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Abu Dhabi, UAEFriday 14 December 2018

Britain's messy divorce from Europe inches closer to reality

With the exit date of March 2019 approaching, officials are under pressure to conclude a deal, writes Alan Philps

British Prime Minister Theresa May is in China this week. Chris Ratcliffe / EPA
British Prime Minister Theresa May is in China this week. Chris Ratcliffe / EPA

After a year and a half of shadow boxing, it is crunch time for the British government to decide what kind of future it wants outside the European Union, its home for the past 45 years.

The start of the new phase was sounded by a leak of a confidential government report on the impact of Brexit – leaving the bloc – which was supposed to be shown to Cabinet ministers this week. The report is not comfortable reading for those members of the ruling Conservative party who insist that life will be better outside the EU, once London has “regained control” of its destiny.

The report looks at three scenarios for the future relationship, but all of them mean a poorer Britain. There will be an eight per cent reduction in gross domestic product over 15 years under the “no-deal option”, if Britain leaves the bloc without any agreement.

Under a comprehensive free-trade deal such as the EU has worked out with Canada, the shortfall would be five per cent. The softest option, similar to that enjoyed by Norway, which is a member of the single market but not of the bloc, growth would be down two per cent. But that option has been ruled out by the Prime Minister, Theresa May.

Most significantly, the outcome preferred by the British government – a pick-and-mix option of a free trade agreement with the addition of access for the British services sector, which is more important for Britain than the trade in physical goods, is not discussed by the analysis. That may be because the EU has consistently rejected any such bespoke deal. The analysis says that virtually every economic sector and region of the country would suffer under Brexit.

Ministers who support Brexit dismissed the leak as a ploy to strengthen the hand of those who want the softest possible Brexit, such as the Chancellor, Philip Hammond, who has said he wants only “very modest changes” to Britain’s relationship with the EU. Others pointed to the fact that previous predictions have been excessively pessimistic about the impact of Brexit.

The leak will inject some urgency into Mrs May’s decision-making process. She has refused to state what she wants, fearing that whatever she opts for may fatally crystallise the divisions in her party. This Hamlet-like indecision has prompted talk of plots to remove her for lack of leadership, and made Britain a laughing stock in the EU. The German Chancellor, Angela Merkel, apparently had journalists in stitches as she recounted how she was trapped in a circular conversation with the British prime minister. When asked what she wanted, Mrs May would only counter: “Make me an offer”.

Mrs May is in an unenviable position: her party is split and she remains in power only because no other potential leader wants to hold the helm as Britain steers a course to an unknown destination which, at least in the short term, could be a unique act of self-harm. She is there to roll with the punches.

With the exit date of March 2019 approaching, officials are under pressure from business interests to bring the Brexiteers down to earth. So far the two sides have been talking past each other: the Brexiteers are full of faith in Britain going it alone towards a buccaneering future, while the Remain camp, which wants to stay close to Britain’s main market, argues with statistics and spreadsheets.

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Liam Fox, a leading Brexiteer who serves as International Trade Secretary, has injected a dose of reality into the debate, telling MPs they will have to “live with disappointment”. The disappointment he was referring to is the proposed “transition period” up to the end of 2020 during which Britain will continue to follow all EU rules, but have no vote on them.

Those who yearn for a clean break with the European Union worry that this transition period could be endlessly extended, leaving Britain in a limbo where it will be a “vassal state” of Europe but without any leverage to conclude a final agreement.

But business and banking interests are demanding this transition period, given the limited time for negotiating an end state before March 2019.

Perhaps the most telling element of the government analysis was the economists’ puncturing of optimistic assessments of the benefit of a UK-US trade deal. The government had cited forecasts that trade deals with the US and other counties would raise GDP by 40 per cent. The latest analyst puts the contribution of a US trade deal to British growth at a measly 0.2 per cent.

Just as Britain’s limited range of options has become clear, the eurozone – the 19 countries at the core of the EU that use the single currency – are emerging from years of low growth. Eurozone growth reached the highest level in a decade, at 2.5 per cent in 2017. Only two years ago, the Brexiteers were predicting that the eurozone was about to collapse.

Ultimately, it is unlikely that statistics will significantly move the British public which voted by a small margin in favour of Brexit in 2016. Those that argue that the voters did not know what they were voting for may be right, but that does not mean the anti-Brexit camp is about to overturn the referendum result. A more realistic goal is trying to soften the effect.

It is clear that the referendum was not about GDP – Britain has been doing rather well on that metric. It was a chance for those who felt abandoned by the globally-minded elite to give the establishment a kick in the teeth. The conviction that Britain needed to regain control of its borders was more important than figures compiled by economists.

So despite the unpalatable menu of options on offer, it looks like a messy divorce will go ahead, even if it satisfies no one. And it may be that the decades-long story of the Conservative Party tearing itself apart over Europe will continue.