“Seven key British perspectives” – Fisk

This is a brief fisk of an article written by Andrew Lilico, a leading Leave economist, entitled “Seven key British perspectives on the Brexit negotiations” which is in circulation.

To understand the essential flaw in this article it’s first necessary to appreciate that it is underpinned by 3 implied assertions.

1. They (the EU) need us more than we need them because…
2. We can tolerate a loss in GDP more than they can and also…
3. We can, if necessary, walk away with no deal

If these assumptions are wrong, then almost all the perspectives are false.

This blog outlines some of the reasons why these assumptions are in fact wrong.  To summarise, it demonstrates how:

1. the trade deficit with the EU is in not the bargaining chip Leave supporters believe it to be
2. If the UK fails to secure an EU trade agreement then any loss in trade would be significant & greatly magnified (by a factor of 4 or more) for the UK in relation to the EU

Once this is understood, the perspectives are exposed as empty posturing.  The UK is not in the driving seat, the EU is, and this has been demonstrated in the concessions the UK is already making (as reported over the last few days).

With that said, below are the 7 perspectives:

1. There’s zero possibility of the UK agreeing to pay tens of billions of euros for a divorce bill before talking about a trade deal. So Angela Merkel and Francois Hollande can insist all they like that the divorce bill has to be agreed before we commence trade talks and that parallel talks are impossible and that those are the EU’s rules, but the blunt reality is that the alternatives are: a) parallel talks; b) no talks. It’s the EU’s call.

The second point, sequential rather than parallel talks, has already been conceded by the UK government, at least initially.  We will begin with discussion of the “divorce bill” and other matters and then Trade talks will begin in parallel from some point after October if sufficient progress has been made on the overall separation agreement.

However the EU will set the conditions for acceptable progress & therefore will decide when parallel talks begin.  If they don’t believe we are serious about the settlement then trade talks will be delayed.

As to the bill, the EU have asked for the broad outline to be agreed rather than the final amount.  In the end however, it will be a legal matter based on UK obligations, again, already conceded by UK government.  If the UK doesn’t agree to pay, there will be no trade deal, and the UK needs a trade deal.

2. There’s zero possibility of the UK backing down and agreeing to retain free movement. A bizarre article in the New Yorker yesterday… said that: “Many European officials believe that May will eventually soften her stance, because leaving the EU without a deal would be catastrophic.” No. She’s not going to soften her stance. And if she tried to soften her stance she would cease to be Prime Minister and the person that replaced her would not soften her stance either.

This statement is predicated on either a) the UK has a stronger hand than the EU, b) the UK can afford to have no deal or c) the UK government is prepared to put political pride before the national interest.  Since neither a) or b) are true (see above) then this indicates we will likely get a deal which has been cherry picked to suit the EU. The stance is softened or we get something between a very poor deal & no deal.  In point of fact the stance has already been softened, as May has indicated that free movement may well continue in some form after March 2019.

In reality, there will likely be some face saving fudge of existing EU FoM policy.

presented as a victory by the May government, as most people are not aware that FoM regulations actually require EU nationals to prove they can support themselves after 3 months.

3. The European People’s Party MEP Manfred Weber said on the Today programme on Thursday that he hears the UK wants a trade deal, but in that case why are we leaving? In the UK our perspective is that we don’t see why we should find it any  harder, or requiring of any more conditions, or any more dependent on accepting free movement, for us to do a trade deal with the EU than for Canada or Korea to do such deals.

This may be true, but Canada & Korea do not have a trade deal that is anywhere close to the scope of the single market.  In any case what we think is irrelevant, unless we are the stronger partner, which we are not.  The EU will either offer a significant deal which involves free movement or a greatly reduced deal on their terms.

The underlying flaw in this perspective goes back several years and stems from the fact that Leave leaders have never fully understood the single market.

They believe the SM is a free trade area with an inconvenient “tacking on” of free movement of people. The EU by and large see free movement of people as fundamental to the single market, one of its 4 freedoms & integral to its operation.  It is a benefit, not a burden, as far as the EU is concerned.

And indeed movement of people is part of all trade negotiations, as evidenced by Australia & India looking to include visa discussions in trade agreements.

 4. The UK is not “requesting” a trade deal with EU and we aren’t interested in making any “concessions” to be “given” such a deal. Instead, we are proposing a trade deal because we believe the trade deal itself in the mutual interests of the EU and us. If the EU doesn’t think a trade deal with us is, in and of itself and with no further “sweeteners”, in their interests we will be philosophical about that & say “OK. Your call.”

This repeats in essence the above, we are offering a deal on our terms and the EU can broadly accept those terms or not.  As outlined in the introduction this is simply empty posturing.

5. We do not accept that the UK “inevitably has the weaker hand” in Brexit trade negotiations, as the New Yorker tells its readers we do. Even were it true that the economic damage to the UK would, in GDP terms, be larger than for the EU (which many Britons don’t accept — not only because of the trade deficit we run with the EU but, more crucially, because of the dependence of the EU’s finance and corporate sectors on the City), we think UK voters and politics will be more able to tolerate losing some GDP, in the short-term, than EU voters and politics will be. We believe our system and economy are solid, whilst the EU’s teeters on the brink. We can bear it. They can’t.

Fundamentally Mr Lilico presents no figures for what this loss of GDP would be or how long it would last for.  All we do know is that the loss of trade to the UK would be magnified due to our relative differences (again, see here for why it could be 15% loss for the UK vs 2% for the EU).  Therefore this statement is saying “We believe our system can support a loss of GDP better than the EU can, even though we have no idea what the loss could be, no figures to assess its impact and consequences and even though we know that the EU’s losses will be a fraction of ours in any feasible scenario”.

“We believe we can absorb 5X the pain you can in scenarios we haven’t actually quantified” is a statement of faith, not economics.

6. The UK does not believe itself a small country, or a modest player in the world dependent upon its EU connections for its global influence and prosperity, or a diplomatic naif liable to be exploited this way or that by more hardened negotiators. We believe ourselves one of the three or four most powerful countries in the world, a nuclear power, a permanent member of the Security Council, long-term cunning diplomatic player in global arenas, with many outside options beyond Europe if Europe walks away.

This may be true but what, for example, does being a nuclear power have to do with Trade?  Do any of these things deliver us new trade deals on the day we leave the EU with no deal, because if not then what relevance do they have.   The lack of trained UK trade negotiators is a statement of fact, no more or less.  This is essentially British Exceptionalism and has little to do with economics.

7. We believe it happens quite frequently that others in Europe need our money, our intelligence and security assistance, and our soldiers. And we believe that saying “If you want to get these things next time you need them, you’d better play nice” is not an appalling blackmail. It’s blunt statement of a few realities of life that others would do well to remember.

I’m reasonably certain that some of the above refer to our duties as NATO members.  Nevertheless, to be equally blunt, any idea of the UK using its security capabilities to drive a better trade deal dies when we consider the possible future headline:

“5 killed in Paris Terror raid.  Did UK intelligence withhold vital information?”

The UK would be an international pariah.  This, frankly, is gunboat diplomacy which takes no account of the interconnected media saturated world we live in.  Refusing to share terror intelligence for trade purposes is indefensible on the world stage, no matter how logical it appears in government circles.  The UK government has also backtracked on this point.

Finally

Now, all the above might be “delusional”. But it is the British perspective. And if other countries don’t grasp that, there’ll be a mess.

Well, it is delusional, or at least very misguided.  And I don’t expect the EU will be in a mood to pander to our delusions.

To summarise.  If the UK has the stronger hand OR can walk away from any deal then this article makes sense.  However, we do not, and walking away would sacrifice the national interest for political posturing. As these 7 perspectives largely rest on that mistaken belief in our bargaining power and/or our ability to easily walk away they can essentially be dismissed.

This is important however as Lilico is a “leading Leave economist”.  The posturing in this article indicates that not only did the Leave leadership enter the brexit process with a false perception of our bargaining strength but more importantly, they have learned very little in the intervening months.

3 of the “perspectives” are publicly close to breaking point within a week of the Article 50 process.  We can only hope our actual negotiators have a more pragmatic outlook.