Watching them watching us

It is always interesting to read what outsiders think of Brexit, so I recently did a quick trawl of some of the main international newspapers to get a handle on the issue. One of the best places to start is with the excellent Irish Times, largely because it is a newspaper similar in tone to its more rational English cousins, but also because Ireland is the one EU economy likely to suffer heavily in the event of a nasty turn of Brexit events. 

This piece by Chris Johns argues that the attitude of the British government is reminiscent of the Charge of the Light Brigade. In his words, “Theresa May has just ordered ‘charge’ and an incredulous Europe stands, like the Russian gunners at Balaclava, ready to shoot as soon as the British come into view. It’s as one-sided a negotiation as they come.” He also notes that “the UK is facing into the most challenging set of decisions since the second World War and is being led by May, Johnson, Davis and Fox, all of whom appear to have been completely captured by the Daily Mail … it is rare to see such a lethal combination of incompetents and ideologues. Even Margaret Thatcher had a deeply pragmatic side and was able to populate her administration with people who knew how to get things done.” Clearly, it is not just me.

The Irish Times’ Berlin correspondent Derek Scally wrote in a recent article that  “for seven decades, most Germans idealised Britain much as many Brexiteers idealise Britain’s past and its post-EU future: a thriving, open-yet-closed land of cricket, cream teas and fair play. But Brexit has toppled Britain from its lofty, post-war pedestal in Germany.” I can attest to the fact that the German view of Britain is very different to that which many Brits have of their country. The Germans have failed to understand how the UK domestic political landscape has changed and how the right-wing capture of the centre ground has made the political debate a lot harsher. Those who come to live here soon notice that beyond the flashy façade of London, the public finance squeeze makes the UK look pretty shabby in contrast to most German towns. Those who have been here for any length of time understand, just as the natives do, that there is an increased degree of mean-spiritedness about Britain which is far from the idealised version of the story books.

What about the view from Germany? The conservative Frankfurter Allgemeine Zeitung argued in an editorial last week that Germany was likely to be a big loser from Brexit since it will reduce Germany’s blocking majority against the creeping trend towards turning the EU into a transfer union. An online reader survey in the same newspaper, which polled more than 20,000 readers, showed that 64% are opposed to the idea of the UK leaving the EU, versus 30% who believe it to be a good thing with 6% undecided.

Die Welt was rather less sanguine, with one story about Theresa May carrying the headline “The Iron Lady of Little Britain.” The range of views amongst reader comments was also interesting and echoed many of the opinions one often hears outside the rabid UK tabloids. This one from Ulrich H. particularly caught my eye, “For many jobs there are no British candidates, not because they are badly paid, but because the British are too poorly trained. Note also that the UK voluntarily opened its doors to the likes of the Poles, when Germany and Austria did not do so due to transitional arrangements. The fact that the number of foreigners is now regarded as a problem and a cause for Brexit has more to do with xenophobia - which does not really fit with a country which is open to the world.”

The French newspapers, perhaps surprisingly, also took a conciliatory approach. Le Monde reported in an editorial that “Now begins the enormous task of undoing all the ties that have united Great Britain to the life of the Twenty-Seven. And the ties that bind them to the life of the British. We must forge a new relationship that minimizes the damage for both. This will be all the harder since Theresa May, the British Prime Minister, has set goals that ultimately will hurt her country's economy and, most likely, inflict collateral damage on its ex-partners.”

The article also highlighted the extent to which people have crossed borders and made their lives in other countries, Brits in the rest of the EU and continentals in the UK. It thus concluded “now that Article 50 has been activated, this issue has to be dealt with separately, not as a "parameter" in the talks, which will be tough. We suggest starting the talks on a positive gesture: let's first deal with the question of our nationals trapped by Brexit. The four European dailies signing this editorial call for an agreement between London and the 27 to guarantee the rights of these five million people.”

Whilst this trawl was, of necessity, a fairly quick exercise I believe it shows there is sufficient goodwill amongst other EU nations to ensure that a reasonable settlement can be achieved as long as both sides approach the talks in the right spirit. But perhaps what it shows most of all is that the sheer nastiness of the domestic debate, in which the press has played a key role, is in stark contrast to the more reasoned view elsewhere in Europe. The British pride themselves on their good manners. Perhaps some of our commentators and politicians should look across the channel for lessons on how to conduct themselves with dignity.

Cool it (for now)

After years of resistance, I recently signed up for Twitter. After all, if the leader of the free world uses it to conduct policy, it’s where anyone with an interest in current affairs needs to be. And what a revelation! I was previously aware of the phenomenon of homophilous sorting (the tendency of people with similar interests to group together) but it is quite incredible how Twitter enables social divisions to occur. The people I tend to follow are very much anti-Brexit and given the torrent of commentary which they tweeted and retweeted in the wake of the Article 50 letter, it is hard to see how the electorate ever voted for Brexit in the first place. But in the interests of balance, I had to check out what the other side was saying – and yes, it was as bad as I feared.

This highlights that both sides in the Brexit debate talked past each other in the run-up to the referendum and clearly are still doing so today. Theresa May’s hope that the country will emerge more united after the EU negotiations, appears forlorn. Regular readers will know that I am totally opposed to the notion of Brexit but I can see why those in favour express irritation with people who argue that “Article 50 can still be stopped” or “we need another referendum to verify the terms of the deal.” Not that I necessarily disagree with the sentiments, but this is not the right time to make such arguments because it does come across as “Bremoaning” (such an ugly word) and merely hardens the position of those who are going all out for Brexit.

Indeed, it may be time to let the EU27 take up the cudgels on behalf of the Remainers. Already, German Chancellor Angela Merkel has suggested that the issue closest to the UK’s heart – securing a trade deal with the EU – will have to wait until exit terms are agreed whereas the UK’s position is that the two should run in parallel. For all the domestic bravado since June, we have known all along that the terms of engagement would change once the Article 50 letter was delivered. The pressure is now on those who argued that Brexit would result in a bright new future, to deliver on their promises (Boris Johnson, David Davis, and Liam Fox to name but three). Now we will see what they are made of, and if they are perceived to be failing to deliver, that is the time to really turn up the pressure because that is when some of the cracks in support for Brexit may begin to show.

Whatever happens after the EU negotiations have been concluded, and whether it is a “good” deal or not, it will be mighty hard to convince me that we will be as well placed as we were in the EU. Indeed, as Simon Wren-Lewis wrote in his latest blog post, “those who voted Leave didn’t win. If they wanted immigration to quickly fall, it won’t ... If they think their wages will rise because of Brexit they will see - are seeing - the opposite. £350 million to the NHS will become £50 odd billion to the EU ... In other words the big news is that Leave voters were conned.” Unfortunately, it will take many years for the full effects of the damage to become evident. If the economy grows 0.3% per year slower than it would have done otherwise, it will take 15 years to produce a 5% reduction in relative living standards. The real tragedy, of course, is that it is the children (and more likely grandchildren) of today’s Brexit supporters who will have to live with the folly of the vote (“tell me again grandad, how did you vote in the referendum?”).

In the longer term, of course, the sun will continue to rise and the world to turn and we will all have to deal with many personal heartbreaks which put Brexit into perspective. But Brexit will change Britain – and indeed will likely change the EU, and nowhere will the loss be more keenly felt than in Ireland and Germany.

Nonetheless, I do wonder how the political map of Britain will evolve on a 5-10 year horizon. If the UK does indeed suffer economically from Brexit, the right-wing of the Conservative Party will undoubtedly blame the current leadership for failing to deliver the right deal. This will probably push the Tories further to the right which could produce one of two outcomes. Either the Conservatives maintain their dominance with a leader who is even more in thrall to the Eurosceptics than anyone we have seen so far, and condemns the Labour Party to the irrelevance which is often predicted. Or – and history suggests this is more likely – the pendulum will swing, leaving space for the Labour Party to move towards the centre ground and capture the popular vote. However, they won’t do this as long as Jeremy Corbyn remains leader and it relies on regaining some ground in Scotland (I assume that Scotland will not be independent within five years though further ahead, I wouldn’t like to guess). An alternative prospect is that an element of the Conservative Party splits off to form a new political group, just as the Labour Party split in 1981 with key figures going off to form the centrist Social Democratic Party.

Whilst all this is necessarily speculative, it is a recognition that something is going to have to give in the political landscape. Too many people have too much political capital invested in Brexit (either for or against), for events not to go their way. And then there is the electorate in whose name all these shenanigans have taken place. My guess is voters care less about ideology than income and if Brexit fails to deliver the goods, it will not be the “experts” who have to answer questions – it will be the politicians.

Now what?

Today’s delivery of the letter triggering Article 50 has set the UK on a road to a far less certain future. I have been through the economic arguments countless times as to why Brexit is a thoroughly bad idea – indeed I have been making them since January 2013 – but that is an argument which has been lost and there is no point in raking over old coals. Theresa May’s speech to parliament tried to sound convincing but I suspect it fell flat on the near half of voters who do not share this government’s vision.

All the challenges it faces were contained in one sentence from the prime minister: “I want this United Kingdom to emerge from this period of change stronger, fairer, more united and more outward-looking than ever before.” It’s hard to see how we will emerge stronger given that most of the evidence suggests that there will be significant economic costs. Unless, of course, any trade deal with the EU offers most of what we have already, in which case what is the point? More outward-looking? We have just announced a withdrawal from the largest, and arguably most successful, single market in the world. I am not sure how that is consistent with the outward-looking vision she espouses. As for being united, that is a bitter irony. Almost half those who voted do not want this policy at all, and the Scots want to secede altogether. The UK will have to negotiate a hell of a deal with the EU to persuade the disaffected minority that Brexit is a risk worth taking.

The biggest problem that the government will face in the long-run is how to take back control in an increasingly globalised world. One of the great ironies of the post-Brexit world is that sterling is around 10% weaker than it was pre-referendum. Aside from the fact that this impacts upon the living standards of ordinary citizens by raising the costs of imported goods, it also makes British companies more attractive takeover targets by reducing their price in foreign currency terms. An article in The Economist noted three weeks ago that although the UK accounts for 3% of world GDP and its companies account for just 5% of global market cap, UK corporates have accounted for a quarter of all cross-border M&A activity since 1997.

This is a result of the laissez-faire approach of successive British governments towards market intervention. Moreover, over the last 10 years, foreign companies have bought significantly more UK companies than the other way around. The most high profile of these cases was the purchase of Cadbury’s plc by Kraft Inc in 2010. Just a week after promising to keep one of Cadbury's local plants open, Kraft backtracked and said it would close it. Although this resulted in a major revamp of the takeover code in 2011, it came too late for Cadbury’s workers and prompted howls of popular outrage. But here’s the rub: The UK is running out of attractive takeover targets. Admittedly, it still has attractive companies such as AstraZeneca, which beat off a bid from Pfizer in 2014, or the London Stock Exchange, whose proposed merger with Deutsche Börse was today blocked by the EU competition commissioner (of all people).

All this is a prelude to the question of what will attract global capital to the UK in future? It has fewer takeover targets and it is about to leave the EU, which will make it less attractive to firms which want a European base when they can go elsewhere. The attractiveness of London as a business location will not diminish easily: It is still a world-class city with all the amenities that the global community requires. The attractiveness of the legal system and use of the global lingua franca are added bonuses.  But depending on the nature of the deal with the EU, the London financial services industry may be in for a torrid time which will impact on the ancillary services that depend on it. Only time will tell how the likes of the Japanese and Americans will react to the prospect of having their European headquarters located outside the EU. Tax competition would certainly be one option to enhance the attractiveness of the UK but that is a race to the bottom which could put even bigger holes in the public finances.

The Economist notes that “even the free-market wing of the ruling Conservative Party … backs a change [to the takeover code] ... Britain’s 30-year experiment with a free market for takeovers is quietly coming to an end.” But the real irony is that if Brexit is at least in part a backlash against globalisation, this policy change could have been implemented years ago and saved us a lot of grief. And to double the irony, making it more difficult for foreign investors to buy UK companies is now precisely the wrong policy response when (a) most of the assets have already been sold and (b) the UK needs the capital inflows. You almost couldn’t make it up. Unfortunately that is the result of 30 years of short-sighted policy.

The big day dawns

We are less than a day away from the triggering of the Article 50 process which will signal the UK government’s determination to leave the EU. It is the equivalent of serving the divorce papers, and like most divorces it is unlikely to run smoothly. It was thus rather depressing to watch the BBC’s pre-Article 50 debate (here for those in the UK, and those outside the UK may have to be content with this). Having watched with increasing despondency the debates in the run up to the June referendum, I took no comfort from the fact that the country is still as divided on the issue as it was nine months ago and continue to believe that the government’s public position on its negotiating stance is naïve.

After the UK government communicates its desire to leave the EU, everything changes. The UK no longer has any control over how the negotiations will proceed and the ball will be very much in the court of its (soon-to-be erstwhile) EU partners. Although Theresa May has set out her 12 key negotiating points, I maintain that they are little more than a wish list. And if the key issue at the heart of the Brexit campaign was immigration, the UK government does not appear to have developed a clear strategy on how to proceed from here. Brexit minister David Davis yesterday confirmed that the government will not seek to cap the number of EU migrants working in the UK after Brexit, but expects that the government will eventually meet its target of cutting net migration to the “tens of thousands.” Short of redefining the migration statistics to exclude students, it most certainly will not be able to do so. I won’t bore you with the economic arguments about immigration again – suffice to say many people have it wrong about the balance of costs and benefits.

There are those who argue that the weakness of the EU is a good opportunity for PM May to press hard for a deal which will benefit the UK. Allister Heath in the Telegraph argues that “the rise of populism on the continent, the strength of Britain's economy and Europe's fear of terrorism all make a good deal for the UK more likely.” I’m not sure I agree that the EU is as weak as he makes out. The Dutch election earlier this month showed that Geert Wilders’ brand of populism was decisively rejected and latest polls put Emmanuel Macron ahead in the French election, suggesting that he will breeze the second round. The EU is not, in Heath’s words, “on the verge of the abyss.” It is weakened, for sure. But Brexit may even act as a catalyst to force it to rethink its strategy.

For those Brexit supporters who claim that it is not curbing immigration which is the real prize but the opportunity to strike new trade deals, Gideon Rachman’s recent column in the FT nicely skewers some of that thinking. Rachman argues that the UK establishment suffers from collective amnesia in which the national story is centred around the war against the Nazis rather than focusing on Britain’s imperial past. In Rachman’s words “Most British people, including leading politicians, are profoundly ignorant of the country’s imperial history. This imperial amnesia … means that leading Brexiters and advocates of “Global Britain” … speak warmly of returning to Britain’s historical vocation as a “great trading nation”, when it was actually a great imperial nation. That important distinction leads to overconfidence about the ease of re-creating a global trading destiny, in a world in which Britannia no longer rules the waves.”

In the first Brexit presentation I made, back in 2013, when I shared a platform with former Europe Minister Denis MacShane (before his conviction for expenses fraud), I recall making a similar point. Those who believe that the UK will be able to rely on our Commonwealth partners, claiming special historical ties, clearly do not see the imperial position through Indian (or Pakistani or Kenyan etc) eyes. The former British colonies have emerged from the shadow of their imperial past and have no desire to return to it. Indeed, Theresa May’s efforts to conduct a trade deal could be threatened by her refusal to reform visa restrictions for Indian citizens (here). 

For the 48.1% of us who voted in favour of Remain in June, the decision to trigger Article 50 will signal another step on the path away from the common Europe of which we hoped to remain part. I would like to think that whatever deal is struck, it will not inflict too much pain on the UK. But much will depend on the magnanimity of the EU, for what I have heard so far gives me little confidence in the UK’s negotiating strategy. When our own prime minster reckons “no deal for Britain is better than a bad deal for Britain” you really have to wonder what we are letting ourselves in for.

What drives politicians?

Human actions can broadly be understood in the context of three forces which act to offset each other in order to produce balanced outcomes. On the one hand, we are motivated by self-interest which is the driving force propelling individuals forward and helps societies to develop. But this is constrained by the loyalty to the tribe to which we belong, and by the responsibility to the wider society. So it is with politicians in a democratic society: Self-interest is tempered both by party loyalty and a responsibility to represent the people which put them in office.

The actions of someone like President Trump are a bit harder to fathom, particularly since he appears to owe no fealty to the Republican Party. I would venture to suggest, however, that he was motivated to run for the presidency out of ambition but his actions will be constrained by what the American people – or more properly, Congress – allow him to get away with. Trump’s attempt to repeal Obamacare should be seen as a policy of self-interest, designed to ensure that he is seen to be fulfilling his election promises. Equally, Congressional action to block this attempt should be celebrated as an example of how this self-interest can be held in check. (For anyone interested in a more detailed analysis of the difficulties the Trump Administration will face in trying to push through its legislative programme, this article from the New York Times is well worth a read).

On this side of the Atlantic the British political scene offers a number of fascinating insights into the motivations of politicians. The news over the weekend that UKIP’s only sitting MP is to leave the party is a case in point. Douglas Carswell is a former Conservative MP, and a well-known Eurosceptic, who defected to UKIP in 2014. Carswell’s reasons for leaving UKIP are unclear. He obviously did not see eye-to-eye with former leader Nigel Farage (who has never managed to be elected as an MP) but Carswell posted on his blog that “I switched to UKIP because I desperately wanted us to leave the EU. Now we can be certain that that is going to happen, I have decided that I will be leaving UKIP.” A cynic might say that a cause he believed in so strongly has been achieved that, for the second time in three years, he has decided to leave a party which no longer suits his purpose. Or, as the Huffington Post put it,  “He’s just another hypocritical politician. Just another MP motivated by self-interest, who picks and chooses his principles to match whatever he has already decided to do.” 

There again, the same could be said of Winston Churchill who was elected as a Conservative MP in 1900, before defecting to the Liberal Party in 1904 only to rejoin the Conservatives in the 1920s. As the great man put it, “anyone can rat, but it takes a certain ingenuity to re-rat.” With political tribal loyalty these days much stronger than in Churchill’s day, Carswell may not be welcomed back quite so warmly if he were to rejoin his former Conservative colleagues, as has long been rumoured. But whilst one can question Carswell’s personal motivation, he was tapping into a groundswell of anger felt by a large part of the electorate. Like Trump, he was prepared to put other factors ahead of party loyalty and perhaps Carswell really believed that he was acting in the interests of a wider society.

Theresa May, on the other hand, appears to have put the party above all else. She did vote “remain” in the EU referendum (albeit reluctantly, apparently) but has clearly decided that it is more important to keep the party together than allow her personal view on Brexit to determine her course of action. As a result, we appear set for the hard Brexit that many members of the party have long called for. As for her opposite number in parliament, it is hard to know where Jeremy Corbyn stands. It seems that he is not acting in the interests of his party, after his parliamentary colleagues virtually disowned him last year (although he can at least claim that the party’s rank-and-file membership backs him – for now). Most of the polling evidence suggests he is unelectable and as a result he would do his party a favour by stepping aside for someone who is. Arguably, Corbyn is putting personal ambition and his apparently genuine belief in some of the causes he espouses, ahead of party loyalty.

In a world where many of us express irritation at the actions of politicians, it is important to be aware of the forces which drive them. On the one hand, doing so might help to narrow the chasm which has emerged between politicians and the electorate, which is an important factor driving the populist movement and is driving us towards a resurgence of economic nationalism. In addition, it may help counter the more extreme positions adopted by some of the populists. The prejudice of the Brexiteers, for example, could have been fought far more effectively if their opponents had tried to engage with the electorate’s fears rather than dismiss them. Sun Tzu’s The Art of War recommends that we know our enemy.  What was true in the 5th century BC still holds today: Good ideas never die – they just get recycled.

Fund the police

The terrible attack on the UK parliament last week which claimed the lives of four innocent people would have been a lot worse were it not for the actions of the security and other emergency services. As it was, one police officer was killed in the line of duty and politicians from all sides were quick to praise the work of the police on the front line in maintaining law and order. But we should not allow these warm words to deflect us from the fact that the police service, like many other publicly funded bodies, has had its funding slashed over the past seven years.

The Mayor of London warned in January (here) that  “it would become increasingly difficult to keep Londoners safe from growing security threats if the Government continues to underfund the Met, or makes further cuts in funding” and this is a message which is being heard up and down the country. A report last year from the impartial House of Commons Library (here) noted that between fiscal 2010-11 and 2015-16, the central government grant to police was cut by 22% in real terms. Although the police in England are able to rely on some local government funding, the report notes that two-thirds of its revenue derives from central government. The total number of full-time police officers in England and Wales has fallen by 11.8% since 2010 compared with a planned decline of 11.2% and total staff numbers are down by 15.6% versus a planned 12.7%. In fairness, the report also notes that most police forces have coped well with the additional austerity. But this does not disguise the fact that there are limits as to how much further budgets can be cut.

Another report issued by the HoCL around the same time (here) reported that since 2010-11, funding for the fire and rescue services has been slashed by between 26% and 39%.  Taken together with the cuts to police funding, it is clear that these are not insignificant cuts and they underline the belief of a growing number of people that we have gone way beyond the point of trimming fat from the public sector and we are now cutting into the bone and muscle. A recent article in The Economist  – not exactly a supporter of big government – made the point that the public sector is under increasing strain and that it may be about to break under the load. Citizens Advice – a voluntary organisation that provides help and support to those who are struggling to get what they need from the state – has seen a sharp rise in demand for its services. The government’s decision to cut back on its Legal Aid budget has left many people with no recourse to legal representation, with CA taking up the slack, and changes to the benefits system have resulted in many people falling through the cracks.

I have highlighted before the excellent report by the Institute for Government which argues very strongly that recent additional cuts in government spending are beginning to erode the fabric of public services. The evidence-based analysis makes the point that although there has been a big rise in real spending on hospitals since 2010, admissions rose at an even faster pace. Or take the case of prisons, where the prison population has remained unchanged since 2010 but the number of officers has fallen by almost 25% with the result that assaults on staff have risen by 70%.

None of this is news. Nor is it an ideological point about how we have to spend more money on public services. However, the evidence before our eyes is mounting to suggest that public services are struggling to cope and they are increasingly unable to offer the level of service which the public demands of them. With the best will in the world, a police officer cannot be in two places at once.  If we continue to starve our public services of resources, this will continue to eat away at morale and they may reach a tipping point beyond which it is very difficult to recover. Indeed, taxpayers as a group are not finding that the exchequer is taking any less tax yet they are getting far less in return.

I am reminded of the story that was frequently told of British Rail – the old and (at the time) unloved nationalised body responsible for running Britain’s railways – about how in the 1970s it was one of the world’s most cost-effective railways in terms of spending per passenger mile (even today, UK railways still receive far less public money per passenger mile than other major European networks – see chart). But it was criticised for poor service; lack of staff morale; the frequency with which workers went on strike; the quality of the food served and the general state of the trains. It did, however, get people from A to B, even if it was a utilitarian service, before it was abolished in the 1990s when the railways were privatised.

Today, people look back to the halcyon days of an integrated railway network which conducted world class research and built its own rolling stock, providing jobs for many thousands. This demonstrates that if governments do not put money into public services, the quality of service deteriorates and public trust is eroded, even if in accounting terms it offers good value for money. But when you replace it with something else, it is often not perceived to be as good. As Joni Mitchell put it, “You don’t know what you’ve got till it’s gone.”

The games people play

Brexit is often described as an economic game-changer, whilst Prime Minister Theresa May has accused the Scottish First Minister of playing a game with her call for a second Scottish independence referendum. But politics is a form of game and Brexit certainly warrants examination in a game theoretic context, which can be described as “the study of mathematical models of conflict and cooperation between intelligent rational decision-makers.” Leaving aside the question of the rationality of the Brexit decision, we can perhaps use it to gain some additional insight on what the optimal (or least sub-optimal) outcomes are likely to be, not only for the UK but also for the rest of Europe.

Mathematical games can be split into two broad categories: cooperative and non-cooperative. Whatever the EU may be, it is a consensus based institution in which decisions are traditionally arrived at in a cooperative manner (although the Greeks may not see it in this way). In principle, the EU is a cooperative environment in which players are constrained to act according to the legal rules. Those who breach the rules are subject to sanctions. To take the example of environmental protection, there were 3464 infringements of EU law over the period 2007 to 2015, of which the UK accounted for 179, or 5%. Italy was the biggest offender accounting for 9% of all infringements followed by Spain (8.6%) and Greece (7%). Without making any judgement on individual nations’ degree of compliance with the law, the rules are known and the EC publishes data to name and shame the transgressors who are expected to comply with sanctions.

Similar rules apply to trade. But not everyone thinks the EU applies the rules consistently. Alan Halsall owns a company (Silver Cross) which makes prams, and in 2015 the French government banned his company from selling its products in France on safety grounds despite being cleared for sale elsewhere across the EU. Not surprisingly, Mr Halsall argued strongly in favour of Brexit. But the problem is not the EU rules: it is that the French government applies higher safety standards than other countries. In fact, Mr Halsall had a case for applying to the European Commission to appeal this decision although he chose not to do so, arguing that he will benefit more from applying his energies to markets where he is able to generate sales.

But if he thinks the current rules are stacked against him, Brexit will change the rules of the game completely. The process of renegotiating trade deals with the rest of the EU implies entering into a non-cooperative bargaining “game” where the EU has no incentive to cooperate with the UK, primarily because it wishes to avoid giving support to the idea that leaving the EU is an easy option. Although the ultimate outcome is likely to result in a cooperative situation in which a new set of rules apply, the process of getting there will be non-cooperative. And even if we do reach a cooperative solution, the end result is likely to produce an outcome which is worse than the position we started from. In game theoretic terms, the outcome will be inefficient – at least for the UK.

Those of you who have seen the film A Beautiful Mind will be aware of the work of John Nash, who offered significant insights into the mathematics of bargaining problems. His key insight was that equilibrium is reached when no player can unilaterally change their strategy and get a better result, given that they know the strategy of the other player(s).   In other words two parties should cooperate when non-cooperation leads to results where at least one side is worse off (so-called Pareto inefficient outcomes). Clearly, the EU is not going to allow the UK to have free access to the single market: such a strategy will weaken the EU because it implies there is no cost to exit, which will endanger the EU’s long-term existence. But the UK cannot accept access to the single market whilst continuing to pay into the EU budget and accept ongoing free movement of labour (the Norwegian solution), because this gives the UK the same system as before Brexit but without any control over the legislative process.

The problem the EU faces is to trade off punishing the UK against the harm that non-cooperation inflicts upon itself. Likewise, the UK must trade off the best deal against the political costs of giving away too many concessions. Abstracting from deals regarding the exit costs, one possible Nash equilibrium is for the EU to offer the UK continued access to the single market for an annual fee which is lower than the UK's current net EU contributions but which offers no say over drafting legislation. The UK should accept this because although it is a worse deal than the current arrangements, it is economically less damaging than relying on WTO tariffs and preserves market access for exporters on both sides of the table.

One of the best known forms of game is the zero sum option. Many Brexit supporters appear to believe they are operating in a positive-sum game: if the UK leaves the EU, any disadvantages from leaving will be more than offset by the gains. There is no evidence to support this sunny optimism. Indeed any action which harms UK trade with the rest of the EU, such as the imposition of trade tariffs, will result in a negative sum outcome. 

Looking at this in a wider perspective, it is evident from recent polling evidence that the degree of dissatisfaction with the EU is rising across the whole continent. We can thus perhaps think of the decision of whether to leave as a sequential game, in which the action of one country influences the decisions of others. It is yet possible that the UK’s decision to be the first mover in this game will trigger other countries to go down the same path. But it is not in the UK’s interest to be the first mover because it will face all the adverse consequences as a result. Far better in this case to allow others to make the first move – this may be a game where there is no first mover advantage.

Contrary to what politicians tell us, Brexit really is a game – admittedly one with high stakes. However, a central assumption in many variants of game theory is that the players are rational. In other words, they always choose an action which gives their most preferred outcome, given what they expect their opponents to do. I have a pretty fair idea how the European Commission is likely to act: Based on recent rhetoric I am less certain of the rationality of the British position.