4 December 2024

France’s budget turmoil reveals an EU damaged by Brexit

During its membership, the UK exerted a disproportionately strong influence on EU legislation, often in subtle ways.

Even after five years, it is still hard to gauge the political and economic impact of Brexit on the UK. But we do know the answer to a more interesting question, one that hardly ever gets asked: how did Brexit affect the EU?

Brexit changed the way the EU has been functioning politically. What used to be a fine balance between northern liberal states and the dirigiste states of the south and west shifted when the UK left. Contrary to predictions at the time, the EU’s single market has become less liberal. The momentum for a capital markets union has been lost. Its absence is what keeps the EU underinvested in 21st-century technologies.

It is, of course, impossible to construct counter-factual scenarios for both the UK and the EU. My best guess is that there would probably still have been a Green agenda, the flagship project of Ursula von der Leyen’s last European Commission. But I suspect it would have been more pragmatic. The main complaint from business has been the sheer volume of bureaucracy the Green agenda created. Probably the most pernicious bureaucratic assault was the EU’s corporate social responsibility legislation, which makes companies responsible for their supply chains. It is, of course, right that European companies should not rely on child labour in Chinese sweatshops, but the way the EU has implemented this law has turned into a bureaucratic nightmare. The same is true for the deforestation law. Small African cocoa producers, for example, are struggling to prove – to the standards required by EU law – that they do not farm on deforested land.

During its EU membership, the UK exerted a disproportionately strong influence on EU legislation, often in subtle ways. UK-trained civil servants turned out to be master legislation drafters. They made sure it was workable, and not in conflict with other legislation. The EU’s single market programme, by far the most important body of legislation ever passed by the Union, carried a strongly British signature. The technical quality of EU legislation has deteriorated since.

One of the many striking findings of the recent report by Mario Draghi, the former Italian prime minister, on the EU’s competitiveness relates to the quality of the EU’s tech legislation, the bulk of which was passed after Brexit. There are inconsistencies between the EU’s general data protection regime, agreed before Brexit, and the more recent AI regulation. There are also inconsistencies in how regulation is applied across member states. Spain, for example, applies data protection laws far more bureaucratically than others. Ireland and Luxembourg are far less bureaucratic than Germany.

I struggle to imagine the UK, especially under the previous government, would have assented to the EU’s anti-digital laws – the AI-regulation, the crypto-regulation, the Digital Markets Act, or the Digital Services Act. These laws are not only destructive in their own right, but they also run counter to the time-honoured regulatory principle of dealing with problems after they arise. Europeans invented the car before they drew up a highway code. But the post-Brexit EU is doing it the other way round. There are hardly any AI or crypto companies in Europe, and yet the EU thinks it can regulate the global tech industry.

Regulatory divergence was one of the big issues in the negotiations of a trade and association agreement between the UK and the EU. The EU feared that the UK would turn itself into an ultra-liberal Singapore-on-Thames and take business away from the EU. This is not what happened. The retained EU law (REUL) passed under the previous government laid out a modest programme of targeted divergence. But most of the divergence that occurred since Brexit came from the EU itself, like the Green Deal or the tech regulations. This country has mercifully not followed the EU in this area, which is why the UK is a more attractive place to set up a digital company from scratch. For digital entrepreneurs, the EU has become a no-go zone. It was not nearly so bad five years ago.

I would expect the divergence between the UK and the EU to widen further, and cohesion within the EU to weaken. Economic problems are starting to mount. Germany is unwilling, and France is unable, to bankroll expansion into Ukraine. I doubt Poland and the other net recipients of the EU budget will sacrifice their own financial gain to pay for Ukraine’s membership.

I never thought the UK’s contributions to the budget during its years of membership were excessive, given the rebate. But I expect the bill would be incomparably higher should the UK try to rejoin, or even realign. It is not as though the UK government has a lot of fiscal leeway either.

And then there is the possibility of another sovereign debt crisis, this time in France. The financial markets are starting to get nervous about such a possibility. The Greek crisis ended when Aléxis Tsípras, the former Greek prime minister, cut a deal with the EU. Emmanuel Macron or Michel Barnier, his prime minister, do not have the power to end the crisis without the consent of France’s fractured National Assembly. Sovereign debt crises eventually get resolved. So will this one. But the last one left a legacy of distrust from which the EU has still not recovered.

I, too, see scope for closer cooperation between the UK and the EU on foreign and security policy. But voluntary or formal alignment is a pipe dream once you look beyond the surface. It is the EU that changed, more so than the UK.