02 November 2017

Martin Wolf: Britain has to offer more money for a smooth Brexit

[...] Brexiters should remember that Remainers accounted for nearly half the electorate. To heal the domestic rift, they should want a good post-Brexit deal. Moreover, the EU shares our values and, by virtue of its proximity, most of our security interests. Opening a deep and potentially permanent rift with the rest of the EU cannot be in the UK’s interests. Finally, the EU is our neighbour and will remain the UK’s most important economic partner.

Some economists argue that neither proximity nor favourable market access matters much. Yet US trade in goods with the EU (less the UK) is almost exactly the same as the UK’s, even though its economy is seven times as big. What explains this? The answers are proximity and the fact that the UK is inside the customs union and single market, instead of trading on terms agreed at the World Trade Organization.

Moreover, 48 per cent of UK exports went to the rest of the EU in 2016. Exports to the US, an even bigger economy than the rest of the EU, were only 16 per cent of its total exports. China took 5 per cent. Canada, Japan, Australia, New Zealand and South Korea, together, took 6 per cent. Distance and market access matter. On both points, the UK stands to lose an irreplaceable deal after Brexit.

Reaching a deal that preserves good relations and as much access as possible to EU markets is self-evidently in the UK’s national interest. Moreover, with the best will in the world, it will be hard to arrange a smooth transition to trading on WTO terms, in time to meet the March 2019 deadline. But the will cannot be the best if the UK walks out, leaving vital EU objectives — the UK’s financial obligations, treatment of EU nationals resident in the UK and Ireland — not just unresolved, but repudiated. The view that a “no deal” outcome makes sense, for Brexiters, is surely ludicrous.

Progress has to be made soon. The latest a deal covering the divorce, transition and outlines of the final relationship can be reached is around a year from now. Even that would be too late for business, which needs to know early in 2018 what will be happening after March 2019. To get there, enough progress on divorce issues must be made by mid-December for the EU to move on to issues of the future.

Making progress on the divorce is also of vital interest to the UK. It is not in the UK’s interest to leave the fate of EU citizens resident in Britain or of British citizens resident in the EU in limbo. People who came here to work in good faith should not be treated as pawns. Doing so is sure to damage the UK. Similarly, as I learnt on a fascinating recent trip to Belfast, the prospects for prosperity in Northern Ireland, and perhaps even for peace, may be in the balance. This, surely, is a vital UK interest.

True, to make progress the UK may have to offer a one-off payment of €20bn-€40bn more than Theresa May, the prime minister, has offered so far. But even a total of €60bn would be only 2.5 per cent of UK gross domestic product. Borrowing this amount would increase public debt by just 3 per cent. The UK can now borrow this money at near-zero real interest rates and then amortise it over decades.

The simple truth is that not only can the UK afford to make this payment, to create goodwill and move on with the negotiations, but it cannot afford not to do so. The economic and fiscal losses from a chaotic crash out of the EU would certainly cumulate to a far larger sum. While gaining a good transition and final deal remain big challenges, we have to move on to those discussions and we have to do so now. This is in the UK’s interests. That must be recognised. [...]

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