Wolfgang Munchau: UK needs a Brexit plan B, but so does EU

The biggest category of risk in the forthcoming Brexit negotiations is political miscalculation – but not of the variety you would think. Yes, it is always possible, indeed probable, that a bombastic UK politician fails to understand the intricacies of EU politics. Far more likely and more dangerous is the possibility that the EU misjudges British politics.

There are plenty of examples where this has already happened. David Cameron was given a raw deal last year when the European Council ignored the former prime minister's warnings about Brexit.

Decision

The European media's coverage after last year's referendum was full of reports of anti-Brexit demonstrations and petitions in the UK, the legal proceedings by Gina Miller, an anti-Brexit campaigner, and more recently of the Open Britain cross-party political initiative by former prime minister Tony Blair and other pro-Remain advocates. If you read the German newspapers, and nothing else, you would think that the decision of whether Brexit happens or not has yet to be taken.

This is extraordinarily dangerous. If EU negotiators believe that Brexit may not happen, why offer the UK a good deal? They may even think that a lousy deal could become a self-fulfilling prophesy. They might think that the harder they negotiate, the bigger they can make the Brexit bill and the greater the chances of the UK not leaving.

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My recommendation to the UK government would be to liberate their EU counterparts from those lingering doubts.

Slogans such as “Brexit means Brexit” or “no deal is better than a bad deal” have no traction in Brussels. There is a whole industry in that city specialising in ways around categorical clauses. Remember the no-bail-out clause for the eurozone and what became of that? If they can get around that, they can get around anything.

Exit

What London needs instead is a detailed plan B, to be triggered if there is no agreement or if an exit plan is vetoed either by the European Parliament or the House of Commons. Prime minister Theresa May’s own post-industrial vision for Britain would be a good starting point.

This credible plan B needs to be fleshed out with costings, timetables, legal and technical analyses, enough detail to roll out the programme if and when it was needed. No matter whether the negotiations succeed or not, an industrial strategy is vital to anchor expectations of investors about post-Brexit Britain.

Plan B will naturally have to address trading relationships. The two choices would be either the World Trade Organisation schedule for tariffs on traded goods, or unilateral free trade. This means that the UK would not impose any tariffs on imported goods even if the other side does. There are good arguments in favour. The question is how that will impact Britain’s ability to access foreign markets because it reduces the incentives for others to offer a reciprocal deal.

One can add further credibility to a plan B by pre-legislating, to ensure that it kicks in simultaneously with Brexit should the negotiations fail. This would help dispel any residual doubts over the UK’s intentions.

One should keep in mind that the function of plan B is that of an insurance policy. British politicians do not want it to be triggered. The UK and the EU should strive to reach an agreement.

Contracts

The ultimate purpose of plan B is to shift the debate within the EU away from the question of whether Brexit will or ought to happen to how it would affect the EU when it happens abruptly. There has been no such debate in the EU yet. The moment of truth is still too far away.

When it approaches, the EU might realise, for example, that its manufacturing companies would be among the biggest losers. The highly complex supply chains into which they have invested would become worthless overnight. European industry can cope with a hard Brexit, but not a sudden one. The EU will also find that a large percentage of financial contracts will all of a sudden no longer be subject to EU law – hardly something that is conducive to financial stability in the eurozone.

It is only once the EU begins to calculate the costs of a sudden Brexit that these negotiations will start in earnest.

Copyright The Financial Times Limited 2017