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14 June 2023

Brexit has an upside: Britain could dominate in high-tech goods and services

The EU has slept through the digital revolution. The UK can capitalise on this, if it prioritises data over diplomacy.

By Wolfgang Münchau

We Europeans are relationship people – and that’s where a lot of our political confusion stems from. We commingle the notion of strategic interests and external relationships. It is one of the things the UK and the EU have in common. The entire Brexit debate, on both sides of the argument, was about who we wanted to be with, not what we wanted to do.

The US defines its national interest independently of its relationships. This is the privilege of a superpower. But it is also hard. In the previous decade, the US shifted its focus away from the Atlantic towards the Pacific. Russia’s war against Ukraine refocused the US on Europe. This has prompted many Europeans to draw the wrong conclusion, that the US has seen the error of its ways. This seriously underestimates the Biden administration’s strategic thrust.

[See also: Britain is not the sick man of Europe – that accolade goes to Germany]

The obvious problem with the relationship approach to diplomacy is that we are not in control of the other side. It does not answer the Donald Trump question: if the former president were to win next year’s presidential election, where would this leave the US relationship with Britain? Is it not a tad risky for your national strategy to rely on someone not getting elected?

One of the deeper reasons the Remain campaign lost the 2016 Brexit referendum was the absence of a sustainable strategy for the UK inside the EU. Being the financial centre of someone else’s monetary union turned out to be as silly as it sounds. What has since emerged is that the Brexiteers, too, did not have a strategy.

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I see at least two competing strategic options for the UK, which would have different implications for its future relationships. The first is a strategy of reindustrialisation. This is what the Biden administration is trying to do through its Inflation Reduction Act, and what the Labour Party is seeking – though with a much more modest budget. I am not sure how such a strategy can work without the advantage of a large single market. But if it were the choice of a Labour government, I am convinced it would lead the UK back into the arms of the EU – or at least to rejoin the single market at some point. Traditional industry and the single market go together.

[See also: Britain is not the sick man of Europe – that accolade goes to Germany]

The alternative, and in my view better, strategy would be to focus on 21st-century data-led technologies. The UK already has a lead over other European countries in high-tech venture capital start-ups. It has the strongest research in artificial intelligence, which is obviously a growing sector. The UK is also ahead of other European countries in high-tech medical research. Environmental technologies offer another potentially lucrative niche. And then there are technologies that are not yet fully on our radar.

The presence of a large and liquid financial centre gives the UK an advantage, and so do its excellent universities. High-tech goods and services don’t suffer the Brexit-specific problem of customs duties, or loss of market access. For these types of business, the freedom to regulate themselves outweighs the benefits of a single market.

If that were the strategy, the last thing the UK would want is to forge a closer relationship with the EU and subject itself to EU regulation. It became clear during the Brexit negotiations that the EU is focused on stopping the UK from exploiting competitive advantages. In this case, the UK would be better off unaligned, and free to choose its regulatory regime. In neither case would it make sense for the UK to become the junior partner of the US, however.

[See also: Britain’s Brexit divisions are re-emerging]

If we end up with the scenario of a UK focused on high-tech and a Luddite EU focused on industry, the scope for deepening the relationship will be limited. Bilateral relations have improved only because Rishi Sunak has made an effort and the UK has not yet departed from EU rules. The notorious “sunset clause” to end all EU regulations at a stroke is gone. But just wait until the UK starts departing from a few strategically important EU rules – on data security, for example. If the UK pursued a high-tech strategy, I struggle to see how this could be made compatible with the EU’s regulatory regime.

Sunak’s government is slowly moving in this direction. The Prime Minister embodies that strategy perhaps better than any other senior UK politician. Labour, too, will need to build its external relationships around its own economic strategy; what is absolutely not going to happen is the EU giving Keir Starmer a better deal.

The EU, too, is muddled about its interests and relationships. And European transatlanticists have no answer to the Trump question. The EU’s industry-based economic model is no longer providing the growth rates needed to finance welfare services and generate public-sector investment, and it has slept through the digital revolution. It is delusional to think that the EU could be the world’s regulator.

Why has the EU fallen behind in the high-tech race? I see the big problem as insufficient private-sector investment. This in turn is caused by a lack of deep capital markets. My advice for the EU is to prioritise the seemingly abandoned capital markets union, and to become less hyperactive. Without the capital markets union, the EU’s green agenda stands no chance of success.

So, focus on what needs to come first, which is not the same as what is most important. And most importantly, focus not on who you want to be with, but on what you want.  

[See also: Rebuilding industry is a mistake. The West should focus on economic alliances instead]

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This article appears in the 14 Jun 2023 issue of the New Statesman, Over and Out