Reasons to be cheerful, or why brexit is very unlikely…

Theresa May said “brexit means brexit”, we see a parade of right wing clowns into the government roles related to negotiating brexit and we hear the rest of the EU wants us out. So if you believe in the UK’s EU membership you should suck it up and get over it, right?  Wrong.

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Neither the economy nor the national debt is sustainable outside the single market. Estimates available on a leave website suggest the effect of leaving without any kind of single market access and relying upon WTO membership could be that seven to eight million jobs are at risk if the UK were to go that route. Equally, the EEA model is inferior to EU membership in every way. The UK would pay about the same for access, have no say in laws and regulations and would have to accept free movement.

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Serving a notice to leave the EU under article 50 of the treaty on European Union (otherwise known as the Lisbon Treaty) sets in train a process whereby a state that gives notice is presented with a draft agreement by the European Council and a two year time period is set running by the end of which the UK has to have agreed to the proposal or it has to leave. This puts all of the bargaining power in the hands of the EU and none of the power in the hands of the departing state. This is exactly why the UK wishes to negotiate without serving an article 50 notice and why the EU is insisting upon it. It makes the idea that the article 50 notice will be served quickly even more laughable now the Commission has appointed Michel Barnier as its brexit negotiator. Barnier is a brilliant mind with an excellent grasp of detail. David Davis, well, isn’t…

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Negotiating a free trade relationship with the EU (similar to Switzerland) will take 7-10 years and will come with obligations to pool sovereignty not dissimilar to EEA membership (and no access for financial services to the single market which would be disproportionately damaging to the UK economy). 

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Rewriting the UK’s laws to reflect withdrawal would take at least 15-20 years – it would be reasonable to expect the European Communities Act to remain in place with saving provisions for years to come.

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Scotland’s executive is also itching for the first concrete proposals on brexit with a view to launching a second independence referendum, and Theresa May would likely prefer to be the prime minister who fudged brexit than the prime minister who lost Scotland (and it’s pretty clear anything short of EU membership will not meet the requirements of the SNP). It seems almost certain that regardless of what the Mail and the Express write, Nicola Sturgeon has effectively been told she has a veto over article 50.

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We shouldn’t disregard the abject danger of brexit causing a collapse of the Northern Irish peace process too. The better alternative is Irish reunification – the worse alternatives do not bear thinking about for anyone who remembers the 70s and 80s. Theresa May and Enda Kenny can talk about no hard border in Ireland all they like, but the only way that works is if the UK maintains freedom of movement with the EU. It’s worth thinking about the Republic of Ireland too – regardless of how justified it might seem to the average British person, Irish people genuinely have historic reasons to dislike the UK. Common EU membership has provided a medium to redefine a troubled colonial relationship into one of equals within the EU. However, Ireland’s economy is predicted to be very negatively impacted by brexit, which can’t but help to boost negative stereotypes of Britain.

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The Conservatives are keen not to end up taking the blame for all of this. Hence uniting around May and presenting “brexit as brexit”. The problem is that “brexit” has no substance – it means nothing. Theresa May saying she plans to implement brexit is about as coherent and substantial as me saying I plan to build a perpetual motion machine.

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The international politics and the law of this dictate things happening in a more geological time period, which is beyond the capabilities of one government mid term. The only way to implement the vote for brexit quickly is the suicide option of invoking article 50, which is even less attractive than losing Scotland, given it gives all the bargaining power to the EU. I expect, one way or the other, we’ll still be waiting for the article 50 notice at the end of this parliament.

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So anyone who thinks this is a done deal, think again. Brexit is very much the proverbial can, about to feel the full force of Theresa May’s lovely footwear (perhaps the Daily Mail could run some photos of that). The downside is the uncertainty affecting our economy for years and an almost inevitable recession. However, be in no doubt, the uncertainty is infinitely preferable to the “certainty” of article 50.

6 thoughts

  1. I’m not for or against brexit (i just used to come here for the photos…), but I’d like to play devil’s advocate. I’m worried that if the left pushes to block the democratically-chosen brexit move, it sets a dangerous precedent. The [arguably better educated] minority will be overruling the majority.

    Also, I feel that arguments suggesting that leaving the EU would destroy the economy echo protectionism. Completely distinct states with solid borders can engage in successful trade. If Britain requires membership in an entity such as the EU in order to be economically viable, perhaps it has little competitive advantage in most sectors. Besides, the pound is now approaching parity with the euro. So brexit appears to have normalized the currencies, possibly making trade more favorable.

    I live in the USA, and I recently ordered a pricey British audio product. I ordered it because it suited my needs best. Is this not the ideal model for trade? Take Germany, for example, if they left the EU, would Britons purchase fewer Volkswagens or Staedtler pencils or Wusthof knives (or Leicas)? I think the competitive advantage of the German heavy industry and the German work ethic is so strong that it could survive were it to leave the EU. Why is Britain different?

    • Because Britain’s economy and tax take largely depends on exports of regulated services to the EU and the rest of the world (largely financial services, accounting, legal and other professional services). A significant proportion of manufacturing is basically foreign direct investment, dependent on free access to Europe. The UK’s trade outside of the EU is based on trade agreements entered into by the EU, which the UK would lose access to on leaving.

      So any “remainer” doesn’t argue it is impossible for the UK to exist outside the EU: rather it will make the country poorer with fewer jobs. Various commentators have estimated the benefit of single market membership as being worth in the region of 4% of GDP (about GBP 75 billion ). That’s almost certainly an underestimate. The professional and financial services I referenced above are responsible for something like 25% of the U.K. tax take. So actually leaving results in a perfect storm of departure of the services industry together with a widespread collapse in manufacturing jobs. It’s not a pretty picture.

      That’s before the fact that Scotland and Northern Ireland voted to remain and that leaving may result in the break up of the U.K. The actual process of leaving the EU (article 50 of the EU treaty) also results in the dice being loaded against the departing member, they have to like the deal they get on leaving, or lump it.

      So, this isn’t about the principle that countries cannot exist outside of the U.K., rather that once integrated, the costs of leaving will be very high. Almost certainly, it results in unacceptable choices.

      As for democracy, well, the U.K. isn’t a plebiscite democracy. The legislation establishing the referendum expressly referenced it as advisory, not binding. It has moral authority only, and even that would disappear after an election: Parliament is sovereign.

      • Thanks for the reply.

        While we all agree that leaving the EU will make the country poorer in the short term, do all economists agree that remaining in the EU will strengthen British service industries in the long term? I don’t think depending on exports of regulated services to the EU will yield a sustainable future for the UK. If the UK truly offers superior services, the EU will be incentivised to use these services regardless of Britain’s status as a member country. If EU regulations are artificially keeping the UK’s economy strong, then perhaps Brexit just shines a light on the inherent weakness of the economy. Were the EU to collapse or disband, it would be catastrophic for the UK. The EU is certainly not a boon for all, as Spain and Greece suffer crushingly high unemployment. Could we at all envision a scenario where Brexit has caused the UK to be introspective and rebuild parts of it’s economy so that people aren’t earning their livelihoods off regulations alone?

      • While some (like Minford) have painted a generic picture of benefit to the UK longer term of leaving the EU, approximately 90% of economists believe the effect of leaving the EU will be negative longer term. The truth is that pure market based economics do not apply to regulated sectors of the economy. Without access to the EU single market, the current polity known as the UK ceases to be economically viable. It is naive to assume the EU will seek to access UK services regardless. Many banks and law firms are preparing to move to Ireland, Paris or Frankfurt to maintain access the to the single market and EU passporting. You can say that exports of services are not viable as the sole economic activity for the UK going forward without supporting brexit (I would prefer a broader based economy). Leave campaigners have themselves estimated the impact of leaving the single market as resulting in 7-8 million job losses. That simply isn’t a price worth paying for a notional benefit rejected by the majority of economists.

        I perhaps would have some sympathy if the UK was really diminished in sovereignty by its membership of the EU. In truth, the EU multiplies the EU’s influence in global politics, as established in an independent report from Chatham House.

        So while there may have been a viable argument for the UK to reject EU membership in 1975, there is no persuasive argument that stands up in 2016. This is particularly so when leave supporting economists like Minford believe brexit will lead to the annihilation of manufacturing and the suspension of environmental, social, and other regulatory protections even leavers hold dear.

        It’s time to admit brexit was ill advised on any measure, and for those who voted for it to realise they need to get over it…

  2. Thanks for your detailed responses.

    Here’s just one example from the news this week of the EU overriding sovereignty. I understand why the EC is doing this, but I’d like to suggest this could work in the UK’s favor.
    http://www.telegraph.co.uk/technology/2016/08/30/apple-ordered-to-pay-11bn-after-european-union-tax-investigation/

    I found this discussion to be very helpful:
    http://www.bloomberg.com/news/audio/2016-08-30/bloomberg-law-apple-s-14-5-billion-irish-tax-bill-audio

    • Thank you. You are correct to point to the European state aid regime, administered alongside competition/anti-trust law by the commission as an instance of pooled sovereignty in the EU. However, the Apple case is illustrative of why having that regime is socially beneficial to member states generally.

      The case really has little to do with tax other than Ireland having found a convenient way to subsidise foreign direct investment is through its tax code. All good when that competition is based on Ireland’s low rate of corporate taxation. Within the EU, countries are permitted to adopt higher and lower rates of taxation. What was problematic in this case was that the Irish taxation authority had engaged in the issuance of bespoke tax rulings applicable to a single company that allowed the creation of an artificial structure to eliminate taxes that would have otherwise have been paid in EU member states.

      It was nakedly a subsidy masquerading as a tax ruling and as such was ruled a subsidy by the EU commission. I’m all for the ruling against Apple in this case because in this case the company was taking money that would otherwise be paid in taxes (thus increasing the need for personal taxation to make up the lost corporate tax revenue) for itself. The conduct seems both legally and morally wrong. You can find more details here: https://waitingfortax.com/2016/08/31/other-peoples-money-the-apple-story/

      As to whether this could work in the UK’s favour: (1) HMRC (the UK tax authority) is opposed to these kind of structures and almost always rules against them; (2) it seems unlikely that the UK could create a framework that would duplicate the kind of tax avoidance seen in the apple case given it is purportedly (though it seems less likely by the hour at the moment) leaving the EU; (3) the UK public is highly opposed to tax avoidance structures (hence (1) particularly in recent years).

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