Archive for the ‘Economics of Brexit’ Category

Covid-19 hurts the vulnerable most. So does Brexit

It is already clear that the impact of the Covid-19 pandemic will dwarf that of Brexit. Yet both disproportionately affect the vulnerable. Eve Hepburn (PolicyScribe) explains why.

When the Scottish government published my report on the Social and Equality Impacts of Brexit at the end of January 2020, Covid-19 appeared to be a far-off problem in a distant land. My aim at that point was to map out some of the potential effects of different types of Brexit on our most vulnerable individuals and communities. I hoped this would be a valuable exercise, especially for public sector and third-sector organisations supporting equalities groups, given the absence of a detailed Equalities Impact Assessment from the UK Government. The report identified 137 potential ‘impacts’ on equalities groups, ranging from the loss of specific legal rights and benefits resulting from EU legislation, to wider impacts on people’s jobs and quality of life, due to projected slower economic growth.

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Doubly vulnerable… a homeless person in Trafalgar Square, 2014. Photo: Garry Knight via a CC BY 2.0 licence

Fast forward two months, and with Europe now the epicentre of the pandemic, the focus of the UK and devolved governments has dramatically changed. While the potential impacts of Brexit on equalities groups remains an ongoing concern, the greatest risk to the wellbeing of vulnerable groups in the UK – and indeed around the world – comes from Covid-19. Importantly, the impacts of coronavirus don’t just result from the spread of the disease itself (in medical terms), but also the government’s response to the pandemic – which has wider social and economic implications.

Social and equalities impacts of Brexit

The UK left the European Union on 31 January 2020. However, after three and a half years of debate since the 2016 referendum, there remains a lack of clarity about what the UK’s future relationship with the EU will look like. In February 2020, the UK government published its negotiating approach, which confirmed its intention to pursue a basic free trade agreement (FTA) focussed on trade in goods with the EU. While the UK government plans to maintain high labour and environmental standards, it seeks full control over UK regulations. The aim is to obtain a Canada-style FTA, plus side deals on fisheries, data, judicial cooperation, transport and energy. This is not the comprehensive trade agreement outlined in the non-binding Political Declaration signed by the UK and EU in October 2019. In particular, the UK mandate rejects the ‘level playing field’ commitments of the Political Declaration and any role for the European Court of Justice in the UK.

The UK government has stated its intention to complete a trade agreement with the EU by the end of the 11-month transition period, i.e. 31 December 2020, and that it does not plan to extend the transition period by up to two years (which it may request up to June 2020). To keep to this tight schedule, the government announced that negotiations on the future UK-EU relationship will continue, but they would be conducted online due to the coronavirus. Talks have since been suspended. Despite this, the government maintains that the virus will not delay negotiations or necessitate an extension.

While Brexit will undoubtedly bring long-term systemic changes to the UK economy, politics and society, and there continues to be uncertainty about how leaving the EU might affect the lives of the UK’s inhabitants, the government has not yet produced a full equalities impact assessment examining the potential legal and socioeconomic effects of Brexit on different groups of people . This leaves a significant gap in our understanding: it is highly likely that vulnerable groups will be affected, and that there will be unintended consequences.

To that end, the Scottish Government commissioned research to map out potential impacts of different types of Brexit on social and equalities groups. It asked: what effect might the UK’s decision to leave the EU have on the legal rights and protections of individuals and groups in Scotland/the UK? Should Brexit have a negative economic impact, what might this mean for people’s jobs, spending and access to public services? These questions were examined from the perspective of 20 equalities groups who may face discrimination as a result of their personal characteristics – including disabled people, ethnic minorities, migrants, people who are or were in care, the elderly, religious communities, children and young people, the homeless and women.

The report identified 137 potential social impacts across such groups, including the loss of legal rights, employment protections, funding opportunities, healthcare rights, access to public services, community tensions, and – especially in the case of a no-deal Brexit – impacts on food, fuel and medicines. While some of these impacts reflect similar trends (e.g. the loss of certain rights/services), they are distinct in terms of how they happen, who they affect, or both. The research also included three case studies, providing an in-depth analysis of the potential social impacts of Brexit on women, ethnic minorities, and the disabled.

If the majority of economic forecasts are correct and the UK’s economy suffers post-Brexit, the negative effects will have an impact on all those equalities groups disproportionately represented in the low-income bracket (i.e. women, ethnic minorities, the disabled, refugees and asylum seekers, people who are or were in care, precarious workers) who rely more on public services and benefits and have less disposable income and spending power. For those living in poverty or homeless, or suffering job losses, these impacts will also be deeply felt. Brexit has already affected the mental health of these groups – due to the stress and uncertainty it has created – and for some, Brexit has resulted in increased hate crimes and discrimination.

Legally, Brexit will see the loss of the EU-derived rights and protections these groups currently enjoy, such as the Charter of Fundamental Rights, which guarantees a freestanding right to non-discrimination. People will no longer have recourse to the rulings and case law of the European Court of Justice. Equalities groups are likely to lose EU funding (in particular, the European Social Fund). Everyone will lose their European citizenship (including free movement and access to EU consular protection), access to EU institutions and programmes (i.e. Erasmus, Horizon, European Medicines Agency, European Centre for Disease Control and Prevention), and other EU social rights and protections that are not transposed into domestic law or which may come to an end (i.e. the European Health Insurance Card). How far these will be affected depends on the closeness of the future UK-EU relationship, trade agreements with other countries, and the UK’s post-Brexit policy agenda.

Social and equalities impacts of the coronavirus

The primary impact of Covid-19 is, needless to say, on the physical health of individuals. Research published by the government shows that elderly people and those with underlying medical conditions are especially at risk of severe disease and death.

But the effects are not just physical: pre-existing mental health conditions, such as anxiety, depression and OCD, may find their symptoms increase with the stress, uncertainty and enforced isolation caused by the pandemic. People who must self-isolate – especially elderly people – may struggle. Those whose income is cut or who lose their jobs may suffer stress and anxiety as a result, and those who are already disadvantaged will find it even harder. Precarious workers in the gig economy are especially vulnerable, as they may not be able to claim sick pay or earn if they have to self-isolate, and they are more at risk of being let go if businesses need to pull in their purse strings. Homeless people are among the most at risk, with individuals more likely to have underlying health conditions, but without the means to self-isolate and secure their basic needs for food, shelter and sanitation.

Some foodbanks have already reported shortages due to panic buying. People who cannot afford to bulk-buy or pay more for food in short supply are at a disadvantage. Renters

Disadvantaged groups are also more reliant on the NHS (which is already under considerable pressure) and less able to access private treatment. These groups are also likely to be more reliant on public transport, which has been reduced in recent days, to do their food shopping because they have a lower rate of private car ownership. People caring for elderly and other vulnerable people affected by the coronavirus – who tend to be women – are also likely to be impacted, making it even harder for them to work. Meanwhile, those being cared for – including disabled people, elderly people and care leavers – may be deprived of vital care in the coming months due to a clause in the emergency Coronavirus Bill, which temporarily removes the legal duty of local authorities to provide social care to those eligible. Finally, some minority ethnic communities – especially East Asians – have experienced increased racism and xenophobia since the outbreak.

Conclusion

Brexit and the coronavirus – despite being wildly different phenomena – will probably affect the disadvantaged in similar ways, albeit to a different extent. Indeed, Brexit is likely to exacerbate some of the effects of the virus. The fact of leaving the EU will make it more difficult to fight the pandemic. For instance, the UK has said that it will not seek to maintain membership of the European Centre for Disease Prevention and Control (ECDP), which oversees the surveillance of communicable diseases, including coronaviruses; the European Medical Agency (EMA), which has a centralised procedure for licensing new drugs; or the EU Clinical Trials Register. According to a report published by the Scottish Parliament, this means that UK patients may not be able to participate in EU-organised clinical trials for life-saving new drug treatments, and the UK could experience delays in accessing new drugs. The UK is now being excluded from EU decision-making – and any collective support packages, for instance the EU’s Coronavirus Response Investment Initiative – on the pandemic. The loss of EU nationals working in the health and social care sector since the EU referendum, at a time when they are most needed, is particularly unfortunate.

People who face multiple disadvantage and inequality – with less financial and social resilience – are most vulnerable to both Brexit and the coronavirus. Measures should be taken not only to protect the health of our most vulnerable communities, but also their quality of life more broadly – including their financial security, mental health, access to resources, and social relationships. Time will tell if the Chancellor’s response to the outbreak will be sufficient to meet people’s core needs.

This post represents the views of the author and not those of the Brexit blog, nor LSE.

A Brexit extension will help stop this crisis becoming a disaster

After a quarter of flat GDP growth, Britain’s economy was hardly in the best position to weather the COVID-19 storm. The prospect of a disorderly Brexit will dent market confidence even further, writes Callum Tindall (University of Nottingham). The government has a duty to ask for an extension so talks have enough time to reach a deal.

On 12 March, the FTSE 100 (index of the 100 largest UK companies) dropped 10.9% – its highest single-day fall since 1987. This follows flat GDP growth in Q4 2019, with almost certain decline expected in Q1 2020. The spread of COVID-19 means investors are extremely pessimistic about the outlook for the economy.

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Photo: Radio Alfa via a CC-BY-NC-SA 2.0 licence

And if a deal cannot be reached, Brexit poses a further economic challenge. Market stability is important, as most British citizens are investors through pensions and there is an ongoing risk of business failures.

The UK government began with a paternalistic role, reinforcing the need for good personal responsibility, hygiene and self-isolation if required. The Budget initially committed £12bn to combating COVID-19 to support public services, provide sick pay and business rates relief for small and medium-size businesses. This was followed by a huge injection of £350bn to support businesses, which could further extend as the government vows to do “whatever it takes”.

The Bank of England has cut UK interested rates to a historic low of 0.1%, leaving almost no room for further movement. Following action by the European Central Bank, this was supported by an initial quantitative easing programme adding £200bn into the economy. With ongoing supply-side issues, it’s unclear how effective this will be.

Most of the UK’s consumer economic activity will be suspended by social distancing, so these measures will be welcomed. However, buses, trains and airlines are already vulnerable to Brexit uncertainty and are likely to need additional assistance. Without support, business collapse could cause job losses and further reduce consumer supply, creating a downward spiral of economic contagion.

Those at greatest threat from economic disruption are individuals living in precarity. The government’s £350bn measures cover businesses, but not people. There are almost a million UK workers on zero-hour contracts, without access to full sick pay. Many are living hand-to-mouth and cannot afford income losses. Another government consideration must be for the five million self-employed. Both these groups have yet to be provided enhanced income support, but can claim Universal Credit if unable to work. However, this takes five weeks to receive, and entitles recipients to less than £100 a week per person. There have been calls to introduce a temporary universal basic income to help these people. Additionally, a quarter of British people have insufficient savings. Whilst wealthier peers stockpile non-perishable goods in anticipation of potential quarantine, these people risk food shortages. Also particularly vulnerable are the elderly and disabled.

Throughout this crisis, Brexit negotiations have to be resolved. For all that cannot be predicted about COVID-19, there is much known about Brexit. The transition period following the UK’s exit is due to end on 31st December 2020. The EU has presented a draft treaty outlining its position, although the next round of negotiations has been cancelled – jeopardising a potential resolution in the current timeframe. Boris Johnson has previously indicated COVID-19 disruption will not derail negotiations, suggesting an extension is “not happening”. Foreign Secretary Dominic Raab reinforced the message. Whitehall insiders have nonetheless suggested that the UK may nevertheless be preparing for an extension, which must be decided by 1 July. The Labour leadership contender Lisa Nandy has called for an extension of the transition period, although the frontrunner Keir Starmer has not yet done so. These mixed messages only add to the confusion.

As COVID-19 continues to rampage across Europe, trade talks are naturally of lesser importance than high death tolls and economic shutdown. An extension – perhaps of six months – would be a wise move. It would indicate the UK’s prudent approach to crisis-management and instil confidence in its desire to get a well-constructed deal in the national interest.

Importantly, agreeing an extension does not mean it must be used, but provides a sensible contingency. With only a few months left until the extension deadline and so much unknown about COVID-19, it would quell fears of a second economic slump caused by a no deal exit. While a backlash is likely – as Brexit will have dragged on for almost 5 years – this international emergency cannot be allowed to facilitate a crash out of the EU. Every effort should be made to reduce the market impact of leaving. It also reminds us of the importance of working with neighbouring countries in order effectively manage crises, particularly the European Medicines Agency. In terms of economic relationships, potential loss of further EU trade from a no-deal Brexit at the end of the year could spell disaster when the UK economy will be in a state of recovery. We do not know when the market will bottom out, but for investors with the luxury of time, market wisdom suggests economic recovery will follow. Consumer confidence is likely to return once the COVID-19 threat has abated, if economic order can be restored. While the government must act in line with health experts to limit contagion, alongside the Bank of England it has a role in maintaining economic stability in these volatile times. This includes the prudent measure of extending the Brexit deadline as a contingency.

This post represents the views of the author and not those of the Brexit blog, nor LSE.

Long read: The problem of the level playing field – and how it might be overcome

The EU insists on a ‘level playing field’ in any free trade agreement with the UK, concerned as it is about the risk of unfair competition; the UK says this is unreasonable. How might it be possible to reconcile both sides’ demands? Totis Kotsonis (Pinsent Masons LLP) proposes a possible way forward that would neither compromise the UK’s desire for sovereignty, nor the EU’s concerns about unfair competition.

While the EU-UK trade negotiations have barely started, one thing is already quite clear: the two sides are poles apart on the key issue of level playing field (LPF) provisions, and the extent to which these should feature in a future EU-UK free trade agreement. The aim of these provisions, as originally set out in the Political Declaration which the two sides agreed in October 2019, would be to ensure open and fair competition between the UK and the EU essentially by providing for the maintenance of regulatory convergence in areas such as state aid, competition, social and environmental standards.

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Photo: Andy Carter via a CC BY 2.0 licence

The UK government has since made it clear that it does not consider such obligations as either necessary or reasonable given that it is seeking a trade deal that is no more ambitious than that which Canada has agreed with the EU. Equally, it opposes such commitments on the basis that any trade agreement with the EU should respect the UK’s regulatory autonomy. For its part, the EU considers that robust LPF provisions would be necessary in relation to any trade deal with the UK, given the latter’s geographic proximity and the interconnectedness of the UK and EU economies.

Unfortunately, this issue risks becoming a deal breaker, and finding a compromise would be challenging given how entrenched the two sides seem to be. However, it should not be impossible to come to an arrangement which recognises each side’s regulatory autonomy but also facilitates regulatory alignment.

A possible way of doing this is considered below. However, first, it is important to understand each side’s position and room for manoeuvre on this issue.

Context matters

According to the Political Declaration, a future EU-UK trade relationship should be underpinned by robust LPF commitments in the form of “common high standards applicable in the [EU and the UK] at the end of the transition period.” No doubt one side would be keen to stress that this document is not legally binding, and in any event provides for the precise nature of these commitments to be “commensurate with the scope and depth of a future relationship”. Equally, the other would be quick to point out that the Political Declaration was agreed in good faith and recognises the need for “robust” LPF commitments so as to “prevent distortions of trade and unfair competitive advantages”.

Ultimately, arguments of this kind will not prove particularly helpful in advancing negotiations on this issue. Instead, it is important for each side to recognise that the other’s position is legitimate. It is legitimate for the UK to choose regulatory autonomy over a deeper trade relationship with the EU, as it is legitimate for the EU to insist that any privileged access to its market (that is, beyond WTO terms) should be conditional on robust LPF commitments.

At the same time, both sides must recognise that there is room for them to shift their respective positions on this issue without compromising their respective interests. For example, while the EU might be rightfully concerned that, absent appropriate LPF commitments, granting any privileged market access to a major and geographically proximate trade partner would lead to unfair competition, it should be possible to address these concerns without the UK having to adopt EU rules and regulations in its domestic legal order. In fact, the EU has already modified somewhat its initial position on this issue.

As to the substance of the UK’s concerns, there are arguably two subtly distinct issues here. First, as a matter of principle, a future free trade agreement with the EU should not constrain the UK’s right as a sovereign state to regulate domestically as it sees fit. Second, the UK does not accept that LPF commitments should, in any event, involve the UK having to adopt the rules and standards of the EU – a separate sovereign entity.

In line with my comments above, the UK’s stance would seem stronger on the second issue. At the same time, its position on the principle of regulatory autonomy merits review and reassessment.

A matter of principle, a matter of interest

First, it is important to acknowledge that international treaties, freely entered by sovereign states, involve the creation of both rights and obligations. Compliance with those obligations constrains their ability to act domestically.

For example, the ability of the UK Parliament to legislate so as to limit the award of public contracts to UK suppliers only, is limited by the UK’s obligation under the plurilateral Agreement on Government Procurement (GPA) to allow suppliers from 47 other countries, including all EU member states, to compete for important UK public contracts above a certain value. Similarly, the UK parliament cannot legislate so as to raise unilaterally the contract values which trigger this obligation, as these are set at a GPA level. However, by accepting these obligations, the UK has secured the important benefit of access to the public procurement markets of 47 other countries for its own domestic suppliers.

If the principle of rights in exchange for commitments is valid and relevant, then the focus moves to the question of whether the type of commitments which the other side is seeking – in this case, the EU – are fair and proportionate. However, in the context of negotiations between two sovereign parties this issue is ultimately irrelevant. Each party is negotiating with a view to advancing its own interests to the best of its abilities. Each has the option of walking away from the negotiations. Ultimately, the distinction between commitments which are acceptable and those which are not would normally depend on what is at stake and what a party stands to lose.

In this regard, the principle that both the UK and the EU should commit to a set of “common high standards” aimed at ensuring open and fair competition between them should not be as controversial as it might first appear – not least in view of the UK’s role in shaping many of these standards over the years, and the country’s excellent record in terms of compliance. Indeed, in recent pronouncements, the UK government has tried to dispel concerns that in seeking to retain regulatory autonomy it intends to relinquish high standards in areas such as state aid, labour and environmental laws.

The issue of subsidies is instructive. There is no obvious interest for the UK government to abandon its traditionally strict subsidies discipline. Indeed, it has constituted an indispensable part of the UK’s world-class competition regulatory regime, which has deservedly led to the UK’s reputation as a place which is “open for business” and where enterprises can compete on the basis of a level playing field. A more permissive subsidies regime would ultimately damage the competitiveness of the UK economy by discouraging enterprises from becoming more efficient and innovative. It could also lead to a domestic subsidies race to the bottom, with devolved administrations competing with each other to attract investment or support local industries.

These issues would not have escaped the UK government. At the same time, there are a number of advantages in enshrining strict anti-subsidy obligations in an international treaty. For example, this would make it more difficult for future governments, which might perhaps be inclined to adopt a more dirigiste approach, to change domestic laws so as to make it easier to grant subsidies. Equally, enshrining these obligations in an international treaty would enable the government to defuse pressure from specific industry groups or other lobbies for the state to intervene, using taxpayers’ money, so as to support uncompetitive businesses or failing industries.

At the same time, it would seem very unlikely that the UK would agree to LPF provisions which require it to apply domestically EU rules and regulations. The EU has already softened its stance on this issue in certain respects. More specifically, while the EU is asking that the UK should apply EU state aid rules domestically in relation to other areas, it is proposing that in upholding “common” high standards and “corresponding” high standards “over time”, EU standards should constitute “a” reference point. Although not entirely unambiguous, this position is less maximalist than it could have been and it is helpful as a starting point from which to try and reach a compromise.

A possible way forward

A possible way forward might lie in the two sides agreeing to maintain common (or corresponding) high standards in certain regulatory areas, but without this involving an obligation to maintain the same legislation. The principle underlying this commitment would be that the effect of their respective policies should be equivalent, with a view to ensuring that trade between the parties is carried out under conditions of open and fair competition.

In the event of a dispute, the two sides could also agree that evidence should be required to show that the policy’s effects are harmful to open and fair competition between them. This is distinct from an approach where harmful effects, and therefore breach of the LPF commitments, could be assumed purely on the basis of identifying non-equivalence in the laws of the two sides.

As a counterweight to this less stringent approach, the parties could agree to more effective trade defence provisions, including the ability to take unilateral interim measures. It is true that this approach would go beyond the UK’s position that any commitments on subsidies, labour and the environment, for example, should be outside a trade agreement’s dispute resolution mechanism. However, this would seem a reasonable compromise to make, given that the mechanism could be designed in a way so as to not impinge on regulatory autonomy.

An effective dispute resolution mechanism could be modelled partly on the provisions of Articles 13 and 14 of Annex 4 to the Ireland/Northern Ireland Protocol in the non-ratified Withdrawal Act of November 2018, but with such a mechanism being actionable by either side. On that basis, if either party considers that the other has relaxed relevant domestic rules and regulations in a way which breaches their obligation, that party may request a consultation within a Joint Committee with a view to finding a commonly acceptable solution.

If the Joint Committee fails to resolve the dispute, the party asserting a breach of the commitment to maintain the LPF commitments could then adopt unilaterally “appropriate remedial measures” pending resolution of the dispute via arbitration.

The panel’s rulings would ordinarily be expected to be binding (but see further below). That would mean that, where the panel finds that a party has breached the LPF commitments, that party would be required to take measures to comply with the ruling. On the other hand, where the panel finds against the complainant party, the latter would be obliged to cease any unilateral remedial measures it might have taken. At the same time, the other party could be permitted to take appropriate and time-limited remedial measures itself to address any harmful effects already suffered as a result of the complainant’s unilateral interim measures.

Although it would render the system more complex, consideration could also be given to the possibility of the arbitration panel rulings being advisory rather than binding, in cases where the panel finds in favour of the complainant party. If the party which is found to have breached the LPF commitments chooses to disregard the panel’s advisory ruling, the other party can continue to apply appropriate countervailing measures – such as tariffs or restrictions on access to markets. The regulatory autonomy of the parties would not be affected as they would have the option of disregarding the panel’s ruling in these circumstances, and accepting the consequences. At the same time, the Joint Committee – or, failing that, an arbitration panel – could rule on the appropriateness of the other side’s retaliatory countervailing measures before these are fully put into effect.

The question of harmful effects and other relevant considerations

Equally crucial in this context would be the question of how to establish that a new measure or policy change by one side constitutes a breach of the commitment to maintain common high standards, in that it is harmful to open and fair competition. For example, it would seem reasonable that this should involve not only consideration of the harmful effects on competition that have already accumulated but also the harmful effects that are likely to accrue if the measure or policy were to remain in place.

Ultimately, this question should be determined primarily by reference to economic rather than legal considerations. Given the UK would no longer be part of the Single Market, demonstrating distortions of competition, or the threat of such distortions, could merit a higher evidential threshold than the question of whether a measure distorts or threatens to distort competition within the Single Market under EU law.

Similarly, EU Court of Justice rulings should not be relevant in the context of a dispute resolution system which would not be concerned with the interpretation of EU law, but the effects of a particular policy on open and fair competition between two parties in the context of a free trade agreement.

Finally, the two sides would need to agree on how to deal with circumstances where one side amends its existing rules so as to adopt a stricter approach that would affect LPF commitments. For example, the two sides could agree that, in principle, this should give rise to an automatic obligation for the other to ensure the same effects (but subject to the option of accepting countervailing measures instead). Alternatively, LPF commitments could be limited only to non-regression from certain rules and standards as these might apply at the end of the transition period.

A matter of importance

Devising a system which respects the regulatory autonomy of each side, whilst also ensuring access to each other’s market on terms which provide for open and fair competition, would be complex and might require novel approaches. Ultimately, the wider benefits that would ensue for both sides from a comprehensive free trade agreement justify the careful consideration of possible ways to bridge the gap between them.

This post represents the views of the author and not those of the Brexit blog, nor LSE. This is an abridged version of an article first published on the Kluwer Competition Law Blog on 3 March 2020.

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