The EU will play hardball with post-Brexit Britain

Opinion piece (The Telegraph)
John Springford , Simon Tilford
19 April 2016

Donald Trump and Brexiteers have many things in common, but the most obvious is supreme self-confidence in their powers of negotiation. In his book The Art of the Deal, Trump wrote: “My style of deal-making is quite simple and straightforward. I aim very high, and then I just keep pushing and pushing and pushing to get what I’m after. ” Meanwhile Boris Johnson’s proclivity for having his cake and eating it is well-established. “It is certainly true that if you vote to leave all your options are good, and you could certainly strike a great free trade deal”, he said in February.

Here’s what Johnson and his fellow travellers appear to believe. Britain could have unfettered access to EU markets. This would extend to services exports – despite France and Germany’s discomfort at the bloc’s pre-eminent financial centre lying outside the eurozone. There would be no need for any arrangements to make sure that Britain’s rules – on health and safety, on safeguarding the European financial system, on labour standards, on data privacy – match those of the rest of the EU. Britain could duck out of the free movement of labour. It would not have to make any contributions to the EU budget.

In reality, EU leaders will force a Brexiting prime minister to choose between two options: membership of the European Economic Area, or nothing. Why? Because they hold stronger cards – and for political reasons,they  will want to avoid a special deal for Britain at any cost.

Eurosceptics always fail to take into account other countries' politics. Britain’s post-exit negotiations will be taking place against the backdrop of a hard fought French presidential election campaign and Germany’s parliamentary elections. The French will be determined to avoid conceding an á la carte arrangement for Britain, for fear of establishing a precedent that could boost popular support for the eurosceptic Front National.

Nor will Britain be able to count on support from Germany. They take European law seriously, and don’t believe in exceptions from the rules. Britain could not unilaterally regulate its companies and labour markets while at the same time having free access to German markets. This is particularly true of Anglo-Saxon finance, which Germans self-servingly portray as a buccaneering amplifier of the eurozone crisis.

The UK is not as big an economic player as eurosceptics imagine. Yes, the UK is not Iceland: it is the sixth biggest economy in the world. And yes, the UK is the EU’s biggest single export market. But the EU market is of much greater importance to the UK than vica versa: almost half of UK trade is with the EU, whereas EU member-states on average do just 8 per cent of their trade with Britain. Everyone will lose from Brexit, but Britain has by far the most to lose.

The terms of the Lisbon Treaty make this scenario all the more likely. Under the treaty’s Article 50, the divorce will have to be concluded within two years of Britain voting to leave, unless all remaining 27 member-states unanimously agreed to extend this. Two years is an implausibly short time to negotiate the kind of wide-ranging free trade agreement envisaged by Britain’s eurosceptics. The other EU member-states, keen to punish Britain and get on with other issues, will simply refuse to go down that route, and turn to the ready-made alternative – the EEA.

Thus Germany and France will say: “it’s all or nothing”. Join the European Economic Area, or no deal. EEA membership would, economically speaking, be similar to the status quo but would amount to a loss of sovereignty. Britain would have unimpeded access to the single market, but would have to abide by EU rules and regulations, including the free movement of labour, and pay into the EU budget. It would not have access to the EU’s trade agreements with other countries. This would be too bitter a pill for the UK.

It is more likely that the UK would the EU’s orbit entirely and trade under World Trade Organisation rules. Britain would be freed from having to comply with EU regulations. But it would face the EU’s Common External Tariff and would not be able to stop ‘behind the border’ protectionism, especially that directed at its services (which now make up more than 40 per cent of British exports). British firms’ access to the EU’s services market would be limited, because the WTO has made little progress in freeing up trade in services.

 The result would be far-reaching damage to Britain’s economy. Investment in the UK would suffer, as multinationals opted to switch manufacturing capacity and service sector operations to countries within the single market, in order to avoid costly tariff and non-tariff barriers. The loss of such investment would further weaken Britain’s already poor productivity performance. The remaining EU would suffer too from such an arrangement, but far less than Britain would: it would win some new investment.

Some Brexiteers play down the risk of trading with the EU under WTO rules, arguing that the gains from trade come from imports rather than exports. They claim that Britain could simply eliminate tariffs, and shrug its shoulders if the EU sought to protect its own economy. They are right that the biggest benefits of trade are on the import side, but those imports have to be paid for by exporting goods and services. The loss of unimpeded access to the single market would further worsen the UK’s already yawning trade deficit, forcing the country to import less, in the process hitting British living standards.

Ironically, the only people that share the eurosceptic,rose-tinted picture of the post-Brexit future are European federalists. However, they will say almost anything to get Britain out of the EU, believing that this would somehow open the way for closer integration. This makes them as delusional as the Brexiteers.

If Britain does vote to leave the UK, it will look back ruefully at its past privileges – inside the single market, but outside the eurozone – and wonder what possessed it to give them up.

John Springford is senior research fellow and Simon Tilford is deputy director at the Centre for European Reform.