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Brexit Scenarios for June 24

Author(s): Jacob Funk Kirkegaard

From the Peterson Institute:

SCENARIO 1: THE UK VOTES TO STAY IN THE EU

If UK voters decide to remain in the EU, the deal forged by Prime Minister David Cameron will take effect quickly. But if most Conservative voters back the losing Brexit side, which seems probable, Cameron is hardly likely to be viewed as a savior inside his party. The long-festering political problem of "Europe" among Conservatives will thus not go away. In Quebec in the 1990s, the secessionist cause faded away after the public narrowly rejected it, but that is unlikely to be the case in Britain. In fact, euro-skepticism could become even more rabid, forcing Cameron to adopt a confrontational stance towards Brussels in order to avoid a challenge to his party leadership and premiership. In other words, a defeat for Brexit is not likely to make the UK government more friendly towards the EU.

Boris Johnson, the mayor of London and proponent of the Brexit, is thus increasingly likely to seek the job of prime minister even before the next UK election. His recent descent into personalized and quasi-racist attacks on President Barack Obama, however, highlights the risks of an increasingly bitter campaign also to his own personal ambitions. Even if the plainly nativist political platform alluded to in his comments about Obama's visit is likely appealing to the (rapidly) aging membership of the Conservative Party and hence might see him win the party leadership and premiership, it would—even against the heavy odds of facing an essentially unelectable Labour leader Jeremy Corbyn—almost certainly see him lose the Tory majority in a highly fractured Parliament after the next election.

SCENARIO 2: UK VOTES TO LEAVE THE EU

Cameron's stated intention to launch a UK exit procedure under the EU Treaty's Article 50 was aimed to undercut any pro-Brexit fantasy that a rejection of Europe could be reversed in a subsequent referendum. Yet a vote to leave the EU would not necessarily preclude more discussions with Brussels before any actual legally binding steps were taken.

A "time out" could take a very long time, however. The history of previous referenda suggests that the heterogeneous collection of rejectionists rarely agrees on what to do next. In Britain, for example, some favor Brexit to reduce immigration to the UK, some simply want to "control their own destiny," and some want to disavow a European super state. Pulled together, they will have to decide whether the country will be "Global Britain" or "Little England." Should a UK outside the EU crack down on immigration from other countries in the EU and/or from countries outside the EU? Should the UK outside the EU try to protect its domestic industry and agriculture, or strike new trade deals with the rest of the world (including the EU)? The British political system will take a while to work through these questions. In the wake of the offensive and atavistic comments about President Obama's part-Kenyan heritage and his alleged ancestral hatred of the British Empire, a Conservative government is not likely to be open about trade or immigration. This would greatly amplify any post-Brexit economic and political downside for the UK.

At a practical level it is also difficult to see the allegedly noxious set of growth-and-job-destroying EU regulations that Brexit would unshackle Britain from. The UK already has among the lowest levels ofproduct market regulations in the OECD(link is external) comparable to levels in the United States. But many of the regulatory practices that surely are problematic in the UK—say land use or licensing and permitting—are domestic in origin, not EU practices. After all, NIMBYism is not something Brussels imposed on Britain.

So unless the Tories post-Brexit intend to turn the regulatory clock back to the Victorian age, few economic gains seem to be available from Brexit-related deregulation, and it is an open question if there is political support for such an approach. And certainly the prospects of such a Victorian post-Brexit UK under a Conservative government should ensure a significant turnout of otherwise relatively skeptical Labour voters for the Remain campaign on June 23.

Meanwhile, the Scottish nationalists in the SNP have already let it be known that they would likely seek a new referendum on Scottish independence if—as appears likely in a Brexit scenario—Scotland were to vote to stay in the EU only to be outnumbered by an English no vote. And as the UK and the EU—being World Trade Organization (WTO) members—could not offer a special deal to Ireland and Northern Ireland, the Green Isle would again be separated by an actual border, including tariffs and likely physical border controls. It does not appear impossible that these prospects could lead to a movement in Northern Ireland to secede from the UK and unify with the rest of Ireland inside the EU. Certainly a vote to leave the EU spearheaded by English voters would unleash very serious centrifugal political forces inside the UK itself, greatly complicating any domestic political process of deciding what the next steps should be. And it would be a mistake to assume that centrifugal political forces unleashed by Brexit would negatively affect only the EU. The UK itself may well not survive Brexit in the medium term.

This will matter greatly, as the rest of the EU—just as the euro area could afford to wait longer for a solution than Greece during the euro crisis—can afford to wait much longer than can the UK for a solution to be found. This is easy to grasp when looking at the latest available detailed Eurostat balance of payments data on goods and services transactions from 2013.1 They show that the EU runs a sizable trade and current account surplus with the UK. But the EU hardly depends on the UK as a market for its exports—only 7 percent of goods and 10 percent of services from the EU are exported to the UK. For the UK, 50 percent of its goods and 35 percent of its services are exported to the other countries in the EU. Yes, Brexit would economically hurt both the EU and UK, but surely the latter far more.

In the face of an exit, the UK should expect the EU to bargain hard. Almost every EU member has a nationalist, anti-EU party in parliament. These parties (together with Vladimir Putin) would love to undo European integration. The incentive for the EU to impose a harsh deal on the UK is obvious. Nor would they have any incentive to speed the negotiations along.

An obvious casualty would be the City of London and its status as the principal financial center for Europe and the euro currency. The EU and euro area governments would actively seek to "repatriate" as many euro-related financial activities (and jobs) as possible from London. In a short time, they would succeed.

The EU would not likely accept anything other than the core components of the “Norway/Switzerland model” for a close economic relationship with the UK. Such an arrangement would require that the UK contribute to the relevant EU program and agency budgets that it wishes to participate in, such as the Internal Market. Such participation is generally guided by a proportionality factor related to the size of the GDP of the non-EU member to the size of the entire European Economic Area (EEA). The UK would lose its EU budget rebate and be compelled to contribute to EU activities on a scale comparable to regular EU members. UK contributions to the EU budget would depend on the of activities it would join, but its contributions to the EU budget would continue to be sizable, with no political influence gained in return.

In principle, Norway and Switzerland must comply with the EU’s internal freedom of movement rules. They cannot impose unilateral restrictions on EU worker migration. Following a referendum in Switzerland in February 2014, which compelled the Swiss government to restrict EU migration into Switzerland from February 2017, economic and political relations between the EU and Switzerland have cooled. The EU has rejected the  and restricting freedom of movement for EU residents, and put Switzerland on notice that unless it changes its position on migration, the broader EU-Switzerland relationship is at risk. In more practical terms, unless Swiss voters change their minds in a new referendum before February 2017, there will be serious economic consequences for the country. Perhaps sensing such risks, the Swiss government in March 2016 expanded free movement of workers(link is external) from the EU to Switzerland by extending such movement to Croatia. Another Swiss referendum—on economic relations with the EU, including migration—may be in the offing later in 2016.

The EU has stood firm against Swiss restrictions on EU migration. A post-Brexit UK seeking to restrict migration of EU residents would lose access to the EU Internal Market, along with any close economic relationship with the EU. Britain would have to choose between keeping the free movement of workers or abandoning economic ties with the EU.

Given the prominence of migration in the Brexit debate, it seems inconceivable that any Conservative government could agree to simply maintain the status quo on this issue, and the prospects for any meaningful economic agreement and certainly Internal Market access hence look very dim.

Following an activation of Article 50, the UK would hence probably fall out of the EU after two years of futile negotiations, and instead be left to trade with the rest of the EU on similar terms as all other non-EU WTO members. The economic consequences would likely be hugely disruptive.

In the end, when Boris Johnson makes the essentially Trumpian argument that he could quickly negotiate a “new and better deal for Britain” with the EU, he has even less credibility than the GOP frontrunner.

NOTE

1. Data missing for exports of goods and services to the UK from Spain, Ireland, and the Netherlands, so these figures represent only the share of the EU-24 goods and services exports going to the UK for which detailed data are available. Standard gravity considerations would suggest that Irish and Dutch export shares to the UK might be higher than the rest of the EU, implying that these figures might be skewed downwards. This will not, however, change the overall conclusion.


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