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The United Kingdom’s Future After Brexit

The U.K. is facing a serious challenge to its centuries-old political experiment.

Deep Dive

|January 5, 2018

Summary

Last month, the United Kingdom and the European Union passed the first major hurdle on the road to the U.K.’s formal exit from the bloc. The president of the European Commission said that “sufficient progress” had been made in negotiations, which is EU-speak for simply moving talks from phase one to phase two. The U.K. will leave the EU on March 29, 2019, at which point the most likely scenario is that both parties will enter a transition period as they hammer out a new trade deal, a process that could take years. In other words, we are only at the very beginning of Brexit.

There is quite a long way to go in Europe’s histrionic political soap opera. And like most soap operas, this one will have a predictable ending. Compromises will be made and a deal will be signed. The EU – Germany in particular among its members – needs trade with the U.K. just as much as the U.K. needs trade with the EU. The incentives for the two sides to come to a deal are overwhelming. Of course, this is a negotiation, and in negotiations, political theater is an important part of gaining leverage. We can expect, therefore, more political theater ahead.

But there are more serious issues at play. The questions to ask are not whether there will be a trade deal or whether the U.K. economy will survive. (For the record, there will be a trade deal and the U.K. economy will survive.) The real question is whether the United Kingdom itself will survive. The divisiveness over Brexit was not conjured out of thin air on June 23, 2016. The United Kingdom is a union of four countries. Brexit raises the question of whether all of these parties have an interest in staying in the union. This piece will not answer that question, but it will present the beginnings of an analytical framework for thinking through it.  

This question is the most important issue from a U.K. perspective. From a European perspective, the challenge Brexit poses is no less critical. The U.K.’s relationship with Europe has been locked in place since World War II ended in 1945, but that relationship will change. Ironically, as the U.K. pulls back from the EU, it will be drawn closer to Europe. The U.K. left the EU because a small majority of its citizens felt Brussels did not represent the United Kingdom’s best interests. Now, the U.K. will pursue its own interests on the Continent – and the Continent will pursue its interests in Great Britain and Ireland. A long-dormant fault line is regaining life.

Economic Impact: Assessing the Value of the EU Market

The debate over Brexit has been filled with apocalyptic predictions about its potential economic implications for the U.K. There are two problems with such predictions.

First, it is impossible to predict Brexit’s precise economic impact until the particulars of the U.K.-EU agreement are decided. Most of the predictions made before the vote were politically motivated – on both sides of the debate – and many have already proved wrong. For example, on the “remain” side, the Chancellor of the Exchequer predicted an “immediate and profound economic shock” that would lead to a sharp rise in unemployment if the U.K. voted to leave. Since Brexit, the pound has lost some of its value and inflation is up, but gross domestic product growth has been decent and unemployment has not spiked. On the “leave” side, many predicted that the U.K. would save a substantial amount by not having to pay EU contributions. But this hasn’t panned out so far either, as the U.K. will have to fork over billions of pounds in a financial settlement to cover its liabilities to the bloc after it leaves.

The second problem is that these predictions focus on the U.K. as a whole. But Brexit will not affect all of the countries that make up the United Kingdom equally. Different parts of the U.K. have different levels of exposure to EU trade. Determining the real impact, then, requires an analysis of trade relations between the EU and each of the U.K.’s constituent parts: England, Scotland, Wales and Northern Ireland.

There are vast differences between each of these countries. England has by far the largest economy – mostly focused on the services industry – accounting for roughly three-quarters of the U.K.’s entire GDP. Scotland has the second-largest economy, with a GDP of roughly 150 billion pounds ($204 billion). Here, too, services matter, but oil is also a vital sector. When Scotland held its independence referendum in 2014, before oil prices collapsed, oil revenue from the North Sea was a key part of the Scottish National Party’s plans to make independence an economically viable reality. The economies of Wales and Northern Ireland are smaller, each contributing about 3 percent to the U.K.’s total GDP. Like England, these two economies are highly dependent on services, but both also rely on the manufacturing industry, and Northern Ireland, the poorest of the four, also relies on its agricultural sector. For the three smallest economies, the economic benefits of union, particularly since the Industrial Revolution when the U.K. was catapulted into the position of global economic behemoth, have been critically important in solidifying the relationship.

To get a better sense of the potential economic impact of the U.K.’s withdrawal from the EU, we need to examine the relative importance of trade with EU members to each these countries.


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The charts above show the total value of exports and imports for the U.K. as a whole, as well as for England, Wales, Scotland and Northern Ireland. They also show the level of trade with EU and non-EU markets. The data varies for each country, but in some cases, non-EU markets or suppliers are more critical than those in the EU. Take England, for example. It exports more to non-EU countries than it does to EU countries. Crucially, England imports more from inside the EU than it does from outside the EU. Some might call this a trade deficit. But in the context of negotiations with the bloc, which is desperate to maintain access to markets for its goods, we might simply call this leverage. The EU is built around Germany’s ability to export, and losing access to the U.K.’s 200 billion-pound market would be catastrophic.

Wales is a different case. It imports more from outside the EU than it does from inside the EU, and boasts the highest percentage of exports to the bloc (roughly 60 percent). But given Wales’ small size and its political alignment with England on Brexit, it is unlikely this higher exposure will amount to much.

Northern Ireland exports more to the EU than it does outside the EU, but it is disproportionately reliant on one member state: the Republic of Ireland. In fact, in 2017, its exports to the Republic of Ireland increased. In the first three quarters of the year, these exports were on track to account for nearly three-quarters of Northern Ireland’s total exports. (Note that this increase in exports may well be a result of the weak pound.) But it’s also true that Northern Ireland’s economy as a whole is not heavily dependent on exports. They account for only 8.9 percent of its GDP. That means that though Northern Ireland is exposed to fluctuations in demand from the Republic of Ireland, it would not be crippled by a downturn in the Irish economy.


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If we break down the export data further to compare intra-U.K. trade with external trade, EU markets appear even less critical. The two charts above show the significance of different markets for exports from Scotland and Northern Ireland. (Similar data was unavailable for Wales and England.) In Scotland, exports totaled 78.6 billion pounds in 2015, the last year for which data is available. Sixty-three percent of these exports went to the United Kingdom, while just 16 percent went to the rest of the EU. What the chart above does not show is that Scottish exports to the EU as a percentage of Scotland’s total exports have been gradually decreasing since 2002. In 2002, 23 percent of Scottish exports were headed to the EU; in 2015, that number was roughly 16 percent. Also in 2002, Scotland exported more to EU countries than to non-EU countries (not counting the rest of the U.K.); in 2015, this was reversed. Scotland, then, is more dependent on the U.K. and non-EU markets than it is on the EU market.

The story is similar for Northern Ireland, albeit with one key difference. Northern Ireland also exports the majority of its products – 58 percent in 2016 – to the rest of the U.K. And although Northern Ireland exported more to the EU than it did to the rest of the world, more than 67 percent of its EU exports went to the Republic of Ireland. As we will see later, the issue of Northern Ireland’s relationship to the Republic of Ireland, both economically and politically, is potentially one of the United Kingdom’s biggest challenges in the aftermath of Brexit.


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Data on the top trading partners for each of the countries also reveals some surprising findings. Two of Northern Ireland’s largest export destinations – the United States and Canada – are not EU members. In fact, the U.S. is the largest export destination for England and Wales, and the second largest for Scotland. Germany, France and the Netherlands are also important markets for each, and in turn, the U.K. is a critical importer of goods from these EU members. Seven percent of German exports, 9 percent of Dutch exports and 7 percent of French exports go to the U.K. – and all of these EU heavyweights have export-to-GDP ratios much higher than the U.K.


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When combined, this data reveals that neither the U.K. nor its constituent parts is heavily reliant on trade with EU members. Trade could be a key issue in negotiations, however, when it comes to Northern Ireland’s future relationship with the Republic of Ireland. But it appears that the U.K. and the EU are already on the road to resolving this issue. In December, the U.K. agreed not to erect a physical border with the Republic of Ireland. Indeed, considering that a common travel area has existed between Ireland and the United Kingdom since the 1920s, more than 70 years before the Maastricht Treaty was signed, it’s hard to understand why this particular issue’s importance has been so inflated.

Even more crucially, the U.K. affirmed that should a deal not be reached, it would “maintain full alignment” with the rules governing the internal market and the customs union. In laymen’s terms, that means the U.K. will do whatever it deems necessary to ensure that trade between the Republic of Ireland and Northern Ireland can continue. While this is just a preliminary agreement, and the U.K. or the EU might well renege on their promises, the fact of the matter is that neither the U.K., nor Northern Ireland, nor the Republic of Ireland would benefit from blocking this kind of trade.

Political Impact: The Crux of the Problem

While Brexit may pose significant short-term challenges, it will not derail the economies of any of the countries that make up the U.K. The critical challenges that Brexit poses are political, not economic, and they stem from a simple reality. Scotland and Northern Ireland voted to remain in the EU; England and Wales voted to leave. Because England is the most populous of the four countries, it was able to take the choice away from Northern Ireland and Scotland.

These two countries feel disenfranchised. In the same way that many in the U.K. felt that Brussels was not acting in their best interest, there are now many in Northern Ireland and Scotland who feel that London is not acting in their best interest. London can claim it is merely carrying out the will of the people, to which Northern Ireland and Scotland can both truly say, “We are different people.”


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This is the crux of the issue in Scotland in particular. Scotland’s independence referendum in 2014 was supposed to put the issue to rest for at least a generation, if not forever. But the slim victory by a 55-45 percent margin for supporters of remaining in the U.K. did the exact opposite. It showed that a significant chunk of the Scottish population was in favor of independence. The issue might have slowly faded away had Scotland not voted to remain in the EU in the Brexit referendum by a 62-38 margin. Voters were strongly in favor of staying in the bloc, but the Scottish government’s hands were tied by the desire of English voters to leave. Shortly after the Brexit vote, there was a spike in support for Scottish independence. Scotland reached out to Brussels to see if it could negotiate a special status in the EU, but the EU gave Scotland the cold shoulder for fear of setting a dangerous precedent with other would-be breakaway regions in Europe.

The Scottish National Party has failed to take advantage of the Brexit issue. Polls indicate that the post-Brexit spike in support of independence has waned: A second independence referendum held today would likely have a similar result to the first. In addition, the SNP performed abysmally in June’s snap elections. But it would be foolish to think that the Scotland issue has gone away. The political vagaries of recent elections notwithstanding, the fact remains that just under half the population wants an independent Scotland, and that Scottish national consciousness has persisted for more than 300 years of union with England. The issue here is not the details of the agreement with Brussels, but the feeling of disenfranchisement that could emerge in Scotland. Whoever resides at 10 Downing Street has to tread much more carefully with Scotland than previous occupants did for fear of pushing Scotland beyond its breaking point.

The Scotland issue is serious, but it is not the most serious one facing the U.K. That would be Northern Ireland.

Indeed, Northern Ireland has been a perpetual problem for the United Kingdom since the Acts of Union 1800 created the United Kingdom of Great Britain and Ireland. The Northern Ireland issue is complicated by three realities. First and most important is the crumbling confidence in the ability of Northern Ireland’s political institutions to govern effectively. The second is the resilience of paramilitarism in the country. And last is its relatively poor economic performance compared to both the Republic of Ireland and the rest of the United Kingdom. These three realities are exacerbated by the artificiality of Northern Ireland’s borders, and the animosity dating back hundreds of years between the English and the Irish.


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This is not the place to rehash the long arc of Anglo-Irish history. It is a history that is long and complex and bloody. The problem, however, is that not all of this history is relegated to the past. The Good Friday Agreement signed in 1998 put an end to the Troubles, but it did not put an end to the violence, nor did it solve the underlying problems that led to the Troubles in the first place. In the midst of World War I, there was a revolt in Ireland aimed at securing national self-determination. From 1919 to 1921, Ireland fought a guerrilla war of independence. The U.K., however, could not simply let Ireland go. Hundreds of years of British occupation meant that a significant portion of the population was Protestant and wanted to remain a part of the United Kingdom. Thus, in 1920, the U.K. passed the Government of Ireland Act, creating Northern Ireland as we know it today.

The creation of Northern Ireland suffered from the same deficiencies as other attempts by the U.K. to draw borders after World War I. It was motivated primarily by political expediency, not by a desire to find a long-term solution. In the early 1900s, Halford Mackinder, the famous English political geographer, wrote, “Ireland, more compact in outline than Great Britain, presents internally no such natural divisions as are produced in [Great Britain] by the elevated watersheds and the more or less symmetrical disposition of the rivers.” In other words, Ireland, unlike Great Britain, has few discernible geographic divisions, so drawing borders within Ireland is difficult to start with. Nonetheless, Ireland has historically been divided into four provinces, as seen in the map above. Had the U.K. drawn the border of Northern Ireland around the historical region of Ulster, Northern Ireland’s borders would have made more sense. But that isn’t what the U.K. did. It created a Northern Ireland where “unionists” were the majority.

The result was a political system designed to empower a unionist, Protestant majority, at the expense of a nationalist/republican, Catholic minority. (Affiliations were more complex than this, but broadly speaking this was the case.) It was an unstable arrangement, and it remains unstable to this day. Lost amid the Brexit negotiations is the fact that Northern Ireland’s government is once more in a state of complete paralysis. The Good Friday Agreement split power in the government between the nationalists and the unionists, and the positions of first minister and deputy first minister must be shared between the two factions. If one minister quits, the government falls and elections must be held.

This is exactly what happened in January 2017, when Martin McGuinness, the leader of the nationalist Sinn Fein party, resigned as deputy first minister in protest over a political scandal that hit the Democratic Unionist Party. The government collapsed and the country held elections in March, but it remains without a government – the DUP and Sinn Fein have been unable to come to a resolution. Talks between the two are ongoing but so far have not proved promising.


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In September, the United Kingdom’s Northern Ireland secretary even suggested that the U.K. would stop paying members of the Northern Ireland parliament if they could not form a government, and that the U.K. might impose direct rule on Northern Ireland as a last resort. It wouldn’t be the first time direct rule was instituted since the Good Friday Agreement – Northern Ireland was ruled directly from London between 2002 and 2007. This measure, however, would not come without consequences. As the chart above shows, shootings and bombings in Northern Ireland spiked the last time direct rule was imposed. And that was without the shadow of Brexit hanging over the country.

It remains to be seen whether a power-sharing government will return to Belfast. The most likely scenario, of course, is that it will. Seeing conflict arise out of this situation is in no one’s interest. All sides, therefore, will push for a deal. The deeper point is that Northern Ireland is extremely unstable politically. Instability breeds unpredictability, and disillusionment can breed desperation. Brexit adds to the tension that has been simmering for years, and considering the DUP’s political alliance with Theresa May’s government, it is an issue that could inflame smoldering resentment.

If this sounds like hyperbole, it isn’t. For the past four years, Northern Ireland’s Community Relations Council has issued an annual peace monitoring report. Three key findings from its latest report are worth briefly summarizing. The first and most important is that public dissatisfaction with Northern Ireland’s assembly has been building. The report was published in September 2016, before the recent gridlock in Belfast emerged. If the public was already frustrated at that time, then it must be all the more so after a year of political paralysis.

The second important point is that paramilitarism is still a problem in Northern Ireland, particularly among the most marginalized communities. The report describes how paramilitarism has morphed into a form of organized crime. Although sectarian and political violence in Northern Ireland has decreased in recent years, it still exists, and there are groups with both the capability and the desire to pursue their ideologies through illegal means.


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The third point is contained in the second point – this problem is most prevalent in areas where the socially marginalized live. Of all the regions in the U.K., Northern Ireland has by far the lowest discretionary income, which is projected to decrease in 2018. The economic fallout of Brexit alone could not threaten the political stability of any part of the U.K. But Northern Ireland, considering the political and social climate, will be more vulnerable than the others. Even more damaging is the fact that the DUP backs Theresa May’s minority government. When combined with a geographically illogical border, a politically volatile status quo, an economically disadvantaged population and domestic political drama, the short-term economic impact of Brexit could tip Northern Ireland over the edge.

Foreign Policy: Breaking Away From the Bloc

There is one last area in which the potential ramifications of Brexit must be considered, and that is on the broader strategic level. On the one hand, Brexit could have major implications for U.K. foreign policy as a whole. The U.K. is leaving the EU, but it is not leaving Europe. We have already seen what a more activist U.K. foreign policy might look like with the signing of a defense treaty between the U.K. and Poland late last month. The United Kingdom’s reaching out to Eastern Europe’s rising power – a power often at odds with Brussels – is no small matter. To a certain extent, the United Kingdom’s policy toward other European nations had been in lockstep with Brussels until Brexit. Now, the U.K. no longer has such fetters and is already setting itself up to ensure that a strong power does not re-emerge on the European continent.

This is a double-edged sword, however. The U.K. of the 21st century is not the U.K. of the 20th or the 19th century. Indeed, its position now is more akin to its position before it existed as one entity, when both Ireland and Scotland were enemies of England, not partners or even brothers, as is the case with Scotland today. Both Scotland and Ireland had independent foreign policies and sought alliances with European powers, especially France, to protect themselves from English power. As we have noted, the main risk that Brexit poses to the U.K. is that it can be used at the political level in either Northern Ireland or Scotland by those who would seek to break from the U.K.

Thus far, neither Scotland nor Northern Ireland has pursued this with much success. Scotland tried in the wake of Brexit to get a guarantee from the European Union that it could remain in the common market, but First Minister Nicola Sturgeon had trouble even getting a meeting with the EU at the time, much less any solid EU assurances. Northern Ireland, mired in its own political instability, does not present this kind of threat to the unity of the U.K., nor does Ireland currently, as it shares an interest in maintaining trade relations with the U.K. But Ireland is already trying to sway Brexit negotiations to its benefit – it reportedly threatened to use a veto during the first phase of talks, and the resulting agreement indicates that it was successful in getting its demands met.

These issues deserve more consideration than this piece allows, and they will be the subjects of follow-up pieces. But as the ramifications of Brexit become more apparent in the course of negotiations, it is impossible to ignore these changes. Suffice it to say, the U.K.’s withdrawal from the EU reverts the U.K. to a geopolitical reality it has not experienced in many centuries. Since the Industrial Revolution, the U.K. has either been the dominant power of Europe or had its foreign policy hardwired into place by participating in various European groupings. Now the U.K. is on its own, and its power is not overwhelming.

Brexit is a symptom, not a cause, of the fragmentation of the EU and the divergent interests in the United Kingdom. These are the two forces that matter most in the context of Brexit negotiations. The EU is desperately searching for a way to prove itself to its remaining 27 members. Meanwhile, the U.K. is facing a serious challenge to its centuries-old political experiment. It is tempting to think of Brexit as primarily an economic issue, but that is only scratching the surface. How the U.K. deals with the political challenges that Brexit has laid bare is of far greater consequence. The United Kingdom is seeing the return of history. Europe will not be far behind.