Economics

Brexit tears

illustration of european union map with flags, from 1 july 2013

illustration of european union map with flags, from 1 july 2013

Like many others, I’ve been mesmerised by the news since last Thursday’s narrow referendum win for Leave. The pace of events has been extraordinary. You feel like if you nip to the shops for an hour it is almost guaranteed that you’ll miss some further seismic political event while you’re out. For political nerds it’s like Christmas, New Year and your birthday all rolled into one. If it weren’t so seriously alarming.

There has been oceans of commentary already, discussing whether the Government is obliged to automatically follow the Brexit result, whether the result needs to be ratified in Parliament, whether a General Election should be called to establish a clear mandate for Brexit, or whether it should put it to a second referendum when the terms of leaving become clear. There have been suggestions that Brexit won’t happen, at least not in the near future, or that Britain will keep kicking the can down the road until we pretty much forget about it.

As time passes it feels like things become a little clearer.

It has been argued that a General Election in which we have a showdown between a pro-Brexit Tory party and a pro-Remain Labour party would bring clarity to the situation. While that might be true, there are two problems. One is that a Corbyn-led Labour party is clearly not pro-EU. The other is that a pro-Remain Labour party is very likely to be taken to the cleaners by UKIP outside the South East of England.

A second referendum on the basis of the same badly-framed question as the first seems pointless. It just feels like sour grapes from Remainers – we’ll keep going until we get the answer we like. However, there is no reason why the Remain side should shut up and accept the result. After all, the anti-EU contingent has spent decades noisily not accepting the result of the 1975 referendum.

On the other hand, a referendum on a different question – assessing the terms upon which the UK would leave the EU and the type of post-Brexit relationship to be established – would be a different proposition. It might bring clarity. But do we have any evidence for thinking that it would be conducted any less mendaciously than the one that we have just experienced?

Personally, I wouldn’t have a problem with the Government putting the Brexit result to a vote in Parliament. The referendum result is advisory. It would be legitimate for it to be confirmed (or not) by the process recognised as at the heart of our representative Parliamentary democracy. Leave campaigners wouldn’t like it. That is, of course, because they fear the vote would be lost. However, I find this position incoherent. If the whole point of Brexit is to ‘take back control’ from the evil EU and restore it to Westminster, so we can make our own decisions, then how can you object when Parliament exercises sovereignty? It’s illogical. But then I don’t suppose that would stop the argument being made.

The other argument is that the Conservatives promised in their manifesto that it would follow the referendum result. So it has to trigger Brexit. But I don’t buy that argument either. For all sorts of reasons Governments – not to mention Leave campaigns – disregard all sorts of promises they put in their manifesto, without compunction. In some cases they even disregard promises because mature consideration suggests that what they had been proposing turns out not to be a very good idea.

But some of these debates have been rather overtaken by events. Whether the Conservative leadership goes to Theresa May or Michael Gove it appears unlikely that either will go to the country to get their own mandate. In a world of fixed-term Parliaments they are under no obligation to do so. It seems unlikely that they’ll rush to test the referendum result in Parliament. Both have indicated that they are in no hurry to trigger Article 50. But it seems to me that motivations here are different. I have no doubt Gove wants to leave Europe. He is a zealot on the point. So for him it may be a question of timing. May, on the other hand, while absolutely authoritarian on questions of immigration, feels like someone who is not so much of an obsessive that she’d ignore the bigger picture entirely.

Quite apart from the difficult political questions around the break up of the UK and the risk to peace in Northern Ireland, it seems possible that if the various Conservative factions stop blustered and bullshitting and look hard at the process of Brexit they will realise quite how catastrophic it will be for the UK economy. The intervention by Cecilia Malmstrom yesterday should – if there is any scrap of rationality left in the political world – help to focus minds.

There is much talk among the Leave camp about negotiating favourable trade deals with the rest of the world or the desirability of EEA, possibly EEA+ or EEA-. Since the start of the campaign it has been obvious that most of this talk ignores the constraints and imperatives of regional and global politics. There is an assumption that UK holds some good cards or that the EU will have to offer us a good deal because, hey, we’re “Great” Britain or that the EU wouldn’t be so spiteful as to punish the UK for its betrayal.

Even if you don’t accept that any and all of these assumptions is erroneous, it is important to appreciate the technicalities of the Brexit process. This is where the Malmstrom intervention is salutary. She pointed out that the UK remains a member of the EU until the Article 50 process has been completed and that EU member states are prohibited from engaging in bilateral trade negotiations, on the one hand, and that it is impossible for the EU to negotiate with itself, which is what discussing trade deals with UK before Brexit would mean. Unless the UK wants to go rogue, from a legal perspective it will have to leave the EU first and then start negotiating trade deals as a third party. It’s a reasonable working assumption that such trade deals would take five-seven years to negotiate. In the mean time UK goods and services are likely to be traded under disadvantageous WTO rules. Much has been made of trade tariffs under this arrangement, but, as has been set out very clearly here, it is non-tariff barriers that will be ruinous. They will absolutely kill UK exports into the EU. And at the same time UK exports to the rest of the world will be at a huge disadvantage until trade deals are signed.

So in addition to the negative shock the UK economy already faces as investment stalls and disinvestment starts, that will intensify during the period Article 50 is active, the UK will likely face a period of years during which it will be trying to trade with the rest of the world on terms that make it uncompetitive.

The Article 50 process, and the system of rules that it is embedded in, is designed to make life very difficult. The UK was involved in designing the system, just as much as any other country. Indeed, the process means that no one would trigger it unless they were willing to risk paying a extraordinary economic price. Indeed, some might be tempted to say no one in their right mind would trigger it if they understood the consequences. Those with their eyes on the sunlit uplands of a free independent country need to recognise that there is a substantial risk that the country will fall into a crater a long time before it even reaches the sun-dappled foothills.

This isn’t talking Britain down. It’s not Project Fear. It isn’t to belittle the concerns that led to citizens voting Brexit or to disregard their aspirations. But this isn’t time for more glib sloganeering: “We’re Great Britain we’ll be alright”, “We’ll sort it out”, “Let’s make Britain great again”. That time has long passed. This is time for understanding the great peril of the Brexit route. To grasp the price that will be have to be paid – by all of us, and our children, and very probably our children’s children – in pursuit of benefits that will prove to be largely illusory anyway. And maybe if that was more widely understood then even more of those who voted leave will decide that perhaps, on mature reflection, leaving isn’t such a great idea.

Then we’d have to deal with ‘non-Brexit’. Which will present plenty enough problems of its own.

Note (01/07/16)
This, by Spinning Hugo, examines the likelihood of triggering of Article 50 from a number of different angles and concludes that it’s quite possible that we find ourselves in a situation where “no responsible government should invoke Article 50”. That’s plausible. It invites us to reflect on whether it’s likely that a post-Cameron Conservative government will act responsibly.

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8 replies »

  1. Great piece & well done on tearing yourself away from events for long enough to write it.

    As my Dad said recently (he’s Indian by birth, came to UK in 1967 as a young doctor): Have any of these people claiming we’ll substitute trade with India for part of the EU shortfall actually done any business there? Do they know how many bribes you need? Have they noticed that actual market for Western goods is still relatively small? Do they know they’ll still have to compete with the Germans even after Brexit?

    This feels like the centre of the Brexit delusion. UK business prices are dominated by cost of living in UK (cost of labour), cost of raw materials in UK (transport). New tariff regimes are not going to make the difference that makes anyone buy a Jaguar instead of a BMW…

  2. Thanks. Yes, I agree. There’s way too much abstract sloganeering and not enough hard thinking going on.

    I had a paragraph about UK export performance in the original version of this post – including the way that loss of passporting for financial services will expose the decline of UK exports in other classes. It would have started to pick up on your point. But I deleted it because it was starting to take me off at a little bit of a tangent.

    • Fair enough. There’s so much 1)Brexit 2) ????? 3)Profit it’s impossible to fit all the different kinds of magical thinking into one post.

  3. An interesting article but one that I think fails to take into account the fact that other countries may follow us out. That would be a whole other ball game and not an unlikely scenario.

  4. I seem to remember being told during the campaign that we didn’t need to leave the EU to restore Britain’s sovereignty, because Britain was already a sovereign country, the proof of which was that we were in the EU voluntarily and could leave at any time.

    Now you seem to be saying that in fact while maybe we could theoretically leave at any time, in practice the barriers to doing so were deliberately constructed so as to be impractical to overcome.

    This seems a little like someone insisting that you are not a prisoner, you are an honoured guest, and you are free to leave at any time, provided you just swim the hundred-yard crocodile-and-shark-infested moat around the house.

    If that is really the case, then it makes me more sure than ever that we needed to vote to leave and that we should get on quickly with doing so.

    (And, that we should tell the EU to stuff themselves and negotiate trade deal with the USA, Australia, India, and whoever else is willing that are ready to come into force on the very day we leave. After all, what are they going to do with us, take us to the ECJ? We’ll have left its jurisdiction before the case ever gets heard!)

  5. Touche.

    I don’t think the two points are in contradiction. The UK is a sovereign nation and it can leave at any time, as could any other country. The EU isn’t trying to stop it. Indeed, in some quarters there is clearly a keenness for the UK to go as soon as possible. The question is whether it is in the UK’s (and the EU’s) economic interests for it to leave.

    I’m not sure I quite buy your analogy. It would be more accurate to say the UK was jointly responsible for helping to dig the moat and introduce the sharks/crocodiles before blowing up the drawbridge from inside the moat. Whether in retrospect that was a good way to try to keep everyone together might well be debated. In an era when the countries were seeking to signal their commitment to cooperation and collaboration it might well have seemed sensible. But that just makes it harder and more painful to unravel.

    But that characteristic is not unusual to supranational agreements. Some of the provisions in TPP or (it appears) TIPP are precisely designed to make life difficult for states that go back on a commitment to a particularly rigorous regime of free trade.

    Your suggestion that the UK might just as well start negotiating because what is the EU going to do about it, even if it is against EU law, is what I meant when I referred to “going rogue”. I would have thought that there were significant longer-term costs to reputation and the willingness of counter-parties to deal if a country has demonstrated that it is willing to disregard the frameworks of international agreements it has previously agreed to comply with. If I were a third party country considering a trade deal with the UK and I witnessed the UK blithely disregarding the terms of the ones it has already signed then I might well think twice about establishing a relationship. A national reputation for untrustworthiness hardly seems an asset.

    • It would be more accurate to say the UK was jointly responsible for helping to dig the moat and introduce the sharks/crocodiles before blowing up the drawbridge from inside the moat

      Well yes, and clearly that was a stupid thing to do.

      In our defence, though, that was negotiated by the insanely Europhilic Tony Blair, who probably would have driven the UK off a cliff if the EU had asked him to (indeed, he would have entangled us the the Euro, which would have had much the same effect, if Gordon Brown hadn’t stopped him, about the one worthwhile thing Brown ever did).

      And also I seem to recall we were supposed to have a referendum on that, but were cheated out of it at the last minute after the EU decided that having to ignore the results of any more referendums would make it look even sillier than it already did.

      [One might also note that Tony Blair spent a lot of his Premiership specifically trying, through various means, to override the usual convention that a Parliament does not bind its successors]

      Anyway, we are where we are and unravelling is going to be painful, but would be necessary at some stage anyway (given that the Eurozone has to integrate more tightly politically or it will fall apart, and Britain would never have adopted the Euro, so there would have had to have been some kind of severing of those links) so it may as well be now.

      If I were a third party country considering a trade deal with the UK and I witnessed the UK blithely disregarding the terms of the ones it has already signed then I might well think twice about establishing a relationship

      I suppose it depends on whether those countries see the EU insisting on the letter of the treaties even when it makes no sense (because, seriously, is there any reason to stop us negotiating with other countries during the leaving period other than deliberately to make things harder for the UK than they need to be?) as the EU behaving unreasonably and therefore the UK being justified in ignoring the EU.

      Given that it will be in those countries’ interests to have their trade deals with the UK as soon as possible, it seems to me there’s a fair chance they might agree that an EU which didn’t agree to waive the ‘no negotiations’ rule, given that the UK is about to leave anyway, was acting unreasonably.

      For a fig leaf, it might be necessary to not actually draw up any detailed trade agreements until after the final exit, just have ‘informal talks’ (not ‘negotiations’) so that the actual drawing up and signing can be done within a matter of days after the UK officially leaves the EU.

      Clearly that would be going against the spirit if not the letter of the EU treaties, but if the EU were going to insist on sticking to their letter out of, it would seem, no motive other than spite / to make the UK’s exit as hard as possible to discourage others from following suit, then I don’t think the other countries with which we might negotiate would hold that against us.

      They, after all, would probably do the same thing in our situation.

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