The Brits narrowly voted for Brexit on 23 June 2016 and perhaps – perhaps! – it will be delivered by 31 October 2019. But we still don’t know what it will look like. Hard Brexit? Deal/no deal?
A way to look at it graphically is done with the table below and should show that a Hard Brexit is a pretty daunting task.
The way to read the table goes like this: Columns further and further to the right describe deeper and deeper economic integration. The corresponding rows describe what needs to be fulfilled to achieve such a level of integration.
Britain is best described today at level 4; as being part of a Common market in the EU. It abhors level 5, the monetary union and has a permanent opt-out from the Single Currency. It possibly detests even more level 6, economic union, which, at its most extreme would imply common tax rates, pensions, social policy, etc. – a formation of a sort of United States of Europe. All countries in the EU seem against this, except possibly the French if, that is, they could impose a French version of common economic policy….
But the Brexit vote was about pulling back from level 4. The major problem was that how much pulling back was never defined and thus has never been resolved. A Hard Brexit would imply skipping levels 4, 3, 2 and 1, a very daunting task indeed as I will try to describe.
Many Brits were against the fully free movement of labour, especially into the UK, and this is part of level 4 the so-called ‘four freedoms’ – the free movement of goods, services, labour and capital in the European Union. Some restrictions on labour movement are very likely – say, only entry for people with certain qualifications. But a Hard Brexit would also require restrictions on the movement on financial and other capital and this will be very damaging for the financial sector in London.
Let me skip comments about level 3 but think of level 2 and 1 also being abandoned. By being in the EU Customs Union, the UK uses the same external tariffs vis-à-vis non-EU countries as every other EU country does and it imposes no tariffs vis-à-vis other EU countries. Scrapping this might imply that the UK would have to negotiate tariff regimes bilaterally with the other 27 member states as well as make trade negotiations with all sorts of countries outside the EU to set tariff regimes with them. That’s a lot of countries and a lot of negotiation….
I can certainly sympathize with the UK being aghast at the idea of an Economic union in the EU and I can even understand their unwillingness to be part of the Eurozone project. But how they will manage, before 31 October, all the negotiations needed for a Hard Brexit, I simply don’t see; that looks close to impossible.
And I guess that is why a Hard Brexit is rather a ‘Hard, Hard Brexit’ – dropping all levels of economic integration without negotiations in place. And that will be ugly with a lot of trade simply stopping.
Solution? 31 October may be postponed. I have started to wonder whether I will really witness Brexit in my lifetime.
Morten Hansen is Head of Economics Department at Stockholm School of Economics in Riga and a member of the Fiscal Discipline Council of Latvia.
Points of view expressed here are not necessarily those of the Fiscal Discipline Council.