New briefing: The real Brexit debate - how easy would it be for the UK to leave the EU and what trade deal could it get instead?

(PresseBox) ( London, )
The debates between UKIP leader Nigel Farage and Lib Dem leader Nick Clegg are valuable, but they have also highlighted how artificially polarised the wider EU debate tends to get between two contrasting views: Outside the EU, Britain will become like North Korea: miserable, impoverished and completely isolated. Or like Hong Kong: fully liberalised and with the world at its feet.

Both views are not only simplistic, but they also completely miss where the majority of the British public, which wants to stay in Europe but on radically reformed terms, is at.

The new briefing, based on the conclusions of the first-ever simulated UK-EU negotia­tions hosted by Open Europe in December, cuts through the ideological simplifications to look at what deal the UK could realistically get outside the EU - and how it would actually leave.

Open Europe Director Mats Persson said,

"Despite the various claims by the likes of Farage and Clegg, Britain would neither become like Hong Kong nor North Korea outside the EU. While it is likely that a free trade deal for goods could be reached relatively easily if the UK left the EU, a deal on services and financial services in particular would be far more difficult."

"The two-year process to leave the EU gives the remainder EU the upper hand in any negotiation on new trade terms, with the UK being unable to take part in the final vote and the European Parliament having a veto. Those who say 'let's just leave' don't quite realise that the EU institutions may actually have an equally strong, if not stronger, say, over Brexit talks than if Britain seeks renegotiation from within the EU. This is not to say that a relatively favourable deal couldn't be struck, but it will take time and no doubt come with a high transaction cost."

Key points:

The only formal way to the leave the EU is via the so-called "Article 50" exit clause of the EU Treaties, which stipulates a two-year timeframe within which to potentially conclude a continuity deal.

In our simulation, after their initial hostility, all other member states recognised the need to strike a new trade deal with the UK with economic incentives trumping political rhetoric. Britain is unlikely to face the 'worst case scenario' of having to fall back on World Trade Organisation rules.

However, as our simulation showed, the initial new deal would likely fail to replicate the full access to the EU single market currently offered by full membership:

- A Norway-style deal - effectively single market membership but with no formal political influence - is likely to be rejected by EU partners and is in any case a bad deal for the UK as it amounts to "regulation without representation".
- While a reciprocal trade agreement for goods, where the UK has a sizeable trade deficit of £56.2 billion (2012) with the EU, would be relatively easy to strike, access to the EU's services market - where the UK has a trade surplus of £11.8 billion (2012) - will be far more difficult.
- Access for UK financial services would be a particular concern since a third of the UK's trade surplus in financial and insurance services in 2012 came from trade with other EU member states - of the total £46.3 billion UK financial and insurance services trade surplus, £15.2 billion was with the EU and £14.5 billion with the US. Perhaps over time, further bilateral deals on market access could rectify this but the political resistance from France and some others could be high.

While Article 50 of the EU treaties has the benefit of definitely triggering negotiations - which isn't guaranteed under Cameron's renegotiation plan - it comes with several drawbacks:
- Article 50 is a one way street - once it is triggered, and even if the deal available at the end of the process proves unsatisfactory to the UK, there is no way back into the EU except with the unanimous consent of all other member states.
- It is likely to put the UK on the back foot in any negotiation. The remaining EU member states would be in charge of the timetable and the European Parliament would have a veto over any new agreement. Therefore, while having to fall back on WTO rules entirely is unlikely, it would remain a possibility.
- As the UK will not take part in the final qualified majority vote on whether to accept the new deal, protectionist-minded member states could have greater influence on the degree of market access the UK could secure post-exit - particularly on services.

Article 50 is therefore best kept as an implicit threat, as in practice it cedes more control than it provides, though any leader negotiating new membership terms must clearly be ready to trigger it.

Ultimately, though, while a high transaction cost is undeniable, the big question is if there is a point - and if so when - at which the high one-off cost of Brexit would be outweighed by the long-term benefits of more economic and political independence over areas such as financial regulation, agricultural policy or criminal justice, particularly if the eurozone comes to dominate the wider EU and the necessary reform proves unattainable.

To read Open Europe's full report 'Gaming Europe's Future: Simulating the negotiations that could determine Britain's place in Europe', please click the link below. The report covers both the 'renegotiation' and 'Brexit' scenarios, with the Brexit section beginning on page 16.

Notes for editors

1) Open Europe's 'war game' was held on 11 December 2013. The first part was focused on a UK renegotiation of its position in the EU. The results and analysis were published shortly afterwards and can be found here:

2) For more information, please contact Open Europe Director Mats Persson on 0044 (0)779 946 0691 or the Open Europe office on 0044 (0)207 197 2333.

3) Open Europe is an independent think-tank calling for reform of the European Union. Its supporters include: Lord Leach of Fairford, Director, Jardine Matheson Holdings Ltd; Lord Wolfson, Chief Executive, Next Plc; Hugh Sloane, Co-Founder and Chief Executive, Sloane Robinson; Sir Stuart Rose, former Chairman, Marks and Spencer Plc; Jeremy Hosking, Director, Marathon Asset Management; Sir Henry Keswick, Chairman, Jardine Matheson Holdings Ltd; Sir Martin Jacomb, former Chairman, Prudential Plc; Lord Sainsbury of Preston Candover KG, Life President, J Sainsbury Plc; Michael Dobson, Chief Executive, Schroders Plc; David Mayhew, former Chairman, JP Morgan Cazenove; Tom Kremer, Chairman, Seven Towns Ltd; Michael Freeman, Co-founder, Argent property group.

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