Sean Rickard - Independent Economic Analysis

Giuseppe Tomasi di Lampedusa famous, if misquoted dictum that ‘Everything must change so that everything can stay the same’ may be paradoxical nonsense but it neatly sums up several position papers published by the government ahead of the next round of Brexit negotiations.   The government’s position is that we will leave the single market but in its place negotiate a ‘deep and special relationship’ guaranteeing businesses frictionless access to the single market.   We will leave the EU’s customs union but replace it with an agreement that replicates the present arrangements regarding tariff free trade.   Relationships with the EU will no longer be subject to the jurisdiction of the European Court of Justice but we will accept the adjudication of another supranational court that takes its opinions from the ECJ.


The government, and in particular Mrs May, are on the horns of a dilemma.   In my opinion government minsters – even the Brexit zealots – were woefully ignorant of the actual benefits of EU membership and ill-informed as to the complexities involved in leaving.   Government ministers, having assured the British people that they could have their ‘cake and eat it,’ are coming to realise that the nation is facing a painful trade-off between economic prosperity or an anachronistic sovereignty.   Their dilemma is when to level with the country.   The government’s pretence that all will be well as it is fully prepared and in control of the negotiations is unlikely to survive beyond the next two or three rounds of negotiations.   By mid-2018 it will be clear to the government that only an election – which the Tories are likely to lose – or another referendum – which will further damage their electoral prospects – can cut the Gordian knot of their own making.   Labour’s position – or more correctly Jeremy Corbyn’s – maybe just as nonsensical but politics is a rough trade.


Theresa May’s ludicrous claim in her Lancaster House speech at the start of the year that ‘no deal is better than a bad deal’ has been comprehensively abandoned – the economic consequences of such an outcome having finally registered with all members of the government who retain a measure of common sense.   The reality is that the government now has only two practically choices for April 2019, either: full EEA participation in the single market –  a la Norway – plus membership of the customs union; or the abandonment of Brexit.   Of course the government would admit to no such choice but a careful reading of its position papers reveals a striking number of references to the EEA and its ECJ dominated court that enforces the agreement.   Both choices are politically toxic for the Tories.   The former due to its requirement to accept the free movement of labour, effective ECJ jurisdiction and continued financial contributions.   The latter due to its revelation of the damage Tory infighting has wrought on the country.   A transitional agreement embracing membership of the EEA and customs union may serve to prolong the deception but ultimately the Tories will have to face the consequences of their irrational and divisive opposition to membership of the EU.  


As the ‘shock’ of the referendum fades it is clear that post the election the population has rejected the zealots ‘hard’ Brexit and at last the voice of business is emerging.   Economic reality is replacing xenophobia and business is pressing hard for the status quo.   If, as the zealots are fond of saying, Britain seeks merely a FTA free trade agreement, it would be logical to join the European Free Trade Association.    But EFTA membership does nothing for services nor for the non-tariff barriers that now dominate international trade.   That is why, three of the four EFTA members are also members of the EEA.   According to the Centre for European Reform an unpublished analysis by the Treasury and a published study by the NIESR both concluded that the economic benefits of future FTAs would be significantly less than the economic cost of leaving the single market and customs union.   According to the NIESR the UK would suffer a long term reduction in total trade of between 22 and 30 per cent depending on whether the UK concludes an FTA with the EU or not.   The estimated increases in trade from concluding FTAs with all of the BRIICS, are much smaller at just over 2 per cent while concluding FTAs with all the Anglo-American countries (USA, Canada, Australia and New Zealand) is associated with a long-term increase in total UK trade of less than 3 per cent.   This stark difference reflects the benefits to a modern, service orientated economy of the reduction in non-tariff barriers afforded by membership of the single market.  


Faced with this economic reality and the arithmetic of the post-election Parliament, the government will, I believe, find it impossible to secure parliamentary support for anything other than the two options outlined above.   But any attempt by government to embrace one of these solutions will be disastrous for the Tory party.   The zealots have never been driven by economic reality and hence, the rupture of the Tory party which Cameron so incompetently and recklessly sought to avoid is now an even greater threat.    Thus, during 2018 the Tories are very likely to come to the view that there is a strong case for another referendum.   By which time it will be clear to all but the zealots that unless Britain is prepared to accept EU laws that she has no role in formulating she must leave the single market and the customs union at enormous economic cost.   Parliament will not vote for economic chaos and rightly so.   The election demonstrated that the population does not want such an outcome.   Ironically, our leaders will be forced to resort to another referendum to escape the potential damage triggered by the first.   No true democratic could object to a second referendum in such a situation, the more so as this time people will have a much greater understanding of the consequence of their vote.  


Q U E L L E  E S T  L A  D I F F E R E N C E ?

27th August 2017


Sean Rickard Ltd