Back in 2020, when Brexit dawned, the UK was an average economic performer within the EU. Five years on, it is still an average economic performer relative to the EU. From an economic perspective, then, Brexit was a non-event.
Try to tell anyone this though, and both sides will erupt in violent disagreement. The Brexiteers insist it is just a matter of time: the sunny uplands are within reach. The Remainers, too, say it just takes time: the sheer horror of Brexit will yet materialise.
Well, it won’t. And the reason why Brexit has yet to have any visible impact is because, just like in Hans Christian Andersen’s The Emperor’s New Clothes, there was never anything to see. The EU’s single market is simply not what it says on the label. It is not a genuine single market. If it were, Brexit would have been a big shock. But, as Mario Draghi reminded us recently, the EU’s internal trade barriers are actually higher than the ones Donald Trump has just imposed on Europe and the rest of the world.
I am not denying that the EU operates something that is called a single market. And in the years after it was formally introduced in 1992, it did produce higher growth. Where markets were once fragmented and protected, the EU’s single one was more open and liberal. But over the years that has changed drastically. Today, it is hampered by a thicket of rules and regulations, many of which are detrimental to business. It might be large, but the single market is far from free.
A perfect example of this is the EU’s anti-tech legislation, which is particularly leaden — as Draghi’s report on Europe’s competitiveness pointed out. But the UK, while it was still a member of the EU, only ever implemented the first part of the legislation: the general directive on data protection. As the co-owner of a small publishing company that has a lot of European customers, I can confirm that the GDPR requirements are an absolute nightmare. After the UK left, however, the EU doubled down with regulations for AI, the crypto-industry, for digital markets, and for digital services. It made companies responsible for human rights abuses in their supply chains, and it imposed on itself the world’s most stringent Net Zero regulations.
The single market was also meant to be for goods and services. But in reality, it is mostly for goods only. Services are the bigger part of the economy by far, yet the volume of intra-EU trade in services only accounts for 15% of GDP, while that of goods accounts for 50%. For the UK, a country whose main export is services, the single market was even more irrelevant than for the other EU members.
Nonetheless, there is one place where the EU single market lives on: in our minds and our discussions about Europe. I have spent a fair part of my life on panels, and there are always talking heads who will elevate the single European market to be the EU’s crowning achievement. This is a story told too many times by too many idiots, signifying a degree of self-delusion that is at the heart of what the EU has become.
The Europeans are good at putting on a show. And this one has been playing for a long time. Our modern equivalent of the emperor with no clothes is the sight of European leaders taking the overnight train for a photo op in Kiev, with no money and no weapons in the bag.
It’s the same watching Keir Starmer trying to reconnect with the EU. In a year full of critical events, today’s reset is a great big naked non-event. If leaving the single market was an economic anti-climax, then, surely, putting bits and pieces of it back together isn’t going to make a difference either.
The same logic applies to the UK accession to the EU’s €150bn defence fund. The EU always puts misleading headline numbers on its programmes. What you have to do is to divide the headline total by the number of years. The money is to be disbursed over a period of five years, so the €150bn shrinks to €30bn. If you add the UK to the mix, this translates to 0.1 percent of total economic output. Since EU programmes are frequently not fully disbursed, the actual money will be even less. I did a similar calculation for the Covid recovery fund five years ago and came up with the same sort of numbers. The economic impact is simply statistical noise. But it does give pro-Europeans the opportunity to make some political noise. It allows them to say that the EU does defence now. And it allows Starmer to claim that he is resetting the relationship with the EU when nothing much of substance will change.
Now I am all in favour of the idea of a single market — but not this monster. My idea of a single market is one with low regulatory barriers, a market that would, by definition, have to take the member states out of the equation. But right now, every country implements EU rules in their domestic legislation, which is where Draghi’s internal barriers arise. A genuine single market, and a common financial market, would require nothing less than a smallish federal state. And this is never going to happen.
Instead, the EU will continue to stagnate under the burden of its regulation. The paths of the UK and the EU will continue to diverge. The UK has clearly not made the most of Brexit, but its economy is functioning, more or less. The City of London is doing well despite all the gloomy Brexit forecasts. And one of the things that is driving success is the financial innovation that would not have been possible inside of the EU. The UK currently has more AI business than France and Germany combined, and almost as much as the whole of the EU. While you would struggle to spot the impact of AI in anyone’s national accounts today, in 10 years’ time, AI will certainly be playing a bigger role in our societies and economies.
Britain is well-placed for this. But, hamstrung by its legislation, the EU is going nowhere. The entire thrust of its AI and data regulation is to protect consumers against abuses by companies. An interesting question is why the normally so powerful business lobbies in Europe allowed such an anti-business regulation to happen. I suspect that the lobby groups care about existing businesses more than about new businesses. Modern tech is an exciting new start-up opportunity. The old companies that are so well represented in Brussels are techno-Luddites.
The UK and the US, in contrast, have always been far keener on AI because both have large capital markets. Investors don’t care whether the company that delivers growth is old or new, large or small. And the US, in particular, managed to channel private capital to the new tech industries.
The EU failed to do this. Instead of real investments, it has programmes with fancy names like “Horizon Europe” or “Digital Europe”. The European Commission makes the bold claim on its website that “the EU is spearheading AI research, collaborating with scientists, and funding projects to develop safe and ethical applications of AI, fostering AI ‘made in Europe’, from the lab to the market”. I recall a time when Angela Merkel wanted Germany to be the world leader in AI. This now seems delusional.
My expectation, then, is that the EU will remain in denial for many years, and that the UK will perform a little better because it is not weighed down by bad regulation. But I see no sunny uplands either. Brexit would have been more successful if the UK had used its regulatory freedoms to greater advantage, starting with data and tech. Getting rid of the wretched GDPR would have been a good first step. And today, we have empty, outdated talk from Starmer about dynamic alignment with the EU on product standards — following EU rules on things like safety standards for widgets. I struggle to get excited about stuff like this because it is totally irrelevant to economic success or failure in the future. The 21st century economy is no longer one of standards committees and industrial patents.
So forget the reset. This is about nothing more than good relations with your neighbours. There is nothing wrong with that. Neighbours can organise a street party, or set up a neighbourhood-watch scheme. They can agree to trade more home-made cookies for lemonade. But they are not moving in together.
Europe’s neighbourhood watch scheme is Nato. It is not the EU. In fact, defence is specifically excluded from the most important areas of the EU’s competences, like the single market. That, though, does not stop the EU from having a defence commissioner and politicians talking about nothing else these days. It is a sign of decline when the reality of your existence does not match the image you have of yourself.
This is exactly the story of Andersen’s fairy tale. One day, some kid will remark that there is nothing to be seen. And then, all of a sudden, reality will dawn.
But even then, will anything change? As Anderson’s tale concludes: “The Emperor shivered, for he suspected they were right. But he thought, ‘This procession has got to go on.’ So he walked more proudly than ever, as his noblemen held high the train that wasn’t there at all.”
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