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Brexit: the people have spoken – but they didn’t have a clue

Posted by hkarner - 20. Dezember 2016

Date: 19-12-2016
Source: The Wall Street Journal
Subject: U.K. Weighs Cost of Brexit Nuclear Option

A threat to exit from the EU without a deal would only be credible if the U.K.  prepared for the hardest of Brexits—and incurred the very costs it is trying to avoid.
The U.K. wants a Brexit process that would allow it to negotiate both its formal divorce and its future trading relationship with the EU in tandem. But hardly anyone outside the British government believes this is realistic.

The U.K. has spent six months debating where it wants to go. But now, with just three months until Prime Minister Theresa May intends to formally start the Brexit process, it is grappling with a new question: How to get there?

In any negotiation, process is power—and there is growing anxiety in the British government that it may be forced to accept a Brexit process that will give the EU the upper hand. Some officials privately warn that under those circumstances, the U.K. could even abandon the process altogether, taking the nuclear option of walking away from the EU without any deal.
What the U.K. wants is a Brexit process that would allow it to negotiate both its formal divorce—dividing up its shares of the EU’s assets and liabilities—and its future trading relationship with the EU in tandem. It wants to wrap up both deals within the two years allowed under Article 50 of the Lisbon Treaty. That would allow Mrs. May to go into the 2020 election claiming to have delivered Brexit.

Hardly anyone outside the British government believes this is realistic. Most observers believe it would take the EU at least four years to negotiate and ratify a deep and comprehensive trade deal, given that 37 national and regional parliaments in the EU would need to vote on it. Under this parallel Brexit process, the U.K. would likely have to remain in the EU until well beyond 2020, so Mrs. May would have to go into the election with the U.K. still under the jurisdiction of the European Court of Justice and obliged to respect the right of EU citizens to live and work in the U.K.

Besides, the EU doesn’t want to negotiate the two deals in parallel. It says it won’t discuss any trade deal until the divorce agreement is completed. Its argument is partly legal—it says that it can’t negotiate a new free trade deal while the U.K. is still an EU member—and partly practical: Officials warn that in the current political climate, the EU would be unable to make any concessions.

But this sequential approach is politically toxic for the U.K., particularly in the light of reports that the EU will demand up to €60 billion ($63 billion) from the U.K. as the cost of a divorce. British officials say Mrs. May couldn’t possibly enter a negotiation over such a demand without a clear commitment that she would get something in return. Conservative party officials believe that if she walked away under those circumstances, she would likely receive strong domestic political backing.

But would a U.K. threat to walk away be truly credible? British officials say that a disorderly Brexit would hurt the EU as well as the U.K. This is true. If the U.K. were to quit the EU without an Article 50 divorce deal, the question of its continuing financial obligations would have to be resolved through years, if not decades, of litigation. That would plunge Anglo-EU relations into a deep freeze amid considerable geopolitical uncertainty. And if the U.K. quit without a trade deal, it would be forced to trade with the EU on World Trade Organization terms, leading to the imposition of tariffs and customs checks that would carry an economic cost for both sides.

Even so, the costs of a disorderly Brexit would be vastly greater for the U.K. That is because vast swaths of the U.K. economy are currently regulated by EU bodies, an arrangement that serves most sectors well. If the U.K. were to cease to be a member of these regulatory bodies, then the authorizations they provide would lapse, raising questions about the ability of U.K. firms to continue trading. If the U.K. quit the European Air Safety Association, for instance, who would certify that U.K. aircraft were safe to fly? Excluded from the European Medicines Agency, who would provide the certification to let British-manufactured drugs be traded. Similar concerns apply across multiple industries, including food and drink, chemicals, transport and cross-border data flows.

To walk away from the EU without a deal, the U.K. would need to have replicated all these regulatory functions at the national level and have secured the bilateral recognition for its new agencies from all its trading partners. That is a vast and expensive bureaucratic undertaking—and not one that any government would contemplate unless it was certain it was heading for the hardest of Brexits. Ministers acknowledge that they are still far from fully understanding the scale of the challenge, raising doubts about whether it would be technically possible to put everything in place before the U.K. dropped out of the EU in March 2019.

The U.K. government therefore faces a paradox: Its threat to walk away from an Article 50 divorce is only credible if it starts preparing for the hardest of Brexits—and, in doing so, incurs the very costs it is trying to avoid. Yet if it can’t credibly make this threat, its leverage is minimal. Resolving this paradox will be a formidable test of Mrs. May’s negotiating skills and political leadership.

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