See discussions, stats, and author profiles for this publication at: https://www.researchgate.net/publication/301593978
When politics prevails: the political economy of a Brexit
Article  in  Journal of European Public Policy · May 2016
DOI: 10.1080/13501763.2016.1174531
CITATIONS
37
READS
1,887
2 authors, including:
Some of the authors of this publication are also working on these related projects:
Bibliometric analysis View project
European Union Council Presidencies View project
Mads Dagnis Jensen
Copenhagen Business School
23 PUBLICATIONS   152 CITATIONS   
SEE PROFILE
All content following this page was uploaded by Mads Dagnis Jensen on 12 December 2017.
The user has requested enhancement of the downloaded file.
When Politics Prevails: The Political Economy of a Brexit
Mads Dagnis Jensen and Holly Snaith
Abstract
This article analyses Britain’s quest to negotiate its future membership of the EU through the lens of
Liberal intergovernmentalism. The article demonstrates that despite the significant economic
consequences of a potential Brexit, party political factors have hitherto proven more significant in
defining the terrain of the debate than lobby group influence where a cross section of UK lobby groups
are either actively or passively in favour of remaining within the EU ahead of the referendum.
Key words
Brexit, Negotiation, Liberal Intergovernmentalism, United Kingdom, Interest Groups.
1. Introduction: theory and method
Britain’s position vis-à-vis the EU has historically been determined by an intricate interplay between
political and economic interests (Moravcsik 1998: 123; Bank of England 2015: 13-15). As the past often
is the best predictor of the future, this article takes a political economy perspective in analysing Britain’s
quest to negotiate its future membership of the EU. Whilst any number of theoretical frames could
offer valid insights on the topic, this article utilises a critical reading of Moravcsik’s (1993; 1998) Liberal
intergovernmental theory (LIG) to analyse preference formation and aggregation in the UK with regard
to the negotiation process. Moravcsik (1993: 482) uses theories drawn (largely) from political economy
in explaining national preference formation1
and intergovernmentalist theories in explaining interstate
negotiations, therefore proving highly salient for the perspective we examine here.
The article focuses on the national preference formation part of Moravcsik’s framework, which
comprises three main elements, which in each case we amend slightly to reflect the specific context of
Brexit. The first element is based on a liberal understanding of state-society relations, according to
which societal ‘groups articulate preferences and governments aggregate them’ (Moravcsik 1993: 482).
This tenet is potentially problematic for being built on a pluralist understanding of state-society
relations where the state is seen as a ‘pawn’, which makes more sense in the United States of America
(US) than in Europe (Dahl 1963); governments in Europe mostly enjoy considerable autonomy, which
enables them to shape the national interest to a greater extent (see also Forster 1998). The second
element predicts that vulnerability to externalities due to economic interdependence creates incentives
for governments to co-ordinate policies internationally (Moravcsik 1993: 485-486). In the context of a
potential Brexit this implies there should be a change in interests or incentives – such as a decrease in
economic interdependence – that would render it more favourable for the UK to go it alone. The third
element suggests that as the distributional consequences of policy co-ordination vary, opposition is to
be expected from those who are disadvantaged (Ibid. 486-487). Again, this line of argument needs to be
1 A key criticism of LIG is that it assumes that political negotiations are conducted by central state actors and thus
downplays the influence of devolved regions such as Scotland (Tatham 2011). In fact in the case of the UK’s ‘new deal’
negotiations, this has largely been the case, but the domestic consequences of this strategy have yet to be felt.
recalibrated, since the reference point is not future but rather existing international policy co-ordination,
entailing that there must either be a change in the power equilibrium of domestic groups in favour or
changes in their preferences.
Based on this framework, three key questions can be distilled which will structure the following
analysis: what are the issues and who are the key national actors? What is the level of interdependence
between the UK and the rest of the EU? What are the distributional consequences of policy coordination?
The paper relies on process tracing, where policy documents, newspaper articles, academic
articles, economic indicators and interviews are used to create an analytical narrative (Caporaso 2009).
The interviews were conducted in December 2015 with key stakeholders in the Brexit process such as
the Confederation of British Industry (CBI) and the Federal Trust (FT) according to a semi-structured
template that included questions such as ‘Which, in your judgment, are the most powerful groups
influencing the UK government’s general EU policy?’; ‘What were your organization’s views on the
government’s decision to renegotiate its membership and put it to a referendum?’ and ‘What would be
the direct impact for the stakeholders that you are represent if the UK decides to leave the EU?’. These
interviews took place before the announcement of the referendum date and the contents of the ’new
deal’ package, but are regardless enduringly relevant for the myriad uncertainties that remain. It should
also be noted that due to the centralisation of the negotiation process for the whole of the Union in
Whitehall, our sources were selected to represent the central organisations’ views, which may not
entirely reflect the differentiated strategies they pursue across the UK’s other political domains.
2. Analysis of national preference formation: the issue space and key national actors
To identify the key national actors in the UK with regard to the negotiation process the overall issue
space must be specified (Butler et al. 2016). In January 2013, the British Prime Minister David Cameron
promised that should the Conservative party win the 2015 election, he would ‘renegotiate’ the UK’s
future membership of the EU and put it to a referendum by 2017 at the latest (Conservative Party
2015). The decision poses a seeming challenge to LIG – predicated on economic rationales – and
underscores the importance of giving weight to political factors in explaining national preferences. A
significant amount of evidence suggests that the referendum decision was principally driven by the
internal politics of the Conservative Party and, in particular, a ploy to maintain unity prior to the
election (representative for FT, by phone 3, December 2015; representative for CBI, by phone, 16
December 2015). Cameron between 2012-2013 came under increased pressure from (mostly English)
Eurosceptic backbenchers within his own party, who smelled blood because of the rise of the UK
Independence Party (UKIP). To manage the dissident voices and arrest the surge of UKIP, the Prime
Minister launched the negotiation proposal. During the subsequent period, Cameron issued a number
of statements regarding the UK’s priorities, seeking to square the minimum demands of backbenchers
with what other Member States were likely to concede (representative for FT, by phone, 3 December
2015). This resulted in November 2015 in four objectives for the negotiation: 1) to prevent Eurozone
Member States from unilaterally deciding on incentives that influence the functioning of the Single
Market 2) to enhance the focus on competitiveness 3) to allow Member States to opt out from the
attempt to create an ever closer Union and 4) to reduce migrant workers’ rights to social benefits.
The gravity of a potential Brexit entails that a significant range of social actors are invested in the
possibility. Having outlined the process of defining the issue space, the key national actors and interest
groups influencing the latter can now be identified. The business sector, represented by the CBI, has
historically been extremely influential in determining the UK’s EU policy stance, which has also been
the case with regards to the early phases of negotiation (Moravcsik 1993, 1998; representative for FT,
by phone, 3 December 2015). The CBI, which represents both large and small businesses2
, have
expressed a clear stance that they are in favour of staying in the EU and expect to maintain that stance
vigorously during the referendum whilst maintaining cross party support (representative for CBI, by
phone, 16 December 2015; Confederation of British Industry 2013). Informally, the CBI, and
individual big businesses, have used their traditionally strong ties to the Conservative party to put
intense pressure on Cameron to find a pathway which will allow for the UK to remain within the EU
(representative for FT, by phone, 3 December 2015) and the CBI is seen by its members as an
important campaigning organization (representative for NFU, by phone, 18 December 2015)3
.
However, they strongly stand behind Cameron's objective of reorienting the EU towards
competitiveness. Another key actor in the group of economic stakeholders is ‘The City’ (the financial
sector centred in London) and more generally the British Bankers’ Association (BBA). Prima facie, the
financial sector shares the position of big business by strongly advocating for the UK to maintain its
membership (Financial Times 2015). However, a powerful minority, mainly comprising hedge funds,
has emerged within the financial sector and is in favour of leaving (representative for FT, by phone, 3
December 2015). While the majority in the financial sector still favour membership, especially due to
fear of exit costs, their position now focuses on remaining within the Single Market (email from BBA
of December 9 2015, representative for FT, by phone, 3 December 2015).
Looking beyond the groups representing business interests, trade unions are also traditionally important
actors in shaping the UK’s overall EU policy. However, compared to business interests they have a
much weaker link to the Conservative party and thus exert less leverage. By and large, Trade Unions are
hostile to both the demands that Cameron is putting forward in Brussels and to the potential of a
Brexit. More precisely, the unions perceive the negotiation as an attempt to roll back and possibly
prevent future legislation coming from the EU that will enhance the rights of their members (Trades
Union Congress 2015). However, the UK’s biggest union Unite has for tactical reasons threatened to
campaign in favour of a Brexit if Cameron uses the negotiation as an opportunity to weaken its
members’ right (O’Connor and Pickard 2015). Agriculture is another sphere where there is significant
interest group representation. British farmers benefit not only from €3.084bn in basic payments under
the Common Agricultural Policy (CAP), but also from access to the single market: the UK is a net
agricultural importer, importing twice as much from the EU as it exports; but 73% of the UK’s total
exports go to EU States. The National Farmers Union (NFU) has been awaiting the outcome of the
negotiations and canvassing its members before stipulating a firm position, but has serious reservations
regarding the likelihood of the government replacing CAP subsidies at similar levels, possible
2 The British Chambers of Commerce, one of a number of similar less influential organisations, suspended their Chief
Executive on 4 March 2016 in response to his speaking in favour of Brexit.
3 The CBI may be inclined towards a cautious stance in the wake of the Scottish referendum, where CBI Scotland was
registered as a ’no’ campaigner, resulting in the resignation of 18 CBI members, including universities, six Scottish
government quangos and the broadcaster STV.
restrictions on migrant labour, and the subsequent risk of UK farming becoming uncompetitive with
respect to European neighbours (National Farmers Union 2015; representative for NFU, by phone, 18
December 2015).
3. The level of interdependence and vulnerability to externalities
In the classic geopolitical approach, the degree of economic interdependence between the UK and the
EU consists of two dimensions (Rosecrance et al. 1977): Vertical interdependence expresses how
changes in the price of a factor in one state will influence other states, whereas horizontal
interdependence calculates the extent of transactions between states. Focusing on the latter, in 2014,
44% of the UK’s exports and 53% of imports were to and from the EU (Bank of England 2015). The
EU also accounts for a significant share of inflows and outflows of foreign direct investment, with
43.2% of UK overseas assets held in the EU and 46.4% of assets held in the UK by overseas residents
and businesses attributable to the EU (Ibid). Another way to gauge economic interdependence is the
Exit Model developed by Baldwin (1980) which estimates the economic exit costs of leaving an
interdependent relationship. The Bank of England’s (2015) review of studies estimating the net impact
of EU membership on the UK economy shows that these vary from a positive effect of +20% of GPD
to a negative effect of –5%. Focusing only on those studies that explicitly estimate the gains and losses
of a Brexit produces estimates ranging from +1.6% to –9.6% of GDP. The inconclusive results are due
to the use of different economic indicators, which are rarely exhaustive and different assumptions
about static or dynamic effects.
To complicate things further, estimating the economic cost (if any) of a Brexit with reference to a
counterfactual situation where the UK would cut all ties to the EU is not realistic. Instead, the most
likely outcome of Brexit would be some kind of association agreement with the EU (like Norway,
Switzerland, and Turkey). The kind of deal the UK would be able to negotiate is axiomatically
uncertain, making it difficult to estimate the externalities that the UK may experience should it leave;
nonetheless, some cautious observations can be made. Externalities could particularly arise from the
political actions of other Member States. Although the UK is a net importer (the benefits of which to
the wider EU should provide the UK with leverage towards an advantageous agreement) there is
considerable variation between Member States and those experiencing a trade deficit are unlikely to
support concessions (Bank of England 2015). A post-Brexit UK would be vulnerable to market
conditions imposed by the EU, as Member States such as Germany and France would like to increase
their share of financial services. Furthermore a number of Member States are increasingly tired of what
they perceive as the UK’s demanding behaviour and have indicated willingness to inflict punitive
externalities upon her (Rasmussen 2015). Finally, the UK would have to negotiate bilateral trade
agreements with third countries on her own, the outcome of which is unknowable.
Leaving the EU could provide cost savings for the UK but these are also circumscribed by several
complications. As a net-contributor to the EU’s budget, the UK would reclaim some money, but not
the entire sum. Depending upon what kind of deal it can negotiate with the EU, the UK would most
likely have to pay a contribution to the budget like Norway or Switzerland. Moreover, the UK is a net
recipient of research money from the EU’s budget; the academic sector would likely demand some kind
of restitution or the UK could continue to participate in the allocations (like Switzerland), which would
again involve paying (Jensen and Stenbæk 2015). Even on budget items such as the structural funds
(where the UK is a net contributor), regions including Wales and Northern Ireland benefit and would
probably require compensation. In particular Scotland’s relationship to the rest of the Union is
relatively tenuous after the secession referendum, and a vote to leave the EU could destabilise this
further. Clearly, were Scotland to leave in the wake of a Brexit vote, this would create economic
repercussions far beyond the direct cost/benefit calculations of replacing EU support.
A much-touted potential benefit of leaving the EU would be regulatory easing, as it would allow the
government to roll back costly legislation (Bank of England 2015). However, some caveats are in order.
First, as discussed in other pieces, the process of disentangling EU legislation from national legislation
is complex and associated with high transaction costs (Łazowski 2016). Second, if the UK does sign an
association agreement it will need to accept some part of the acquis communautaire. Third, studies indicate
that the UK is already one of the EU’s most deregulated Member States and the benefits of further
deregulation might be slighter than anticipated (Economist 2015). This section suggests that the level of
interdependence between the UK and the EU is high, that the cost/benefits of leaving are highly
uncertain and that the UK is vulnerable to externalities should it leave the EU. Hence, none of the
factors that according to LIG should apply to prompt a negotiation are present, giving further weight
to the importance of political factors. Under the existing conditions, one should expect most societal
actors to have a status quo bias advocating for the UK to stay within the EU, regardless of the
negotiation agreement.
4. The distributional consequences of (lack of) policy co-ordination
In the immediate aftermath, a Brexit would unbalance multifarious existing power equilibria within the
UK, where various groups would assert their interests in order to ensure that the new status quo is as
favourable as possible for their members (representative for FT, by phone, 3 December 2015). It could
be expected that the most economically powerful social actors – summarized above – might anticipate
this and view it as an opportunity to enhance their own status. The most vociferous of these actors are
clearly located in the business and financial sectors. For the CBI and British Chamber of Commerce
(BCC) a Brexit would be costly in the short- and medium-term, even if the UK should manage to land
a favourable deal that would enable it to remain within the single market (Gordon 2015). The UK is
likewise one of the world’s leading financial centres and the rest of the EU is it biggest customer;
British finance is clearly highly sensitive to this risk, regardless of the advantages that Brexit might bring
in terms of lighter-touch regulation. Nonetheless, whilst these groups are ideally placed to exploit the
potential turbulence of a Brexit, none appears to be actively in favour, despite their comparatively strong
position to capitalize on the disequilibrium it would create. If the most powerful social groups are riskaverse
in this field, it stands to reason that the other, less politically significant lobby groups (trade
unions, agricultural interests) would also stand to lose out.
5. Conclusion: national preference aggregation
This article has analysed the process leading to the ‘new settlement’ of the UK’s future membership of
the EU through the lens of LIG, albeit with some necessary conceptual fitting to the context of
institutional change. The analysis shows that LIG underestimates political factors and overestimates
economic factors with regard to national preference formation. No evidence suggests that the decision
to negotiate was demand-driven by powerful interest groups within the UK. Instead the decision was a
tactical move on behalf of Cameron to appease the hardcore Eurosceptics within the Conservative
party in England. The analysis suggests that the majority of powerful interest groups prefer to remain
within the EU. However, interest groups have had limited influence on the formulation of the concrete
objectives being put forward in Brussels. Some of them have informally put pressure on the
government to find a way out of the quagmire and allow the UK to remain in the EU, whilst offering
support on the objective of increased competitiveness. This stance arises not least due to the high level
of interdependence between the UK and the EU as well as the degree of risk associated with potential
externalities which would emerge from a Brexit. Breaking down the perceived costs for different
groups in society of leaving shows that the short term ‘Knightian uncertainty’ supersedes anticipated
possible benefits from the subsequent social reorganization. This in turn creates a strong status quo
bias among the most influential interest groups.
Acknowledgments
The author would like to thank Graham Butler; European Research at the University of Copenhagen
(EURECO) and Anah Maskell.
Biographical note
Mads Dagnis Jensen is Associate Professor at the Department of Social Sciences and Business,
Roskilde University, Denmark.
Holly Snaith is Assistant Professor at the Centre for European Politics, University of Copenhagen,
Denmark.
Address for correspondence
Mads Dagnis Jensen, Roskilde School of Governance, Department of Social Sciences and Business,
Roskilde University, Universitetsvej 1, 4000 Roskilde, Denmark. Email: mcjensen@ruc.dk. Phone: +45
46 74 30 56
Holly Snaith, Centre for European Politics, Department of Political Science, Øster Farimagsgade 5,
University of Copenhagen, 1353 Copenhagen K, Denmark. Email: hs@ifs.ku.dk. Phone: +45 35 32 10
28.
References
Baldwin, D. A. (1980) ‘Interdependence and power: a conceptual analysis’, International Organization,
34(4): 471-506.
Bank of England (2015) ‘EU membership and the Bank of England’ Bank of England Report, London:
Bank of England, available at
http://www.bankofengland.co.uk/publications/Documents/speeches/2015/euboe211015.pdf
(accessed December 2015).
Butler, G., Jensen, M.D. and Snaith, H. (2016) ‘‘Slow change may pull us apart’: Debating a British Exit
from the European Union’, Journal of European Public Policy, [PUBLISHER TO UPDATE DETAILS AT
PROOF]
Caporaso, J. A. (2009) ‘Is there a quantitative-qualitative divide in comparative politics? The case of
process tracing’, in T. Landman and Robinson, N. (eds), The Sage Handbook of Comparative Politics, Los
Angeles: Sage, pp. 67-83.
Confederation of British Industry (2013) ‘Our global future: the business vision for a reformed EU’
CBI Report, London: CBI, available at http://www.cbi.org.uk/global-future/index.html (accessed
December 2015).
Conservative Party (2015) ‘The Conservative Party manifesto 2015’, London: The Conservative Party,
available at https://www.conservatives.com/manifesto
(accessed December 2015).
Dahl, R. (1963). Modern Political Analysis, New Jersey: Prentice Hall.
Financial Times (2015) ‘Bankers start to warn on UK's EU referendum’, 8 May, available at
http://www.ft.com/fastft/2015/05/08/bankers-start-warn-on-uks-eu-referendum/ (accessed
December 2015).
Forster, A. (1998) ‘Britain and the negotiation of the Maastricht Treaty: a critique of Liberal
Intergovernmentalism’, JCMS: Journal of Common Market Studies 36(3): 347-368.
Gordon, S. (2015) ‘Debate rages over who speaks for British business’, Financial Times, July 5,
available at http://www.ft.com/intl/cms/s/0/131d47cc-217c-11e5-ab0f-
6bb9974f25d0.html#axzz3vihKEXkm
(accessed December 2015).
Jensen, M. D. and Stenbæk, J. (2015) ‘Evading the joint decision trap: the multiannual financial
framework 2014-20’, European Political Science Review, doi:10.1017/S175577391500020X.
Moravcsik, A. (1993) ‘Preferences and power in the European Community: a Liberal
Intergovernmentalist approach’, JCMS: Journal of Common Market Studies 31: 473-524.
Moravcsik, A. (1998) The Choice for Europe: Social Purpose and State Power from Rome to Maastricht, Ithaca
NY: Cornell University Press.
National Farmers Union (2015) ‘EU Referendum: UK farming’s relationship with the EU’ NFU Report,
NFUonline.com, available at: http://www.nfuonline.com/assets/52824 (accessed January 2016).
O’Connor, S. and Pickard, J. (2015) ‘Britain’s biggest union Unite weighs up campaigning for Brexit’,
Financial Times, July 16, available at
http://www.ft.com/intl/cms/s/0/3aae1b92-2bac-11e5-8613-e7aedbb7bdb7.html#axzz3xR6yXJ7T
(accessed December 2015).
Rasmussen, M. K. (2015) ‘”Heavy Fog in the Channel. Continent Cut Off”? British Diplomatic
Relations in Brussels after 2010’, JCMS: Journal of Common Market Studies, doi:10.1111/jcms.12319
Rosecrance, R. et al. (1977) ‘Whither interdependence?’, International Organization 31(3): 425-471.
Tatham, M. (2011) ‘Devolution and EU policy-shaping: bridging the gap between multi-level
governance and liberal intergovernmentalism’, European Political Science Review, 3(1): 53-81.
The Economist (2015) ‘Common market economics’, 17 Oct, available at
http://www.economist.com/news/special-report/21673507-better-or-out-common-market-economics
(accessed December 2015).
Trades Union Congress (2015) ‘TUC calls on Prime Minister to come clean about his plans to renegotiate
workers’ rights from Europe’ press release, available at https://www.tuc.org.uk/internationalissues/europe/employment-and-social-policy/tuc-calls-prime-minister-come-clean-about
(accessed
December 2015).
View publication statsView publication stats