Britain will drift from Europe, but not very far

IN JANUARY 2017 the Conservative Party’s civil war over how to leave the European Union was just beginning. Many Tory MPs had only a fuzzy idea of what quitting the single market and customs union would mean; some entertained themselves with a campaign to relaunch the Royal Yacht. Sir Michael Rawlins, then the head of the Medicines and Healthcare products Regulatory Agency, (MHRA) Britain’s drugs regulator, saw the road ahead clearly.

Leaving the EU’s pharmaceutical regime, Sir Michael told a House of Lords committee, could mean that Britain was at the “back of the queue” for new treatments as drugmakers neglected Britain’s small market. The European Medicines Agency (EMA) would move from London, and the foreign companies that liked to be close to it would probably follow. But Britain could compensate, he said, by liberalising the rules on clinical trials and gene treatments, and speeding up the MHRA’s approvals process. “We have to get our skates on,” he said.

Escaping what Boris Johnson calls the “regulatory orbit” of Brussels was at the heart of the Vote Leave campaign. Eurosceptic backbenchers subscribed to a simplistic Thatcherite axiom: that “red tape” invariably stifles enterprise, and cutting it unleashes growth. They found a sympathiser in David Frost, Britain’s chief Brexit negotiator, who thought autonomy “the whole point of the project”, and sacrificed market access to get it. The damage that decision has done is already being felt.

Years that might have been devoted to developing a post-Brexit strategy were lost to Tory infighting, but the government is now looking for benefits that might mitigate the damage. Rishi Sunak, the chancellor, chairs a committee on better regulation. Civil servants are reviewing every piece of preserved EU law to find bits to whittle and trim. Lord Frost is now a cabinet minister in charge of “the opportunities of Brexit”. A committee of Tory lawmakers known by the acronym TIGRR, led by Sir Iain Duncan Smith, a former party leader, is bouncing around looking for ideas. Mr Johnson has asked the bosses of big companies to chip in.

In theory, the opportunity is huge, for rarely does an advanced economy get to review its regulation from first principles. European law serves to bind a continent into a single marketplace, and is a dish prepared by many chefs, with their own industries and priorities. Mr Johnson has a big majority in Parliament, which has voted to give ministers wide powers to alter regulations.

But rapid divergence is unlikely. One reason is that Britain shaped European law. British civil servants in Brussels were skilled at killing bad ideas and tweaking good ones, and many businesses are happy to leave things as they are. Mr Johnson once lamented Britain’s powerlessness to set its own rules on truck cabs. But divergence on cars would duplicate the cost of testing new models, says Mike Hawes of the SMMT, a carmakers’ lobby. The so-called “Brussels effect” means EU rules have become de facto global standards on emissions and data. “The fundamental ambition of an industry is to reduce divergence and to reduce complexity,” says Mr Hawes.

Lord Frost’s exit deal also limits divergence. Britain isn’t bound to the letter of EU law, but it has committed not to liberalise its environmental, labour and tax-avoidance policies aggressively. It may be subject to tariffs if it does. Data flows can be severed if Britain strays too far from the European privacy laws that Vote Leave’s head, Dominic Cummings, called “horrific”.

Northern Ireland, too, will anchor Britain to Europe. In order to reduce friction at the border with Ireland, the province continues to follow EU law on goods, so the further apart Britain and the EU grow, the harder it will become to ship goods across the Irish Sea. Unionists are outraged by the new barriers.

Most fundamentally, Mr Johnson does not wish to jettison the European way of life. He knows British voters are fussy about food and fond of holidays. Vote Leave criticised EU working-time rules; Kwasi Kwarteng, the business secretary, dismisses arguments for labour deregulation as 1970s thinking. Within the EU, Britain could argue for the liberalising position and rely on others to make the counter-argument. Now, George Eustice, the environment secretary, has said, “we will not be able to hide behind EU law when there are difficult decisions to make or indeed blame the EU when things don’t work.”

Britain has paid a “fantastically high” price for an autonomy it won’t use, says Philip Hammond, a former Conservative chancellor. "Any economic case for Brexit has always been based on the illusion that Britain can radically diverge from the broad western-European socio-economic model. The truth is, British voters are never going to go for that.”

Not shredding, but polishing

Within these constraints, the government still has substantial leeway to rethink how Britain regulates itself. Red tape will not be slashed, but ministers can trim away reporting obligations, such as having new railway signals approved by the regulator in Lille—a measure intended to smooth travel over land borders, and which is less useful for an island nation. Mr Eustice’s department thinks the EU’s pesticides regime can be simplified without weakening it. The Civil Aviation Authority thought leaving the European regime senseless, but now says the rulebook could be rationalised. No voter will notice such changes, but they may produce incremental dividends.

The government is planning to change the way it gives money to the private sector. It wants to invest in scientific research and poor regions. EU state aid and procurement laws are strict, to prevent rich governments favouring their producers. Now that Britain is out, that is less of an issue. Procurement rules will be simplified. Britain’s state-aid regime will be more permissive, with public authorities given greater leeway to make awards so long as they are proportionate and don’t prop up dying firms. That should result in more innovative policies from local government, and help universities commercialise research, says James Webber of Shearman & Sterling, a law firm. Critics warn of waste and creeping corporatism.

The Competition and Markets Authority, keen to stand tall alongside its peers in Australia and Japan, has ideas on boosting competition, which it thinks fell in the two decades to 2018. “Many regulations create barriers to entry from which incumbents derive huge benefits,” says Andrew Tyrie, the CMA’s former chair. The agency has proposed scrapping the EU’s regime on allocating airport runway slots, which favours incumbent airlines. It has taken on the biggest antitrust probes previously reserved for Brussels, and plans an innovative regime for tech giants.

The greatest scope for divergence lies in sectors where Britain has a critical mass of activity, notes Thomas Reilly of Covington & Burling, a law firm. Mr Eustice’s department is consulting on loosening EU rules on gene editing, which can produce more disease-resistant crops, bringing Britain into line with Japan and Australia. As Sir Michael forecast, the MHRA has created a fast-track approvals process to get innovative treatments to market faster, which enabled it to approve covid-19 vaccines far faster than the EMA.

Then there’s the City. The EU is weighing whether to deem Britain’s regulatory regimes “equivalent”, which would grant asset managers and insurers market access, but financiers are not sure that the prize is worth the price of accepting EU rules. Andrew Bailey, the governor of the Bank of England, has said Britain should not become a rule-taker. There is little clamour for deregulation, but there is room for improvement. Insurance firms think regulation could work better for them than the EU’s Solvency II rules, which reflect the way continental firms are structured. Challenger banks want prudential capital rules to be tweaked to make the banking business more competitive, and Mr Bailey thinks rules can be simplified for small banks that serve only the domestic market. Lord Hill, a former EU commissioner charged with thinking how London can attract more tech-firm listings, has recommended a “complete rethink” of European prospectus rules.

But the big difference will lie in how Britain’s regulators wield the new powers that Brexit has given them. Those that are badly organised or badly resourced may struggle to enforce their new rulebooks. The Office for Environmental Protection, Britain’s new watchdog, for instance, will not be fully established until the autumn. Regulatory weakness could lead to divergence by neglect. The alternative, exemplified by the MHRA, is that they make better decisions faster than their European counterparts, thus enabling Britain to keep its edge. Competition, privacy and financial-services watchdogs could work together better on the challenges of the digital economy. Regulators will have greater freedom to respond to the unknown.

Mr Johnson boasted that the trade deal broke Europe’s “lunar pull”. But rather than heading into deep space, Britain will shift to a not-too-distant elliptical orbit of Europe; sometimes tracking closer, sometimes more distant, but never fully slipping its surly bonds. And just as the moon tugs at the Earth’s oceans, Britain will exert its own pull. Within Europe, it was a fount of good ideas. If it does things differently, and better, outside, the bloc may sometimes follow. ■

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