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Comment by Nebojša Katić, Economist

Brexit No (Good) Exit

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When the UK formally initiated the process of leaving the EU by triggering Article 50 of the Lisbon Treaty two years ago, the British government promised the UK would leave the EU on 29th March 2019, with a new trade agreement combining the best of all worlds

The UK would leave the single market and the customs union while being able to trade with the EU as before, but would also be free to sign trade agreements with the rest of the world. Immigration would be firmly controlled and the UK would no longer come under the jurisdiction of the European Court of Justice, nor be subject to EU laws.

Unburdened by extensive EU regulations, the UK would become a haven for foreign investments and multinational corporations, becoming the “Singapore of Europe”, rich and fully sovereign. Today, not even ardent Brexiteers believe in this rosy scenario. The UK is still in the EU, with its departure extended until 31st October 2019. Instead of a quick, clinical exit, the UK and its economy are struggling with constant uncertainty, stress and political chaos.

The EU is the UK’s largest market by far, accounting for 47% of goods and services. Meanwhile, EU exports to the UK comprise 15% of total EU exports. The trade arithmetic clearly favours the EU, giving it an upper hand in Brexit negotiations. The EU wants an orderly Brexit, but not to allow the UK to profit – the Brexit trauma should be a lesson not only for the UK but for all EU members who might contemplate exiting.

The EU insists that no negotiations on a new trade agreement take place before the UK leaves. The current drama is about the withdrawal agreement – just the first phase of a long exit process. Trade agreement negotiations will come later and will be much harder, especially regarding services.

The withdrawal agreement that the government is trying (so far unsuccessfully) to push through Parliament would keep the UK within the customs union until a new trade agreement is negotiated. How long the UK would stay in the customs union is impossible to predict, as it also depends on the EU. Instead of the best of all worlds, the UK will have the worst – tied to the EU via a customs union, the UK will have to follow all EU rules while losing its influence over the EU, and will not be able to forge separate trade deals.

The current drama is about the withdrawal agreement – just the first phase in a long exit process. Trade agreement negotiations will come later and will be much harder, especially regarding services

If the UK crashes out of the EU and has a so-called ‘no-deal’ Brexit, (as is the wish of diehard Brexiteers) the UK would enter uncharted territory. No one knows how a no-deal Brexit would work or how the UK industry would cope. Relying on smooth supply lines, modern industries are based on a just-in-time system and function with minimal stock. The potential disruption to trade and long queues at borders would create chaos and lead to unnecessary costs, at least in the short term. The status of the border between Northern Ireland and the Republic of Ireland – for which the UK signed an international agreement committing not to implement a hard border and customs checks – also faces uncertainty.

If Goldman Sachs is to be believed, the UK’s economic losses since the 2016 referendum are in the range of £600 million per week. Cumulatively, the UK has already lost around 2.4% of potential GDP. Projections for a future with a no-deal Brexit are even worse. The IMF anticipates that the UK would suffer recessions in 2019 and 2020, even without any border disruptions. By the end of 2021, the GDP would be 3.5% lower compared to the alternative “softer” Brexit scenario. EU economies would also suffer, but to a much lesser extent, with cumulative losses of approximately 0.5% by year’s end 2021. The EU is already seriously lagging behind the U.S. and China, and Brexit has only exacerbated the problem.

Economic predictions are notoriously unreliable, or as J. K. Galbraith stated, “the only function of economic forecasting is to make astrology look respectable”. Yet, when it comes to Brexit, the probability of a disastrous economic outcome is not just political scaremongering.

Ironically, a political system that never cared much for direct democracy has become a hostage of an ill-advised and badly-timed referendum. This self-inflicted harm might prove to be the costliest blunder in modern UK history.

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