‘No-deal Brexit irresponsible because of lack of a strategy it reflects’

The EU will never abandon the level playing field on regulatory competition

“The reason a deal would be the best outcome is rather depressing: it is the only option consistent with the UK’s dysfunctional economic model.” Photograph:  Jorge Guerrero / AFP / Getty Images

“The reason a deal would be the best outcome is rather depressing: it is the only option consistent with the UK’s dysfunctional economic model.” Photograph: Jorge Guerrero / AFP / Getty Images

 

Forecasting Brexit remains a mug’s game, but there is one option I can definitively rule out: the no-deal Brexit followed by a Canada-style trade agreement that would cut tariffs but leave the UK free to strike deals with other countries.

One reason is that the UK is not Canada. Another is the EU’s need to ensure a regulatory level-playing field. Former prime minister Theresa May’s all-UK “backstop” managed to cast aside this issue, but once you revert to a Northern Ireland-only backstop, it will return with a vengeance.

So how could Canada get such a deal but not the UK?

The UK is a bigger economy, more interlinked with the EU, and much closer geographically. Even the Comprehensive Economic and Trade Agreement that Canada signed with the EU in 2016 was not as straightforward as it appears today. Some member states expressed concern over Canadian farmers undercutting EU prices.

Also, since every EU country would have to ratify a broad-based trade deal with the UK, they will all seek to protect their domestic industries. At the end of the process, Britain would inevitably arrive at a future relationship very similar to the one implied by Mrs May’s withdrawal agreement and political declaration. The high frictional cost of a no-deal Brexit, the food and medicine shortages and the chaos at the ports would all be for nothing.

What one has to understand about the EU is its obsession with regulatory competition. The old European Economic Community may already have had lofty political ambitions in the 1950s. But it was born as a producers’ cartel. The EU would surely feel threatened by a “Singapore-style” Brexit in which Britain diverges from the regulatory standards that govern the single market.

Even if the European Commission were ready to agree a trade deal that would leave the UK with regulatory autonomy, it would never be approved by the parliaments of all EU member states. France would surely not ratify.

This is why it makes no sense to discuss the dilemma of deal versus no deal without reference to the future relationship or to the economic models that lie behind each option.

Deal and no-deal imply vastly different visions of the future. If the UK wants to stick with a mixed economy model, more or less, based on integrated global supply chains, Mrs May’s deal is about as good as it gets.

If a no-deal Brexit with a Canada-style trade deal is impossible, what are then the remaining options? I see three – in descending order of probability.

The first, and most desirable in my view, is an agreed deal. Jean-Claude Juncker, the president of the European Commission, said last week that the EU was ready to consider a deal based on a Northern-Ireland only backstop.

If a deal is agreed, I think the European Council should accompany it with a formal declaration that it would not accept any further Brexit extensions. If you want to get the bill passed, you have to remove the safety valve of an extension.

This is the big loophole in the Benn Act requiring Boris Johnson, the prime minister, to seek an extension to Article 50: it does not bind the European Council.

The second most likely outcome is a no-deal Brexit without a trade deal. The trading relationship would be based on World Trade Organization rules. This version of no deal is the most extreme. Even if the British government managed to mitigate the transitional shocks, a no-deal exit would only make sense if the UK succeeds in exploiting regulatory divergence on a macroeconomic scale. It might, for example, set lower thresholds for data protection and shift financial resources to artificial intelligence and other high tech industries.

There is nothing the EU could do to stop this. But it will not encourage the UK either by offering a trade deal.

The third and least likely option is unilateral revocation of the Article 50 divorce process. That is now the Liberal Democrats’ official policy. I see no majority for it, but admire its boldness. It is the only Remain strategy that is not obsessed with procedure. It has been characteristic of EU-advocacy in the UK that it was always hiding behind something – be it the doom-mongering during the referendum campaign or calls for a second referendum or rolling Brexit extensions.

My own view is that a no-deal Brexit is irresponsible, not so much because of the short-term disruption it would cause but because of the lack of a strategy it reflects. The real tragedy about Brexit is that the UK has wasted an opportunity to rethink its low-productivity economic model.

It is the choice of the model that should determine the type of Brexit, not the other way round.

Ultimately, the reason why a deal would be the best outcome is rather depressing: it is the only option consistent with the UK’s dysfunctional model. – Copyright The Financial Times Limited 2019

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