Opinion

Hugo Dixon

Brexit process would be messy

By Hugo Dixon
October 21, 2013

Imagine the British people vote to quit the European Union in the referendum David Cameron has promised to hold by 2017. What happens next? What, if any, special relationship would the UK seek to retain with the EU? Would it be able to negotiate what it wanted? And how would the economic damage unleashed by years of uncertainty be kept to the minimum?

These questions aren’t just troubling British businesses, the vast majority of which want to stay in the EU so they can enjoy full access to its single market. They are also worrying some eurosceptics who are concerned that, even if it would be good for Britain to quit the EU, the process of getting from A to B could be messy.

Hence, the launch of a 100,000 euros prize by the Institute for Economic Affairs, a UK eurosceptic think-tank. It will announce later this month the shortlist for the best essay to answer the question of what measures are needed to ensure a free and prosperous economy after an “out” vote in a putative referendum.

But don’t get your hopes up. The last time British eurosceptics launched a high-profile essay prize, the Wolfson Prize, it was to work out the best way for a country such as Greece to quit the euro. The winner, Roger Bootle, who is incidentally one of the judges of the IEA prize, came up with a not terribly realistic scheme based on maintaining secrecy until the last minute.

The main reason to worry that leaving the EU could be messy is because it won’t be clear after an “out” vote what relationship the British people will want to keep with their former partners. In particular, it won’t be obvious whether the electorate wants to stay in the EU’s single market or to leave that as well as the European political framework.

Losing full access to the single market would be economically damaging. After all, nearly half of the UK’s trade is with the EU. Many companies invest in Britain not just because of its flexible labour markets and English language, but also to use it as the spring-board to sell across the whole EU. That’s why big investors such as Goldman Sachs and Nissan have been arguing that Britain shouldn’t quit.

So why not retain access to the single market while quitting the EU? That may be possible. After all, Norway has such an arrangement by virtue of its membership of the European Economic Area. The snag is that, in return for access, Oslo has to follow the single market’s product and social regulations – and it doesn’t even get to vote on them. Not surprisingly, many eurosceptics want to go the whole hog and pull out of the single market too.

Unless Britain had a multiple-choice referendum or two referendums, the people would not have made clear which of these two radically different options they preferred. How then would the UK government decide which to plump for?

Answering this question would be made even more complicated given that Cameron, if he was still prime minister, would probably have urged the people to stay in the EU. In such a scenario, he would be under huge pressure to resign. His successor would probably be somebody who had campaigned to quit – perhaps telling the electorate that it would be easy to retain access to the single market without following its rules.

Lots of British eurosceptics believe this is possible. The rest of the EU, they reason, enjoys a big current account surplus with Britain – exporting 267 billion pounds of goods and services to it last year while importing just 222 billion pounds. As a result, the EU will be desperate to do business with Britain and will agree to a relationship much more attractive than what Norway has to put up with.

If Britain’s post-referendum prime minister bought this line, he or she could be in for a shock. Of course, the EU wouldn’t want a trade war. But it would be in a far better position to withstand one than Britain because its economy is six times as big. The EU’s exports to the UK may be large, but they amount to only 2.5 percent of its GDP. Britain’s exports to the EU amount to 14 percent of its GDP. If London tried to play hardball, it would probably be sent packing.

Under the Lisbon Treaty, a country can notify the EU of its intention to quit. It ceases to be a member two years later. The two sides are then supposed to negotiate an exit deal. But there’s no guarantee that an agreement will be reached. If that happened to Britain, the default position would be that it would quit both the single market and the EU.

An “out” vote in a referendum would therefore probably trigger a political crisis and a long period of economic uncertainty. In the intervening period, many businesses based in Britain would stop investing. That would be bad for the economy. If the divorce negotiations got particularly acrimonious, financial investors might even decide to stop buying government bonds – leading to a sterling crisis.

Polling data suggest that the British people would narrowly vote to quit the EU if there was a referendum tomorrow. Hopefully, the prospect that the divorce would be really messy will concentrate their minds if and when it actually comes to a vote.

 

Comments
4 comments so far | RSS Comments RSS

What’s wrong with the same deal Canada has just signed up to? Why should Canada have a better deal when it comes to trading with Europe than the UK has? Why should North Korea have a better deal? Our biggest industries are services based & they arent included in the Single market despite Blair giving a vast chunk of our rebate away to finally secure it. At least we will be impose tariffs against the EU if they continue to block our services sector & then they wont be long coming to the negotiating table. Imagine the excitement in Brussels if they are able to secure a genuine free trade agreement with the UK when they were positively ecstatic securing one with Canada!

Posted by thorpy63 | Report as abusive
 

RSS cannot have read the text of the agreement with Canada. Nor have I because it has not been finalised yet. When the text is available, I’m confident that it will be clear that it does not admit Cananda to the Single Market or to the EU customs union (which the UK would need to stay in if it wanted to continue to export to the EU products made here with a high proportion of imported parts). He cannot have read the text of the agreement with “North Korea” either, because there is no such agreement. There is an agreement with South Korea,which I have read but RSS obviously has not. Whilst it does have provisions designed to mitigate non tariff barriers as well as gradually to reduce tariffs on most (but not all) products, it falls far short of providing South Korean with full access to the Single Market. Nor, of course, does it admit Korea to the EU’s customs Union.

Posted by caution2017 | Report as abusive
 

This is a very emotively worded article that simply adds more heat to the discussion and no light.

The IEA is not explicitly eurosceptic. It is pro free-market; euroscepticism may come across because the EU is a statist organisation.

I normally enjoy Hugo Dickson’s articles and this is a subject I crave thoughtful analysis and ideas about but phrases like “EU will be desperate to do business with Britain” are just silly.

It is unlikely that either the EU or the UK will erect traditional trade barriers in the event of Brexit because it is not really in the interests of anyone to do so.

I have worked with manufactures with supply chains stretching all over the world so even if we did end up with customs and import / export bureaucracy again exactly how much difference will it make? – I am craving answers to these sorts of questions and this kind of bunk with Nick Clegg’s spivvy assertion that Brexit is ‘economic suicide’ is just unhelpful and worthless.

We all know uncertainty is bad but you seem to be implying we should never take the risk, which is somewhat scornful towards the idea of democracy.

Posted by Alisdair | Report as abusive
 

Once the UK would be out of the EU, it would also become a competitor. Norway is a small country, and has no industries that compete with European companies, that is why it has such advantageous conditions. However, the UK has industries and services, would be very much coveted at the other side of the channel. I also doubt that the UK alone would get advantageous trade conditions with other countries and commercial blocks that the EU would get, so many of those companies would at the end for one reason or the other would end leaving the country. I think France and Germany will make “the wave” the very same moment UK would vote for the exit.

Posted by Jaksi | Report as abusive
 

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