CER Bulletin Issue 122 | October/November 2018

The EU should not fret about Singapore-on-Thames By John Springford Moving Balkan borders: Peace plan or Pandora’s box? By Ian Bond Italy and the EU: The logic of confrontation By Luigi Scazzieri

WINNER

Think Tank of the Year The EU should not fret about Singapore-on- Thames by John Springford

At the Salzburg EU informal summit on September 20th, EU leaders read the last rites on ’s Chequers plan. They dismissed May’s proposals for a complicated (and probably unworkable) customs relationship and a ‘common rulebook’ in goods and agriculture. The European Commission argues that such an arrangement, allowing the UK unfettered access to the single market in goods, would give a competitive advantage to UK manufacturing businesses. The EU worries constantly that Britain could slash regulations, taxes and labour market protections after in order to compete. Should it be so fearful?

There are many ways in which policy can be used some manufacturing and agricultural processes to try to gain international competitiveness and might not be covered by the common EU-UK increase exports. The most obvious way to gain rule book: as long as the end product met EU a competitive edge would be to deregulate. This standards, the process for getting there might is why the EU says that if the UK wants a Canada- be different. Perhaps certain pesticides would style agreement, it has to accept stringent be allowed, or noise levels in factories might be ‘level playing field’ provisions, far beyond those louder in Britain than in the EU. normally included within a free trade agreement (FTA). These provisions would prevent the UK There are therefore two disputes. One is whether government from allowing more pollution, the UK should agree to the level playing field. curbing protections for workers, subsidising The answer is that it should. According to business, or allowing products for sale that might opinion polling, there is no public appetite harm consumers. for loosening environmental laws or workers’ rights. Current rules benefit British citizens, and For its part, the British government argues that if agreeing to them leads to tariff-free trade with it will agree level-playing field provisions if the the EU, all the better. EU signs up to the Chequers plan, but that such provisions for an FTA would amount to the The second question is whether aligning on obligations of Norway for the market access of goods while diverging on services will give Canada. Under the Chequers proposals, however, British manufacturers a competitive advantage. [email protected] | WWW.CER.EU CER BULLETIN ISSUE 122 | OCTOBER/NOVEMBER 2018 3

There are several reasons why this is unlikely. worked than companies that serve the domestic The EU does not regulate most service inputs market. If Britain’s exporters produce more in the manufacturing and agrifood process. output per input than companies based in other Engineering, design, marketing, cleaning factory countries, they will sell more exports. However, floors and servicing machinery are regulated, if Brexit will tend to lower productivity, not raise at all, largely by national authorities. Any attempt it: highly productive multinationals will reduce by the UK to subsidise manufacturers, or loosen investment in the UK; and the UK will become labour and environmental standards, could be more closed to foreign competition, because dealt with by level playing field provisions. The imports from the EU will fall and UK companies UK could in theory slash financial regulation will find it harder to participate in European governing lending to business (perhaps by supply chains. Both factors will lead to British weakening rules on securitisation or lowering companies losing their edge. capital provisions for business loans). But the Bank of England and the Financial Conduct Authority, which are independent of the The EU need not fear that Britain will government, have no incentive to do so. out-compete“ the rest of the EU after Brexit: The European Commission is on firmer ground the reverse is all but certain. in arguing that services and goods are becoming ” less distinct. Take smartphones: the physical product is inseparable from the services provided Third, Britain could try to compete on price, by over the internet. Driverless cars will require holding down wages or devaluing the pound. regulation to govern how consumer data is used, If businesses could make the same quality and who is liable for accidents. However, the products as now, but at lower prices than UK has signalled that it would prefer to remain businesses based in other countries, that should aligned with the EU’s data regime. raise exports. However, this chain of events is unlikely to happen. British companies are The most likely outcome of Brexit is a trade embedded in international supply chains, which relationship that is far more comprehensive in means they combine imported components into goods than services: either a Canada-style FTA, or new products for export. A cheaper currency a customs union with some regulatory bolt-ons. makes British exports cheaper, but it also makes Either would require the UK to sign up to rules imported parts more expensive. Many British preventing regulatory competition. The UK might exporters invoice in dollars and euros, which therefore try three other ways to seek competitive means that they do not benefit from a cheaper advantage. Brexit makes them more difficult. currency. And even though British workers have gone through an extraordinary period of wage One way would be to make higher quality restraint (in real terms, average wages are 2 products than businesses in the EU, by creating percentage points lower than their 2008 peak), an environment conducive to innovation and exports fell as a proportion of GDP between 2011 foreign investment (so that the world’s best and 2016. companies make their products in the UK). Brexit will make that harder. Higher trade The EU has good political reasons for saying no barriers between Britain and the EU – and to partial participation in its internal market. political uncertainty about relations with the It is right to fear that if it offers this to the UK, EU, caused by Britain’s polarised politics – will others might demand the same, and the web make multinational companies less willing of compromises and bargains that make up the to invest. And, even if immigration policy single market might unravel. It is also perfectly remains relatively liberal after Brexit, the UK will reasonable to make Brexit a binary choice probably become less attractive to the European between ‘in’ and ‘out’ in order to demonstrate the scientists, engineers, designers and computer costs of leaving to europhobes in France, Italy, programmers needed to make cutting-edge Poland and Hungary. Brexiters promised a liberal, products. Britain will also have less fiscal space free-trading, competitive UK after Brexit. This has to invest in research and innovation, since Brexit fed the EU’s fears that Britain will pursue a form will raise the government deficit. At the UN on of slash-and-burn capitalism that will undermine September 26th Theresa May pledged the lowest European markets. But they need not fear that corporation tax rate in the G20. That would Britain will out-compete the rest of the EU after attract some companies to the UK, but would Brexit: the reverse is all but certain. only partially offset the Brexit damage.

The second way is to become more productive. John Springford Exporters tend to produce more output per hour Deputy director, CER @JohnSpringford Moving Balkan borders: Peace plan or Pandora’s box? by Ian Bond

A frozen conflict can ‘thaw’ in two ways: through a peaceful resolution, or a return to war. For the first time since Kosovo declared its independence in 2008, some of the Western Balkans’ frozen conflicts seem to be thawing. Can the EU ensure that they end in peace?

In June 2018, Prime Ministers Alexis Tsipras of President of Serbia, Aleksandar Vučić, appeared Greece and Zoran Zaev of ‘the former Yugoslav together at the ‘European Forum Alpbach’ Republic of Macedonia’ (as Macedonia is known in Austria. Thaçi said “countries in the region internationally) agreed on a compromise should not be afraid of an agreement … even if formula for the name of the country, after a it includes border change”. Vučić implied that he dispute that began when Macedonia declared agreed with this, saying that nobody had asked independence in 1991. If the Macedonian Serbs and Albanians about the borders and Greek populations back the deal in of Kosovo. referendums (by no means certain), the country will henceforward be known officially as ‘the Thaçi subsequently suggested that he wanted Republic of Northern Macedonia’. Greece will to exchange the northern part of Kosovo then lift its block on Macedonia’s accession (largely inhabited by Serbs and de facto outside to NATO, and on the opening of its accession Pristina’s control since NATO intervened in the negotiations with the EU. Kosovo conflict in 1999) for the Preševo Valley, a majority-Albanian area in southern Serbia. Vučić European reactions verged on rapture: European has not said so far whether he would agree. Council President said that “the Serbia’s main road and rail connections to Greece impossible is becoming possible”; EU High run through the district, making a transfer Representative for foreign policy Federica of the whole area difficult. But a deal, which Mogherini and Commissioner for enlargement would need to be ratified by referendums in Johannes Hahn said that it contributed to “the both countries, would clear the way for Serbia’s transformation of the entire region”. Russia EU accession negotiations to move forward reacted more negatively: its intelligence services more quickly. It would also allow Kosovo, with sought to organise opposition to the deal in full international recognition, to begin its EU both Greece and Macedonia. application process.

Meanwhile, there is also progress in the dialogue International views on the nascent Thaçi/Vučić between Kosovo and Serbia. In August, the agreement are mixed. After the latest round of President of Kosovo, Hashim Thaçi, and the talks in Brussels between the two presidents [email protected] | WWW.CER.EU CER BULLETIN ISSUE 122 | OCTOBER/NOVEMBER 2018 5 on September 7th, Mogherini did not refer that Vučić will be able to keep the RS leader explicitly to the land swap proposal, but said Milorad Dodik under control, in the interests in a statement that any settlement must be of Serbia’s EU membership process. Western in line with international law. The US National officials in the region think that Brussels may Security Adviser, John Bolton, said that the US be too relaxed on both points (though RS did did not exclude territorial swaps, but that the not break away when Montenegro or Kosovo parties had to sort it out for themselves. German declared independence from Serbia in 2006 and Chancellor , however, made 2008 respectively). clear her opposition to redrawing boundaries. A Foreign Office minister, Alan Duncan, told Serbian media on September 20th to be careful The EU will need a pro-active information about changing borders, for fear of causing “ “earthquakes and new crises for the people in campaign on how Kosovo and Serbia will the region”. benefit from a deal.” Elsewhere, reactions have been more negative than positive. Three former international High There is already opposition to land swaps from Representatives in Bosnia, Paddy Ashdown, Carl nationalist politicians in Kosovo including Bildt and Christian Schwarz-Schilling, and more Prime Minister Ramush Haradinaj, and from the than 50 experts on the Western Balkans wrote Serbian Orthodox Church. Neither Thaçi nor open letters opposing the deal. Among other Vučić can be sure of winning referendums on things, they were concerned that the Serbs of any deal. And Russia will be working to prevent Republika Srpska (RS – part of Bosnia), would its ‘little brother’, Serbia, and neighbouring exploit the precedent to justify breaking up countries moving towards EU and, in most the Bosnian state. Edward Joseph, an American cases, NATO membership. In Ukraine, Russian former senior international official in the disinformation about the EU-Ukraine association region, also warned of the risk of inflaming the agreement played a significant part in creating Albanian minority in Macedonia, potentially anti-Western hostility in eastern Ukraine before leading to that country’s partition. On the Moscow’s 2014 intervention. other hand, former senior US National Security Council official Charles Kupchan, despite calling If there is to be a deal, regardless of content, the the deal “peaceful ethnic cleansing”, urged US EU will need a pro-active information campaign support for it, as the best chance of achieving showing how Kosovo and Serbia will benefit lasting peace between Kosovo and Serbia. from settling their differences. Moreover, those who worry that a land swap will set a precedent In private, EU officials stress that they would for Bosnia are not merely being alarmist: Bosnia rather that border changes had not become is fragile, and the Bosnian Croats are as likely as the central element in a settlement, and are the Bosnian Serbs to try to use any opportunity not actively promoting them. They underline to undermine the state’s integrity. The EU cannot that any deal must also be acceptable to EU leave it to Vučić to keep Bosnia in one piece. member-states (including Cyprus, Greece, Romania, Slovakia and Spain, which still do not Despite the risks, however, if Belgrade and recognise Kosovo’s independence) and must not Pristina can reach agreement, their progress destabilise neighbouring countries. And a deal should not be held hostage by Bosnia’s must respect the rights of minorities – most of dysfunction and its unscrupulous politicians. the Serbs in Kosovo live outside the area that The EU’s focus should be on minimising the would be transferred to Serbia, and one of the risks of negative spill over in other parts of the three towns in the Preševo Valley is majority region; and then on ensuring that Serbia and Serb. But the EU would also regard agreement the other Western Balkans states do what they between Thaçi and Vučić as a big step forward, need to in order to join the EU, thus reducing not least because the two would have reached the importance of the borders between them. a solution by themselves, rather than having it The last thing left in Pandora’s box was hope; if imposed on them by foreign powers. Thaçi and Vučić (like Tsipras and Zaev) think they can give some of it to the region, they should be The EU believes that the prospect of given the chance to try. enlargement will be enough to guarantee agreement between Kosovo and Serbia, especially now that Serbia (as well as Montenegro) has been told that it can join the Ian Bond EU by 2025, if it fulfils the EU’s membership Director of foreign policy, CER @CER_IanBond requirements. Brussels also seems confident Italy and the EU: The logic of confrontation by Luigi Scazzieri

Four months after being sworn in, Italy’s League-Five Star coalition government has set a more confrontational tone in its relations with the . Although Rome has not immediately begun a spending splurge or vetoed EU sanctions on Russia as some feared, it has picked fights with the bloc on migration, on the EU budget and on Italy’s finances.

Matteo Salvini, leader of the League, has largely conflict with the EU, which wants Italy to cut driven the agenda. As interior minister, he has spending and reduce its debt. But in reality, the taken ownership of immigration, Italy’s most draft budget represents a massive retreat from highly charged political issue. He has claimed the coalition manifesto promises, which implied credit for a reduction in the number of migrants a deficit of around 7 per cent. The weakness arriving in Italy, even though this was achieved by of Italy’s financial position forced Rome to the previous government. And by blocking ships compromise. The League’s promise to lower taxes arriving in Italy from disembarking migrants, will be implemented partially and gradually, while he showed that he can force the EU to make increased social spending sought by the Five Star concessions; on several occasions after Italy will largely be deferred. Additionally, the draft is refused to let ships disembark on its soil, some an opening shot and the final budget could be member-states agreed to distribute migrants lower than 2.4 per cent. As long as both the Five among themselves. Along with a strict line on Star and the League can claim victory, the optics law and order, this has propelled the League from of a confrontation with the EU will matter more 17 per cent in the general election to over 30 than the substance of the budget. per cent in recent polls. By contrast, Five Star has been left to compete on less headline-grabbing Although Italy’s coalition government is likely to issues, such as tackling corruption, reducing the back down and implement a more conservative cost of politics and introducing a universal basic budget than many feared, the EU should expect income. Its efforts have been less successful, and more confrontation on other issues. Criticising it has haemorrhaged votes. ‘Brussels’ is a vote winner for the League and the Five Star. Above all, Italy is likely to clash with In financial terms, Rome seems to be backing the EU on migration. Despite the lower number away from major confrontation with the EU. of arrivals, Salvini will try to keep the migration The draft 2019 budget, released at the end of in the headlines, to highlight the EU’s alleged September sets Italy’s deficit at 2.4 per cent of lack of solidarity. Rome wants other member- GDP. This violates eurozone rules and will create states to take in a share of the people landing in [email protected] | WWW.CER.EU CER BULLETIN ISSUE 122 | OCTOBER/NOVEMBER 2018 7

Italy. Other member-states agreed at the June The rivalry between the Five Star and the to help by setting up migrant League, and the popularity of EU-bashing, will processing centres within the EU and in third continue to shape Italian politics and generate countries, but there has been no progress. confrontation with Brussels. While the coalition is unstable, neither a change of government nor Italy’s foreign policy could also become new elections is likely until the 2019 European increasingly erratic and assertive. Rome is likely Parliament elections. However, in the coming to align itself increasingly with Donald Trump’s years, it is possible that Italy will have a League- criticisms of Germany, France and the European led government. This could result in even greater Commission. Italy could draw closer to Russia, for friction with the EU on migration, foreign policy instance by striking high profile business deals and economic policy. and signalling a willingness to ease sanctions. Italy is also likely to clash with France, which How relations between Italy and the EU develop has openly criticised Rome’s migration policy. depends in part on the EU’s actions. Italians are Italy blames France for reducing Italy’s clout in increasingly disillusioned with the EU, believing Libya and destabilising the country through an it did not show solidarity with Italy during the ill-advised push for early elections in pursuit of eurozone and migration crises. There appears influence and business opportunities. to be little chance of eurozone reform, meaning that Italian economic grievances are likely to Finally, Italy’s coalition government will continue fester. However, with the migration crisis under to be torn in dealing with Hungary. Angered by control it would be relatively inexpensive for Prime Minister Viktor Orbán’s refusal to take in willing member states to set up a mechanism to migrants from Italy, the Five Star has called for share asylum-seekers between them. The League cuts in EU structural funds for Hungary and its and Five Star would claim victory, but ultimately MEPs also voted in favour of triggering the Article such a visible sign of European solidarity would 7 disciplinary procedure against the country. weaken their anti-EU rhetoric. But Salvini has pledged to work with Orbán to oppose the EU’s ‘open-door’ migration policy, a straw man given the bloc’s increasing efforts Luigi Scazzieri to reduce the number of people attempting to Research fellow, CER reach Europe and deport those whose asylum @LScazzieri applications have been rejected.

CER in the press

BBC News nationals outside the EU. deal would be of greater trigger both a recession 11th September 2018 So to accommodate the danger to the single market and a run on the pound. No “The only countries that have British, they would have to and to the European project deal is not a serious option, managed to remove the change their constitutions than the gap in the EU even if today’s febrile politics need for health checks on and, in some cases, hold a budget itself,” said Agata pretends it is. food being exported to the referendum. That isn’t going Gostyńska-Jakubowska from EU,” says Sam Lowe, a senior to happen.” the CER. The Times research fellow at the CER, 1st August 2018 “are the European Economic The National Charles Grant, director of Area members and 31st August 2018 16th August 2018 the CER, said: “The French Switzerland. They have not Ian Bond, director of foreign Luigi Scazzieri of the CER, have been the toughest on only implemented EU rules policy at the CER, equated said Salvini’s remarks were Brexit on a range of issues, in this area domestically, the idea of border changes clearly “trying to deflect including financial services they also apply EU checks to “sticking a hand into a all kinds of responsibility”, and Galileo (the satellite- on all imports of animal hornet’s nest”. “The question but may strike a chord with navigation system being origin entering from the rest is whether you can contain Italian voters weary created by the EU). They of the world.” territory swaps between of austerity. are doing this both to grab Serbia and Kosovo and say business and because they The Financial Times this doesn’t set a precedent The Economist genuinely fear how well the 7th September 2018 for anyone else,” Mr Bond 2ndAugust 2018 Eurosceptic movement will Camino Mortera-Martinez told The National. Brexiteers may call this do in the European elections of the CER says Britain will Project Fear 2.0, but the next May, when the National definitely have to leave the The Telegraph evidence is against them. Front could conceivably win European Arrest Warrant 17th August 2018 Market confidence would more votes [than Macron]. after Brexit. “Many EU states “The EU-27 believe that the suffer. John Springford, So think France needs to have a constitutional ban costs of conceding to the UK deputy director of the CER, demonstrate that Brexit on extraditing their own and giving it a sweetheart says a no-deal Brexit would doesn’t pay.” [email protected] | WWW.CER.EU CER BULLETIN ISSUE 122 | OCTOBER/NOVEMBER 2018

Recent events

25 September CER fringe event at Labour Party Conference on ‘What will be the outcome of Brexit?’, Liverpool With Hilary Benn, Yvette Cooper, Jon Lansman, Keir Starmer and Heather Stewart

25 September CER/Clifford Chance roundtable on ‘Competition policy for the digital age’, Brussels (L to R) Yvette Cooper, Heather With Massimiliano Kadar and Katrin Schallenberg Stewart and Keir Starmer Katrin Schallenberg

18 September CER 20th birthday reception, Brussels With a keynote speech by Frans Timmermans Hosted by Microsoft

19 July CER 20th birthday reception, London With a keynote speech by David Lidington Hosted by Ambassador Carlos Bastarreche Frans Timmermans David Lidington

Forthcoming publications

The cost of Brexit to June 2018 Brexit and services trade: Reaching a common position: John Springford How deep can the UK-EU relationship go? Strengthening European arms export Sam Lowe controls Putin’s last term: A six year plan Sophia Besch and Beth Oppenheim Ian Bond and Igor Yurgens We are hiring: Why Europe needs better legal migration Defending Europe’s values: routes The rule of law vs the people Camino Mortera-Martinez and Ian Bond and Agata Gostyńska- Beth Oppenheim Jakubowska

For further information please visit www.cer.eu