Theresa May has one great advantage as a politician. She looks serious and responsible. But appearances can be deceptive. If you examine how the UK prime minister is handling Brexit, a different sort of politician emerges.
By announcing that she will start the formal negotiations for Britain to leave the EU by March 2017, the prime minister has walked into a trap. She has given away what little leverage Britain has in the negotiations — without receiving any of the assurances that she needs to achieve a successful outcome.
The announcement of the decision about when the UK will trigger Article 50 — the process by which Britain gives formal notice that it intends to leave the EU — was made in a statesmanlike fashion. But the actual content of the decision is reckless and driven by politics, rather than Britain’s national interest.
Once Mrs May triggers Article 50, she has precisely two years to negotiate a new deal with the EU. Senior civil servants have told the prime minister that it is highly unlikely that the UK will be able to negotiate both the terms of its divorce and a new trade deal with the EU within the two-year deadline.
As a result, they warned the prime minister that she must have assurances on what an interim trade agreement with the EU would look like in the long period between the UK leaving the bloc and a definitive new deal being put into place.
Mrs May has chosen to ignore this advice. In doing so, she has knowingly placed Britain at a massive disadvantage in the forthcoming negotiations.
As soon as Britain triggers Article 50, the EU can simply run the clock down — knowing that the UK will be in an increasingly difficult situation, the longer the negotiations drag on without agreement.
At the end of two years, Britain will be out of the EU — and would face tariffs on manufactured goods and the loss of ‘passporting’ rights that allow financial services firms based in the City to do business across the bloc.
The economic damage from this kind of ‘hard Brexit’ would be severe, blowing a hole in the government finances as tax revenues from the City shrink, ushering in a new period of austerity. The most ardent Brexiters claim that this is all scaremongering. Why, they ask, would the EU contemplate the restoration of tariffs when this could be damaging to its own economic interests? The Leavers can answer that question by looking in the mirror. It is clear that the main motivation of the pro-Brexit camp in Britain is political, not economic. And the same will be true of the EU side in the negotiations.
In the British case, the political goal is to restore parliamentary sovereignty and to regain control of immigration. On the EU side, the goal will be to make sure that Brexit does not lead to the unravelling of a European project that has been built up over 60 years. That will mean making sure that the UK pays a clear and heavy price for leaving the EU. As a result, both sides will accept some economic damage rather than sacrifice their political goals.
The difficulty for the UK is that the economic damage the EU will sustain is likely to be smaller and more manageable than that borne by the British side. The fact is that the EU represents a far larger market for Britain than Britain represents for the rest of Europe. Britain sends 44pc of its exports to the EU, while the UK takes only about 16pc of EU exports.
The negotiation process itself is also likely to be stacked against the UK. While the British will need a quick deal to minimise uncertainty for investors, the EU can afford to spin things out. Even if this is not a deliberate strategy on the European side, the realities of trying to secure a common position among 27 nations — and then secure ratification in all 27 countries, plus regional legislatures and the European Parliament — will be long and laborious.
Some in Britain speak blithely of relying on the rules of the World Trade Organisation after Britain has left the EU. They ignore the fact that Britain is a member of the WTO under the auspices of the EU. Creating an entirely separate British WTO membership requires another set of complex negotiations.
That is a much bigger problem for Britain than the EU, since the longer the process is dragged out, the longer Britain is likely to be suspended in a legal limbo that will discourage long-term investment.
For that reason it was absolutely vital that Mrs May should get some clarity on what happens after two years of negotiations — if and when the EU and the UK have failed to reach a definitive new deal.
The obvious solution would have been for Britain to remain inside the EU’s single market, but outside the EU until such time as a new deal was struck. By failing to get that assurance, the British government has severely weakened its position — even before negotiations start.
So why has Mrs May been so reckless? The short answer is politics. If the prime minister had delayed triggering Article 50 any longer she might have faced a revolt from Conservative MPs, who would have feared that she was backsliding on Brexit.
By making her announcement just before the Tory party conference, she has also guaranteed herself some favourable headlines and applause in the conference hall. She may have bought herself another couple of years in 10 Downing Street. But she has also significantly increased the chances that Brexit will cause severe damage to the British economy.
Published in Dawn, Business & Finance weekly, October 10th, 2016
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