Why would a hard Brexit be so serious for the UK?

25 October

If the UK does not have access to the European single market after Brexit it will meet with a lot of serious obstacles to trade. It will not be so much of a problem for manufacturing and industrial production: it should be relatively easy for the UK and the EU to agree to maintain zero tax on the physical goods traded between them.

However, industrial production is barely 10& of the British economy, compared to 25%-30% for countries such as Germany. The UK economy is very much a service economy and here is where it will hit major problems because there are very few trade agreements that deal with the service sector. And service industries such as banking and finance are hugely dependent on the free movement of labour.

It is not just banking. One of the success stories of the UK is that it is a great exporter of university services, but this also requires free mobility. I am not a UK citizen, I am a Belgian, and many of my colleagues at the LSE are foreigners. The openness of the UK university system is its strength: it can attract professors and students from all over the world. If this is all closed off, they will go elsewhere. Other countries will take over.

The idea that the UK can leave the Europe and simply trade with other countries is really wishful thinking. All of the trade agreements that the UK currently has with the rest of the world were negotiated by the EU. Once the UK is out and fully sovereign, it will have to negotiate new agreements – and this invariably takes a very, very long time.

In the event of a hard Brexit, to believe that the UK will be in a strong position vis-à-vis China or the US is just fantasy. It will be in a very weak position because it presents as a small market to these big countries. Being a member of the EU and negotiating en bloc clearly made it a far stronger negotiating partner.

If I were a Brit, I would be urging the government to make sure it maintains access to the single market and to accept some compromise on immigration. A lot of people who voted to leave the EU were not voting for a hard Brexit, but politicians have chosen to interpret this so-called voice of the people as calling for Britain to cut all of its ties with the EU.

From an economic angle it is absolutely crucial to avoid hard Brexit, but there is a lot of information noise around the decision and the problem is that the political dynamic now is such that it seems almost inevitable. The hard Brexiteers will not relent, and Theresa May may find herself pushed into it even if she does not really want it.

Prof Paul De Grauwe’s book The Limits Of The Market is available for pre-order now. 

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