Will it really be a “hard” Brexit?

Will it really be a “hard” Brexit?

May 8, 2018

Maria Valentina Bresciani

A large part of the English MPs would like to leave the door open to membership of the Customs Union. Is this implying that Brexit can be reversed?

 

A large proportion of the English Parliament members would like to leave the door open to membership of the Customs Union. Is this implying that Brexit can be stopped and reversed? After completion of the first phase of the negotiations, the focus is now entirely on the draft Withdrawal Agreement [1], which sets out the legal arrangements for the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union. It implies a ‘divorce’ settlement and a transitional arrangement and is now under discussion before transmission to the UK authorities for negotiation. The successful completion of this phase will help entry into to the second phase of negotiations that will define the UK-EU’s long-term relationships.

Probably not. It is difficult, then, given the current state of affairs, to envisage the hypothesis that the withdrawal process will be reversed easily. Of course, we cannot rule out the possibility of tail events: for example, political defections in the Conservative Party against the current Prime Minister and, therefore, new elections, or a no-deal on the Northern Ireland border question. However, skirmishes and lengthy negotiations also pose risks. According to a recent Bank of England [2] survey, uncertainty surrounding the possible form of future trade relations caused lower growth in productive investments at current prices between 3 and 4% in the first part of 2017; if, however, the situation should unlock, an acceleration of this expenditure item cannot be excluded.

 
Chart 1. Visual representation of the trade-off for some relationships between the EU and non-EU countries. The vertices of the largest triangle correspond to the situation that the UK currently is in as a member state of the EU.
 
Will it really be a “hard” Brexit?
Source: National Institute of Economic and Social reserch (NIESR).
 
 

What will the possible outcomes be for the future relationship between the European Union and the United Kingdom? A recent study presented by the National Institute of Economic and Social Research [3], gives some insights on the possible future trade agreement and the concessions they require by the UK government: Figure 1 gives a visual representation of the existing trade arrangements that the European Union has already established with Norway, Switzerland and Canada and the trade-off implicit in three key areas (level of market access, budgetary contribution and restrictions on labour movement). The largest triangle is the UK’s current situation as a member State of the EU. Ending the freedom of movement of persons and the jurisdiction of the Court of Justice would place the UK in a position similar to that of Canada, which has a trade agreement with the EU (CETA) less extensive than Switzerland and is essentially restricted to goods and does not include a budgetary contribution. In order to maintain a greater access to the single market than Switzerland, which faces a very limited market access in the service sector, the UK would have to continue to contribute at least partially to the EU budget [4] and accept a certain degree of freedom of movement of persons (similar to Norway, that opted to join the European Economic Area (EEA) to have close to full access to the Single Market, both in goods and services).

While the United Kingdom will decide its Brexit policy in terms of what concessions it will be ready to make to avoid important repercussions on its good and service flows to the European market (around 44% of total exports), common sense suggests that a possible outcome between EU and UK could  be midway between the models of Norway and Switzerland (Fig.1) but, of course, this will have some costs in terms of concessions.

 
[1] http://www.consilium.europa.eu/it/policies/eu-uk-after-referendum/
[2] Inflation report. Bank of England, February 2018.
[3] National Institute Economic Review, N° 243 February 2018.
[4] In 2017 the Uk contributes about 0.5 per cent of Gross National Income  to the EU budget, net of what it receives.