Stephen Booth is Director of Policy and Research at Open Europe.
Party conference season is over, and we are entering the final phase of the Article 50 Brexit negotiations with the UK and the EU still at an impasse over the formulation of the so-called Northern Ireland “backstop”. This week, the Prime Minister will face EU leaders at the European Council, and the risk is that the government rushes into a false compromise in Brussels that could well fall apart in Westminster. She must hold her nerve and remember her refrain that “No Deal is better than a bad deal”.
Both during the referendum campaign in 2016, and in the two years since then, we have seen wildly optimistic predictions by some about the economic benefits of leaving the EU. On the other side, we have also heard absurdly pessimistic predictions.
The most powerful arguments for and against EU membership have always largely been political, not economic. New research by Open Europe, to be published tomorrow, suggests that the trade effects on our economy of leaving without a preferential trade deal would be limited. The UK would continue to grow, but No Deal would have an effect equivalent to an average annual drag of -0.17 per cent on real GDP growth over the 13 years up to 2030.
We do not assess the short-term implications of a No Deal Brexit, which are difficult to predict. We estimate the impact of moving to a steady-state relationship whereby UK-EU trade is subject to tariffs, a customs border, and new non-tariff barriers. Our assumption is that aircraft would continue to fly to and from Europe, and that the EU would treat the UK like the United States of America rather than, say, North Korea.
We also show that the steps the UK could take – which do not require negotiation – unilaterally to liberalise our tariff regime and increase our openness to services and foreign investment could further reduce the economic impact of No Deal to an average reduction in growth of -0.04 per cent.
Our results are within the range of other Brexit estimates, and as the Office for Budgetary Responsibility noted in its review of the economic evidence on Brexit on Thursday: “It is important to emphasise that any adjustment we do make to our potential growth forecast as a result of Brexit is likely to be relatively small compared to the degree of uncertainty surrounding the underlying path.”
In other words, while Brexit will doubtless have a material effect on the UK economy it won’t – in of itself – be the most important factor shaping our growth over the next decade or so, whether we leave with a deal or even without a deal. Far more important is the steps the Government takes after leaving the EU in its approach to planning, infrastructure, regulation, and immigration.
None of this is to say that a No Deal Brexit would be the optimal outcome of these negotiations and we should not understate the challenges facing individual businesses and government in preparing for this eventuality. A good trade deal would be preferable for several reasons. It would be wise, and in the interests of both parties, formally to preserve the most significant benefits of over 40 years of economic integration in a new agreement. Perhaps more importantly, a deal would provide a powerful political symbol of the UK and EU’s commitment to continued cooperation as friends and allies in the future, not simply on trade but across a range of issues including security, foreign policy and global development. Thought of in these terms, a failure to reach a deal should be unthinkable in London and national capitals across Europe.
The Government should therefore continue to negotiate a comprehensive trade deal with the EU in good faith, but the reality is we are now in a delicate game of brinkmanship. The UK has put forward a generous proposal for the future relationship in a bid to resolve the border issue on the island of Ireland. The ball is now in the EU’s court to respond with counterproposals. If it does not, the EU’s current approach risks forcing the UK to make an unacceptable choice between preserving the Union and a permanent Brexit limbo. The UK’s counterparts in Brussels are doing this because they are confident that it is the UK which will ultimately fold in these talks. The government must hold firm, wait it out until December if necessary, and force the EU to rethink its approach to the backstop. The issue was fudged at the last minute in December last year, and will need to be again. The UK certainly should not rush to sign a bad deal in the face of exaggerated fears over No Deal.