It has been pretty evident to anyone with even a passing
interest in the subject that the Brexit negotiations are not going as planned.
The closeness of the referendum result in June 2016 reflected a country that
was split down the middle on the issue of EU membership, and in the subsequent
16 months the Conservative Party has all but torn itself apart. Theresa May’s
attempts to placate the hard Brexit faction within her own party has resulted
in a series of clumsy soundbites (“Brexit means Brexit” and “no deal is better
than a bad deal”) which fail to cover up the fact that the government does not
have a plan – or at least not one that is acceptable to the EU27 and the two
factions within the Conservative Party.
This has been compounded by an election which robbed the PM
of whatever authority she had, and as a result the EU27 is loath to accommodate
any demands the UK might make for fear that she will not be able to deliver at
home. With more than a quarter of the negotiation period mandated under the
Article 50 process having ebbed away, the UK is no further forward than in
March. If a scriptwriter had come up a parody of all that is wrong with modern
politics, they would have struggled to come up with a story as bizarre as the
one which is unfolding before us.
There are those who continue to believe that the EU needs
the UK more than vice versa. Indeed, a group of Brexit supporters has written
an open letter to Theresa May demanding that she commit the UK to trading under
WTO rules in the event that no deal with the EU27 is forthcoming because “no deal on trade is better than a deal which
locks the UK into the European regulatory system and takes opportunities off
the table.” Moreover, “it has become
increasingly clear that the European Commission is deliberately deferring
discussions on the UK’s future trading relationship with the EU27 post-Brexit.
The EU is taking this approach because they do not believe that the UK would be
prepared to go to WTO rules for our trading relationship with them.”
Owen Paterson MP argued in a radio interview this morning
(here starting at 1:09:10) that the EU27 has “simply
not taken up [Theresa May’s] generosity to discuss a future trading
relationship” following her Florence speech and it is time to take an
alternative approach. In Paterson’s view, this would give business “certainty”
as to the post-Article 50 trading arrangements. He also repeated the canard
that it is “massively” in the EU27 interests to do a deal on trade because “they run a huge surplus” with the UK.
Paterson argued that a fallback to WTO rules would allow the UK (and I emphasise
that I am quoting verbatim from the interview) to “immediately be able to grab the advantages of leaving the single
market, leaving the customs union and doing trade deals around the world
[and] sorting out our own regulation.” Yes, you did read correctly that
leaving the single market is somehow an advantage.
I am not sure which alternative reality Paterson (and other
signatories to the letter, including former Chancellor Nigel Lawson) are
inhabiting but it is not one that most economists recognise. When 47% of UK
exports go to the EU whilst 16% of EU27 exports go to the UK, it should be
pretty obvious where the balance of power lies – and the EU27 knows it. As for
giving clarity about future trading relationships by committing to WTO rules,
it would effectively give business the green light to think about alternatives
to investing in the UK. Moreover, on the assumption that the UK imposes
most-favoured-nation tariffs on imports from the EU, the Resolution Foundation
reckons that the basket of goods which makes up 40% of consumption would rise
in price by 2.7% which will hit the poorest households most hard. And of course
the WTO approach has little to say about how to deal with services where
non-tariff barriers are more important. Such an approach would clearly signal
to banks that the government is not serious about trying to arrange a
transition deal, which would hasten efforts to move business to other parts of
the EU – a process which is already underway.
Of course, none of this is new. These arguments were made in
the run-up to the referendum by Brexiteers who believe in the primacy of free
trade without acknowledging that the EU has other objectives and no incentive
to play ball. It is a sad indictment of the whole debate that the Leavers
continue to make the same hollow arguments. However, the evidence is mounting
that there is an economic cost. Why, for example, don’t our incomes stretch as
far as they once did? It’s mainly because the currency markets have taken a
negative view of the UK’s post-Brexit economic prospects and have forced down
the value of the pound, resulting in higher inflation and a real income
squeeze. It may not have been the economic disaster that was feared in summer
2016, but whilst we may not have dropped the frog in a pan of boiling water it
is in the pot and the heat is being turned up.
Those people who want Brexit at any price are blind to the
consequences of their actions. But equally, they fear that the UK will not
leave the EU as planned because they underestimated the complexities of doing
so and will be trapped in the exit lounge for longer than they desire. But even
if a transitional period is eventually granted which will give the UK an extra
two years to finalise a deal, it will not be long enough. As Joachim Lang,
managing director of the BDI, Germany’s chief business group told the FT, “it’s unrealistic to expect that we could
renegotiate rules within two years that evolved over the 40 years of Britain’s
EU membership.”
Theresa May will be told at today’s summit in Brussels that
“insufficient progress” has been made during the first phase of Brexit
negotiations and that the UK will not be rewarded with the start of any
discussions on trade. Brexit supporters are fearful because if no such deal is
forthcoming, their lies during the campaign will be found out. Many of us would
be only too happy to see them drive off the much-feared cliff edge – we just
don’t want to go down with them.
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