U.K. Can't Bank on EU's Rationality in Talks
July 01 2016 - 12:31AM
Dow Jones News
Stephen Fidler
For a group of people who urged a step most economists regarded
as irrational, some of those who campaigned for the U.K. to leave
the European Union are unusually confident now that economic
rationality will hold sway in the exit negotiations.
Many who favored so-called Brexit are sure that the 27 other EU
governments will allow the U.K. unrestricted access to the reduced
single market of 440 million people, figuring they will be eager to
have free access to the lucrative U.K. market of 65 million.
Influential German car companies, they insist, will bundle Berlin,
and with it the EU, into a trade deal that suits London nicely.
Most economists argued that Brexit would make the U.K. poorer --
and therefore a vote to leave wouldn't be something a rational
economic actor would do. It happened nonetheless.
Now, those economists would agree that both sides would be
better off if the U.K. remained as close to the single EU market as
possible. That would minimize economic disruption during the
transition out of the EU and provide the most open long-term
trading regime between the two sides.
In a rational world, the EU would indeed react to Brexit by
seeking the closest economic relationship possible with the U.K.,
and this may be what happens. But there are other factors
suggesting this outcome shouldn't be taken for granted.
Here are four reasons why:
Anger: The U.K. can't draw on a wellspring of sympathy from the
EU 27, and some leaders are plain angry that in their view the
British government has put the EU's future at risk to resolve a
domestic political problem. "Moods are ephemeral," said Peter
Ludlow, a Brussels-based historian and analyst, before the vote.
"But it will affect both the tone and the content of the earliest
exchanges between the two parties."
Mercantilism: Modern-day economists don't have much time for
mercantilism, an outdated philosophy that equates national
prosperity with exports. But its tenets still hold broad sway with
the public and with politicians throughout Europe and farther
afield. Germany's exports are seen of a sign of its economic
strength, and there will be pressure from manufacturing companies
on Berlin to maintain access to the U.K. market. But few inside the
EU will be lobbying to maintain the U.K.'s current access in
financial services, where the U.K. excels, exporting GBP22 billion
($29.5 billion) of such services to the EU in 2014. And here other
governments, not least in Paris, are salivating at the prospect of
benefiting from the U.K.'s exclusion from the single market in
services.
Asymmetry: Yes, the U.K. is important to Germany. German exports
to Britain totaled GBP60.7 billion last year, almost twice British
exports to Germany, and the U.K. was Germany's third-largest export
market. But the EU as a whole takes 45% of British exports, a share
that has fallen in recent years while remaining very significant.
On the other hand, Jonathan Portes of the National Institute of
Economic and Social Research has calculated, just under 16% of EU
goods exports go to the U.K.; Ireland and Cyprus are the only two
EU countries that send more than 10% of their goods exports to the
U.K. In other words, the EU is more important to Britain than vice
versa.
Strategy: Perhaps most important for Germany and other
governments is that the specialness of any deal with the U.K. not
tempt other countries to follow it toward exit. Leaders don't want
Britain to get all the benefits of EU membership without paying the
costs. "The British don't want to be in the kitchen, but they want
to be at the dinner table," said Valerio Molli, managing partner of
Italy's Ambrosetti think tank. A further breakup of the EU would
have severe long-term economic consequences that could well make it
worthwhile to deliver a strategic message that exit is expensive,
even at the cost of a short-term disruption to trade with the
U.K.
Indeed, German Chancellor Angela Merkel has shown she is willing
to pursue policies that hurt German industry in her determination
to drive EU sanctions on Russia for its actions in Ukraine.
In her public statements, she has signaled she isn't seeking
vengeance against the U.K. "There is no reason to be particularly
nasty during these negotiations," she said after the June 23
vote.
But any assumption in London that the U.K. holds most of the
cards in talks over its future trade relationship is seriously
mistaken.
(END) Dow Jones Newswires
July 01, 2016 00:16 ET (04:16 GMT)
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