Open Europe Blog

We have today published the full report assessing the implications of our EU ‘wargame’ which simulated the negotiating dynamic under two scenarios: first, a UK-EU renegotiation from within and, second, under ‘Brexit’. As we’ve stressed before, the fact is that unless the UK wants to simply fall back on WTO trading rules and unilateral free trade, renegotiation and withdrawal will both require a negotiation with other EU states and the EU institutions.

The only formal way to the leave the EU is via the so-called “Article 50” exit clause of the EU Treaties, which stipulates a two-year timeframe within which to potentially conclude a continuity deal. In our simulation, after their initial hostility, all other member states recognised the need to strike a new trade deal with the UK with economic incentives trumping political rhetoric. Britain is unlikely to face the ‘worst case scenario’ of having to fall back on World Trade Organisation rules.

However, as our simulation showed, the initial new deal would likely fail to replicate the full access to the EU single market currently offered by full membership:

  • A Norway-style deal – effectively single market membership but with no formal political influence – is likely to be rejected by EU partners and is in any case a bad deal for the UK as it amounts to “regulation without representation”.
  • While a reciprocal trade agreement for goods, where the UK has a sizeable trade deficit of £56.2 billion (2012) with the EU, would be relatively easy to strike, access to the EU’s services market – where the UK has a trade surplus of £11.8 billion (2012) – will be far more difficult.
  • Access for UK financial services would be a particular concern since a third of the UK’s trade surplus in financial and insurance services in 2012 came from trade with other EU member states – of the total £46.3 billion UK financial and insurance services trade surplus, £15.2 billion was with the EU and £14.5 billion with the US. Perhaps over time, further bilateral deals on market access could rectify this but the political resistance from France and some others could be high.

While Article 50 of the EU treaties has the benefit of definitely triggering negotiations – which isn’t guaranteed under Cameron’s renegotiation plan – it comes with several drawbacks:

  • Article 50 is a one way street – once it is triggered, and even if the deal available at the end of the process proves unsatisfactory to the UK, there is no way back into the EU except with the unanimous consent of all other member states.
  • It is likely to put the UK on the back foot in any negotiation. The remaining EU member states would be in charge of the timetable and the European Parliament would have a veto over any new agreement. Therefore, while having to fall back on WTO rules entirely is unlikely, it would remain a possibility.
  • As the UK will not take part in the final qualified majority vote on whether to accept the new deal, protectionist-minded member states could have greater influence on the degree of market access the UK could secure post-exit – particularly on services (see graph below).

Compared to renegotiation from within, Article 50 therefore cedes more control than what is often thought.

Ultimately, though, while a high transaction cost is undeniable, the big question is if there is a point – and if so when – at which the high one-off cost of Brexit would be outweighed by the long-term benefits of more economic and political independence over areas such as financial regulation, agricultural policy or criminal justice, particularly if the eurozone comes to dominate the wider EU and the necessary reform proves unattainable.

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