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A no-deal exit is likely because the prize on offer is so small

Because neither the UK or the EU have much to gain from a concession, a deal is unlikely.

By Stephen Bush

The chances of a no-deal Brexit are high, and one reason is the relatively small size of the prize on offer. The British government’s preferred Brexit end state means they are seeking and offering a relatively poor standard of market access. Neither the UK government or the governments of the European Union are incentivised to move: in the end, the economic cost of a Canada-style negotiated relationship with the EU and the economic cost of a no-deal exit (or as the British government has attempted to rebrand it, an “Australia-style” relationship) are near equivalent.

The big difference is that you pay more of the economic costs of a no-deal Brexit upfront. The theory among its advocates is that you are better off, from a political perspective, doing that, because then you can take the pain and reap the rewards in the right part of the electoral process. It doesn’t matter much if you lose hundreds of councillors in the local elections of 2021 and 2022, if you are in a position to win the 2024 election.

The added complication is the coronavirus recession. The pattern across the world is pretty clear – regardless of whether or not the head of government has “officially” locked down a country, citizens have reduced their social contacts. That has caused recession pretty much everywhere, though the knock-on effects are particularly acute in ageing democracies like the United Kingdom, where the economic activity of the over-50s, who are more at risk from Covid-19, is more important to economic performance.

The big question is whether the governments of the United Kingdom and the European Union think the economic shock caused by coronavirus has reduced or increased the political tariff from a no-deal economic shock, and whether that creates an incentive to move positions. If not, then a no-deal exit looks likely, whether there is an extension or not.

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