Given the high costs associated with a hard Brexit, argues Dennis Shen (Scope Ratings), it is unlikely to happen. The EU27 see no advantage in significant concessions and the challenge of maintaining public support for a hard Brexit is considerable. A transition period concluding in a soft Brexit – or even ‘Breversal’ – are the most likely outcomes.
The UK government’s objective remains a hard Brexit – involving an exit from the single market and customs union – but, importantly, a softening of this stance has already taken place. The UK has already indicated its willingness to agree to a two-year transitional arrangement, to protect the rights of EU citizens in the UK and to continue payments into the EU post-Brexit. Given the obstacles to leaving the single market and customs union, the rush to fulfil the referendum mandate by March 2019 is unrealistic.
These obstacles are considerable. They include the new trade arrangements with the EU alongside 60 other nations (learning from the difficulties faced in Greenland’s much less complicated exit from the European Economic Community in the 1980s), the irreconcilable contradiction between Britain’s desire to maintain maximum access to the single market whilst negotiating controls on EU migration, and opposition from Scotland and devolved administrations. Recognising these challenges, I commented last year that even after article 50 Lisbon Treaty were invoked, Brexit remains far from a foregone conclusion, because of the need to retain political support for it over potentially multiple political cycles. The negotiation of a long-run hard Brexit could be decade-long. The already narrow public majority to leave in 2016’s referendum comes under pressure from multiple risks over extended horizons: May’s failed snap election gambit earlier this year was only one of them.
In a research note published with Scope Ratings – a European rating agency – my co-author and I argued that due to these hindrances and the material costs associated with any immediate, no-deal Brexit, the two most likely outcomes are instead: 1) a form of soft Brexit or 2) a no Brexit (or Breversal) scenario. These outcome expectations are assumed in our ‘AA/Negative’ rating and outlook on the UK. In Scope’s baseline, the UK concludes an eventual soft Brexit arrangement, maintaining full or partial access to the single market, perhaps in a phased process. The conclusion of a soft departure end-state could last well past the two-year window given under article 50 Lisbon Treaty, potentially seeing post-Brexit transitional states and/or an extension of article 50 Lisbon Treaty negotiations (the latter postponing the UK’s exit date from the EU).
However, we noted also that in April, a YouGov/Times survey was the first to show a majority against Brexit since last June’s referendum. Last month, a YouGov poll saw 46% of respondents saying it was wrong for the UK to vote Leave, while 42% back Brexit as the right decision. The Labour party has shifted its position to support transitional membership of the single market and customs union, and possibly on a permanent basis (in a form of Norway+ model, which is not far from favouring remaining in the EU). As such, were public sentiment to harden in opposition to Brexit, negotiations to meet significant difficulties and/or the economy to face increasing headwinds, a no-Brexit scenario (in which the country revokes article 50 Lisbon Treaty, and opts to remain in the EU) is not off the table, and, in Scope’s view, the second most probable outcome. This would presumably need to involve a second election and/or a second referendum. Our expectation of a soft Brexit or no Brexit contrasts with the opinions of financial institutions and research institutions, which anticipate a different outcome.
Why has the EU adopted a stern negotiating stance towards the UK? One reason is the unrealistic objectives of the UK government, and the significant gap between the negotiating expectations of the EU and the UK. Another is the EU’s determination that conditions outside the bloc must be worse than those within, in order to preserve the integrity of the European project.
The UK’s dilemma is compounded by the weak negotiating hand it has been dealt. As the potential economic, financial and political costs of any form of no-deal Brexit would be much more damaging to the UK than they would be to the EU as a whole (see, for example, Oxford Economics’ report that the immediate costs to the UK of a cliff-edge Brexit might be ten times greater than those to Germany or France), the UK government’s threat that it could easily leave without a deal rings hollow. Even a default to WTO trade relations, viewed as the safe fall-back option in the case of no deal, is not automatic and would require completion of complex talks with WTO parties, including the EU.
The EU’s greater leverage means that any negotiated settlement reached under constrained time boundaries would probably resemble the EU’s opening gambit. This means that any deal on Brexit sought under the auspices of article 50 Lisbon Treaty’s initial two-year window benefits the EU position and necessarily demands climb-downs by the UK. In that, the more prudent strategy from the UK’s angle has been and continues to be an understanding of the complexity of Brexit, emphasising a long-term, phased-in process with short-term objectives. Unfortunately, this approach has so far been lacking.
European leaders have expressed hope that the UK’s decision to leave might be reversed. On the one hand, that could help to explain the EU’s unwillingness to compromise materially in the negotiations. But the EU should be careful what it wishes for. In the aftermath of the referendum, the EU has looked more united and stronger, with the common dilemma that Brexit represents enabling states to unite around a clearer and more purposeful message. It could be argued that a no-Brexit scenario – in which the UK remains, after failed negotiations – could revive momentum towards a multi-speed Europe, along with escalating Euroscepticism in segments of a divided UK.
This post represents the views of the author and not those of the Brexit blog, nor the LSE.
Dennis Shen graduated from the MPA in International Development from the LSE in 2013, and completed undergraduate studies at Cornell University. He is Associate Director in Public Finance at Scope Ratings, responsible for sovereign ratings based in Frankfurt. Previously, Dennis was with Alliance Bernstein, most recently as European Economist. His research interests include international political economy, global governance and environmental regulation.