UK Needs to Get ‘Good and Scared’ About No-Deal Brexit: Opinion

October 16, 2018 by

The European Union summit in Brussels this week was meant to be historic: a Brexit divorce deal would be reached and sent to parliaments to be approved. That is now not going to happen, once again raising the risk that the U.K. will leave Europe with no deal at all.

There is a worrying parallel between the current stage of the Brexit negotiations and the run-up to the 2016 U.K. referendum on leaving the EU. What it suggests is that unless Britain gets good and scared about leaving without settling the terms of a withdrawal agreement, risk is all it will get.

In 2016, most people assumed that the U.K. would vote to remain in the EU. The Leave campaign made outrageous claims — a promise that weekly savings of 350 million pounds ($460 million) would be plowed back into the health-care system was the most famous one. The argument that Brexit would be a) easy, b) quick, and c) wildly advantageous were repeated endlessly, and went mostly unchallenged. A lot of people believed them.

With only minutes left on the negotiating clock, something similar is happening now. Those who once advocated giving up EU membership now insist the only way to leave is to cut all the ties built up over four decades, including access to the EU’s single market and many other trade benefits guaranteed by the customs union. Anything less would be a betrayal of Brexit, the argument goes: Having no deal at all isn’t great but it’s really nothing to be dramatic about either.

The “no-deal, no-drama” narrative has gotten louder. Negotiations on a Brexit divorce deal are stalled over how to ensure that there will be no physical border between Northern Ireland and EU-member Ireland after Brexit if the future trading relationship doesn’t solve the problem. Hard-liners in Prime Minister Theresa May’s Conservative Party, and the small Northern Irish party that props up her government, are unhappy with her proposed compromise and say that it’s worse than walking away.

Arlene Foster, leader of the Democratic Unionist Party, May’s Northern Irish ally, says she now thinks that no deal is “the likeliest outcome.” Jacob Rees-Mogg, leader of a group of hard-line Brexiter members of Parliament told a radio show on Monday that a no-deal Brexit would bring “transition issues,” but also asserted that any difficulties “should be overcome as we begin to trade with the EU on a perfectly normal World Trade basis.”

“World Trade basis” was shorthand for the Brexiters’ claim that the U.K. would be no worse off if it jettisoned the EU agreements and lived instead with the ones encompassed by Britain’s continuing membership in the World Trade Organization. That’s almost certainly false, but the problems inherent in what’s called the WTO-option have been rehearsed plenty, and they resonate no more than the warnings of economic cost did during the referendum campaign. As tension rises over the course of negotiations, so has the emotional appeal of what Rees-Mogg called a “much cleaner and quicker Brexit.”

A study published on Monday by the think tank Open Europe provides fodder for the no-deal arguments. The authors say that if the U.K. unilaterally liberalizes tariff and non-tariff barriers, a no-deal exit would lead to a 0.17 percent per year drag on growth until 2030, much lower than many other studies show. Even that negligible impact, they argue, could be wiped out with the construction of an additional 30,000 homes per year and other mitigation measures.

“If you just focus on tariffs and non-tariff barriers, it’s true that you can legitimately get smallish aggregate figures,” said Alex Stojanovic of the Institute for Government, who has studied the impact of Brexit on various sectors. “This still obscures the big sectoral damage, like the car sector, and the loss of jobs in particular regions.”

The study is at least honest about its assumptions. Among them: the model “does not capture the effects of the disruption of deeply integrated value chains, sector-specific regulatory impediments to U.K.-EU-27 trade, the labor market impacts of limiting access to EU labor, or the impact of Brexit on the strategic considerations of multinationals,” who may locate their businesses elsewhere.

It also assumes that the U.K., having ended its two-year EU negotiations without a deal, will manage to quickly form side deals on everything from data to aviation to agri-food and financial services. Given all the factors that are taken out of the equation, it’s breathtakingly bold to ask anyone to draw comfort from the conclusions.

Plenty of other studies suggest that no deal is not just a little bit worse than a deal within the range of options that May and the EU are looking at — it’s a lot worse. And the U.K. is not prepared for it. The British Chambers of Commerce say that 62 percent of member firms haven’t even done a Brexit risk assessment to ascertain what leaving will mean.

The government appears to be similarly unprepared. Despite massive hiring and attempts to gear up for the biggest legislative and institutional change in a generation, a study of Whitehall by Joe Owen, Lewis Lloyd and Jill Rutter in June showed that the machinery of government is nowhere near geared up for a challenge of that scale.

As with the referendum campaign, the pushback against the “no deal, no drama” fiction has been weak. The assumption, which markets seem largely to share, is that a deal will happen at the 11th hour and 58th minute. That’s how the EU always works, the argument goes. And because May has had to maintain the pretense in negotiation that she is ready to walk away, there is no effective counter-narrative coming from the government.

The paradox now is that May’s best chance of getting a deal is for a no-deal Brexit to be a prospect that most Conservative MPs genuinely fear. Only then will they hold their nose and cast a vote for a deal they hate.

That, in turn, favors yet more brinkmanship and a summit of perhaps some soothing words but no real progress. The fear of failure will only become real when the markets buy it and businesses make more noise. At the moment, they are more inclined to shrug, just as many remainers did in 2016.

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