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8 December 2017

The Brexiteers are facing their biggest collision with reality yet

The myth that the UK can retain the economic benefits of the EU while leaving will be mercilessly exposed in Phase Two. 

By George Eaton

In 2016, the UK voted to “take back control”. In 2017, it was the EU that did. Seventeen months after the Brexit referendum and eight months after Article 50 was triggered, the UK has finally been granted permission by Brussels to begin trade talks.

This agreement was secured at a far higher price than the Brexiteers promised. At every stage, they have been forced to defer to reality. Their initial boast that the UK held the “best cards” has been mercilessly exposed. 

Britain, Leave politicians promised, would simultaneously negotiate its divorce from the EU and a new relationship. But the EU insisted that the first precede the second. After predicting a summer-long row, Brexit Secretary David Davis capitulated on the first day of the talks. Since then, the Brexiteers have merely delayed the inevitable. 

In September, Davis described reports of a £40bn divorce bill as “made up”, while Boris Johnson declared that the EU could “go whistle”. Today, No.10. confirmed that the UK would pay a sum between £35bn and £39bn. A payment that Brexiteers used to claim would be withheld until a generous trade deal was in sight was freely offered. The initial threat to end security and intelligence cooperation, which poisoned the process, was withdrawn long ago. And the much-maligned European Court of Justice will now have oversight of EU citizens’ rights for eight years from 2019. 

Davis and Liam Fox repeatedly claimed that Britain could negotiate a new trade deal within the two year Article 50 process. But as reality again intruded, the UK was forced to propose a two year transitional period (from 29 March 2019 onwards) during which, to coin a phrase, nothing will change. Though Britain will formally leave the EU (and the possibility of halting Brexit has been reduced today), it will continue to abide by the rules of the single market and the customs union. 

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The Brexiteers’ defining aim is to eventually break free. Outside of the world’s largest single market, they promise, the UK will thrive by signing new trade deals and dispensing of burdensome regulations. But like Phase One, Phase Two will expose such delusions. 

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As chief Brexit negotiator, Michel Barnier confirmed today, if the UK insists on leaving not merely the EU but its economic institutions, there is only one deal on offer: “a free trade agreement on the Canadian model”. As economists have warned, such a deal, which only covers goods, not services, would be disastrous for the UK economy (the latter accounting for 80 per cent of British GDP) –  an epic act of protectionism. Fox has boasted that a new trade agreement with the EU will be “one of the easiest in human history”. If so, it could also be one of the most costly. 

Outside of the customs union, the UK would be free to sign trade deals with the US, India, China ​and others. But as the former cabinet secretary Gus O’Donnell recently told me, the potential gains “are tiny compared to the potential losses outside of the EU” (other European countries account for 44 per cent of British exports). Even before the UK has left the EU, it has gone from being the fastest-growing economy in the G7 to being the slowest. For the first time in modern history, GDP growth is not forecast to exceed 2 per cent over the next five years. But much worse could follow. 

Meanwhile, the “hard Brexit” model still offers no workable solution to the Irish border dilemma. Any regulatory divergence between the UK and the Republic will necessitate a hard border between either North and South or West and East. Rather than answering the the Irish Question, today’s agreement has merely deferred it. 

There is an alternative route open to the UK. It could leave the EU and its political institutions but, like Norway, remain a member of the single market. This would leave Britain in the enfeebled position of being a rule-taker, rather than a rule-maker, but it would avoid the economic self-harm of a “hard Brexit”. To the Brexiteers, however, such a proposal (along with customs union membership) is an unacceptable infringement of sovereignty. Among other things, the UK would be denied the ability to fully control free movement (the greatest cause of the Brexit vote). As the hardest Brexiteers have signalled this week, even modest “regulatory alignment” between the UK and the EU (to solve the Irish border dilemma) is excessive (a divide that Theresa May will now finally have to resolve).  

Yet such an approach comes at a price. To date, the Brexiteers have pretended that the public can have their cake and eat it – that there is no significant downside to leaving. The UK will replicate the economic benefits of membership and nullify the costs. Such fantasies have already been partly exposed. The OBR and IFS have warned that, far from gifting Britain £350m a week for the NHS, Brexit will impose a net fiscal cost of at least £300m a week. But as the trade talks begin, Leavers will find it ever harder to ignore an ineluctable truth: they are putting “sovereignty” before prosperity. In Phase Two, then, they face their biggest collision with reality yet.