the politicians are likely to be irrational and this could result in ‘sub-optimal’ outcomes for all concerned.

There was a sense that the rancorous response of continental negotiators was not simply driven by the shock and anger of being spurned by Britain. It also revealed the vulnerability of the EU post-Brexit. The Spanish player summed up the potential impact of British withdrawal on the EU as “A tsunami would be a very small thing compared to what would happen with a Brexit.” The German player said, “There is no such thing as a free lunch. Brexit is something which does not only affect you but affects our country.” Furthermore, some of the resentment appeared to be due to the fact that other EU member states felt they had spent time and energy trying to reach a viable deal with the UK – but that deal had then been rejected by voters.

Not Norway or Switzerland, but ‘Canada+’?

In putting forward the framework for life outside the EU, the UK player, former Chancellor Lord Norman Lamont, shied away from the obvious options offering something new and, he believed, ultimately more suitable. He suggested the best approach would be to seek a comprehensive free trade agreement, citing the EU deal with Canada as a good starting point since it removes almost all tariffs on goods and agriculture. However, given the links between the UK and the rest of the EU, clearly things would be more complicated. This led him to propose a ‘Canada+’ style agreement which could see such a deal extended to cross-border services, including financial services, with the UK expressing some willingness to compromise by granting EU citizens access to the UK labour market and providing some contribution to the EU budget in exchange. Ultimately, the UK will have to figure out what it wants outside the EU, but Lord Lamont’s opening pitch was a strong attempt to lay out the potential terms of a new relationship, which the Leave campaigns have been reluctant to spell out so far.

Sending a message not to follow the example of Brexit

One of the more revealing moments of the Brexit discussion was the message that the Polish player Leszek Balcerowicz, a former Deputy Prime Minister, wanted to send to others that might seek to follow the UK’s example. “The common interest of the remaining members is to deter other exits”, he said, and added, “This should have an impact on the terms Britain gets – they should not be too generous.” Lord Lamont responded that this was a strange reaction from what was supposed to be an organisation based on the premise of mutually beneficial cooperation.

Brexit would add to the EU’s list of crises

While some players warned that doing a post-Brexit deal with the UK would not be a top priority – perhaps as a negotiating ploy – former EU Trade Commissioner, Karel de Gucht, playing the role of the EU institutions, disagreed, saying that in reality a new trade deal with the UK would become the EU’s “top political priority.” This did not mean the UK would get an easy ride though, he warned.

Perhaps Enrico Letta summed it up best when he said that “We are discussing as though the European Union is the centre of the world. That is no longer the case. In case of Brexit, we risk having years and years of discussions and wasting energy, time and money when the rest of the world will run without us…We have to look at the big picture – the rest of the world is not waiting for us.” For an organisation dealing with the Eurozone and refugee crises, Brexit could provide another existential threat.

Ireland is worried, with good reason

It was communicated very strongly by the Irish player that Brexit would be a “devastating decision” and regarded as “an unfriendly act…a huge, self-imposed, politically generated shock to our economy”. Open Europe research has found that Ireland could see a permanent loss to GDP of between 3.1% and 1.1% if there were a Brexit – as such, his concerns were well founded. However, he also warned of complications in Northern Ireland, for example around the creation of a customs border and uncertainty about the free movement of people. As a result, he was keen for a deal to be sealed with the UK as quickly as possible and potentially for a special arrangement to take into account the special nature of the Anglo-Irish relationship. While other players expressed a desire for “solidarity” with Ireland, how far this would go was unclear.

Consensus on continuing foreign policy and security cooperation post Brexit

In the post-Brexit session there was a clear consensus that the EU member states would be keen to continue foreign policy cooperation with the UK. This may suggest that such cooperation and the UK’s strength in this area might be a useful strategic card for it to play during the negotiations. It also highlights that much of the scaremongering around the security issue and Brexit might be overblown. However, Spanish player Ana Palacio additionally argued that, “NATO does not encompass all the issues…security today goes far beyond NATO”, highlighting that other EU members will also see security and foreign policy as a distinct part of the EU’s role.

Everyone wants to be like London – the EU’s new financial centre Frankfurt, Paris, Dublin, Amsterdam?

Like the cool kid in school everyone wants to copy, other states were keen to express their interest in becoming the EU’s new financial centre following Brexit. At least four cities – Frankfurt, Paris and (more speculatively) Dublin and Amsterdam – put forward a claim. Ultimately, this highlights that many countries will be keen to try to undercut the UK’s financial services sector in the event of Brexit, as illustrated by the clear reluctance to give the UK’s financial services access (or ‘passporting rights’) into the single market as part of any post-Brexit free trade deal. But the impact of this should not be overstated. At times, some of the threats rang a bit hollow. Let’s not forget that currently Frankfurt, Paris, Amsterdam and Dublin are ranked in the Global Financial Centres Index at 14, 37, 36 and 46 respectively, while London is number 1. Clearly, EU access alone does not make a financial centre. The additional requirements in terms of infrastructure, a large pool of skilled labour and support services should not be underestimated. Furthermore, access to a global rather than just a regional financial centre allows the Eurozone to tap into significant pools of liquidity via global capital markets. Lord Lamont retorted that, ultimately, “It’s not people behind desks” but market forces that will decide where businesses trade.

A final thought

As the Dutch player pointed out towards the end of an acrimonious Brexit debate, it might “be a good idea to reflect on the discussions on [reform] given the experience of the discussions of [Brexit]…would there be a higher level of interest in coming to a solution on the [UK’s reform demands]?” We suspect the answer to his question would have been yes. In any case, the entire exercise highlighted the importance of planning for and considering all eventualities. Not only because such an approach is prudent, but because thinking through these potential future issues can help to better inform your position on current issues.

All of the players were speaking in a personal capacity but were asked to represent the positions of their member states as closely as possible without endorsing them. Open Europe will publish a fuller account and analysis of the discussions in the coming weeks.