Martin Wolf: UK faces grim but unavoidable hard Brexit

Halfway houses between EU membership and hard exit from EU are uninhabitable

“Brexit means Brexit”: the three-word sentence tells us much about UK prime minister Theresa May’s style.

“Brexit means Brexit”: the three-word sentence tells us much about UK prime minister Theresa May’s style.

 

‘Brexit means Brexit.” As circular as it is concise, this three-word sentence tells us much about the style of Theresa May, the UK prime minister. I take this to mean that the UK will, in her view, formally leave the EU, without the option of a second referendum or a parliamentary override. If so, it seems overwhelmingly likely that the outcome will be “hard Brexit”.

By “hard Brexit” I mean a departure not only from the European Union but also from the customs union and the single market. The UK should, however, end up with a free-trade arrangement that covers goods and possibly some parts of services and, one hopes, liberal travel arrangements. But the “passporting” of UK-based financial institutions would end and London would cease to be the EU’s unrivalled financial capital. The UK and the EU would also impose controls on their nationals’ ability to work in one another’s economies.

This is not the outcome many desire. As the Japanese government has made brutally clear, many Japanese businesses invested in the UK in the justified belief that the latter would provide a stable base for trade with the rest of the EU on terms as favourable as those available to producers anywhere else. These businesses are understandably worried about their prospects. The same applies to many others whose plans were made on the assumption that the UK had a settled policy of staying inside the EU.

Rules of origin

“Hard Brexit” would disrupt their plans. Should the UK leave the customs union and enter a free-trade agreement with the EU, rules of origin would apply to exports of goods from the UK to the EU. This standard bureaucratic procedure would be needed to ensure that imports into the UK did not become a route to circumvent the EU’s external tariff. Rules of origin would put UK-based exporters at a disadvantage vis-a-vis those based in the EU. The same would be true for, in particular, banks should the UK leave the single market.

Why then is a hard Brexit the most likely outcome? My belief rests on the view that this UK government will not seek to reverse the result of the vote and that it will feel obliged to impose controls on immigration from the EU and to free itself from the bloc’s regulations overseen by its judicial processes.

Continued membership of the customs union or the single market, from outside the EU, would deprive the UK of legislative autonomy. The former would mean it could not adopt its own trade policy. The latter would mean accepting all regulations relating to the single market, without possessing any say on them, continuing with free movement of labour, and, probably, paying budget contributions. A country that has rejected membership is not going to accept so humiliating an alternative. It would be a state of dependence far worse than continued EU membership.

The only reasonable alternative to hard Brexit would be to stay inside the EU. Parliament is constitutionally entitled to ignore the vote result. The people could also be asked if they wanted to change their minds. But the Conservatives would surely follow Labour into ruin if they tried to reverse the outcome. Their Brexiters would go berserk.

Of course, it is logically possible that the EU might alter the terms of engagement. It might, for example, change its mind on the sacred status of free movement. If it had done so, the referendum would surely have had a different result. But this now looks near inconceivable.

Minimum damage

If “hard Brexit” is, indeed, the destination, the aim must be to get there with the minimum of damage to both sides. Some Brexiters propose that the UK should simply repeal the European Communities Act, rather than go through article 50. That would violate its treaty obligations. Such egregious treaty breaking would hardly be a helpful precursor to the negotiation of new trade agreements.

It is essential for the UK’s future to go through the formal process of negotiating a departure. But, as Charles Grant of the Centre for European Reform notes, that will be just one of six tough negotiations. The others will be: an ultimate trade pact with the EU; an interim agreement with the bloc, to cover the period between exit and the longer-term deal; re-entry into the World Trade Organisation as a full member; new arrangements with the 50 or so countries that now have an accord with the EU and, presumably, with additional countries, too, such as the US and China; and, finally, UK-EU ties in foreign and defence policy, police and judicial co-operation and counter-terrorism.

Make no mistake, this is going to take years. A decision to adopt unilateral free trade, proposed by some Brexiters, would simplify this. It will not happen.

In all this, the crucial negotiation, to accompany talks under article 50, is over transitional arrangements, to ensure the UK does not lose all preferential access to EU markets upon leaving.

Ideally, this deal should be some sort of “free trade plus”. How much it could be “plus” depends on flexibility on both sides, especially over free movement. In practice it would probably not be very plus. But the UK government should state that it will not trigger article 50 until the EU agrees to discuss a transitional agreement that, ideally, would be close to a final one.

Do I like this outcome? No. I would like a government prepared to overturn the referendum. Nothing has changed my view that the UK is making a huge economic and strategic blunder. The country is going to be meaner and poorer. David Cameron will go down as one of the worst prime ministers in UK history. But the halfway houses between membership of the EU and hard Brexit are uninhabitable. So what now has to be done is to move to the miserable new dispensation as smoothly as possible.

The UK has chosen a largely illusory autonomy over EU membership. That has consequences. It will have to accept this grim reality and move as quickly as it can to whatever the future holds. – (Copyright The Financial Times Limited 2016)

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