The Brexit Talks Are Heading for A Costly Failure All Round

This article first appeared on the American Enterprise Institute site.

Miscalculations have consequences, as the example of World War I vividly illustrates.

Although a global conflict is thankfully not in the cards, both sides in the Brexit negotiations are harboring illusions which amplify the risks of a costly failure.

The mother of all Brexit illusions, of course, lies firmly on the British side.

It was captured pithily by Boris Johnson's idea of being "pro having [the cake] and pro eating it." In short, much of the British political establishment refuses to acknowledge that life outside of the EU will involve trade-offs over political control and depth of economic and other ties to the continent.

More control over migration, for example, means new non-tariff barriers facing British exports, services providers, and disruption to existing value chains. Maintaining the current level of economic integration through some version of single market membership in the future (such as the so-called Norway option) means resigning oneself to simply accepting rules, as opposed to having a voice that the UK currently exercises in the EU.

Relative to the status quo, leaving the EU will necessarily mean giving things up: political control, market access, or both.

Still, some of the post-Brexit options are less prone to economic damage than others, such as the Norway option. Yet in the months following the referendum, British Tories took it off the table, in the hope that the EU will somehow end up extending to the UK the benefits of single market membership without asking for all the rigors that come with it.

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A float featuring British premier Theresa May at the Rose Monday parade on February 27, 2017 in Dusseldorf, Germany. Lukas Schulze/Getty

It won't. Regardless of whether the idealized agreement Brexiters have in mind is even possible, so far Europeans have been happy to leave the divorce talks in the hands of technocrats led by Michel Barnier. With German coalition talks in limbo, that situation is unlikely to change in the immediate future.

But therein lies the chief European illusion: that Brexit is primarily a British problem.

Since its accession in 1973, the UK has been an important part of the EU's architecture. When it comes to security or pro-market reforms in the EU, the UK's voice in the Union has been a force for the good — and it will be missed. Mr. Barnier may or may not be intent on punishing the British, but his narrow mandate disregards that bigger picture.

But Brexit matters for Europe for more mundane reasons.

Although in relative terms, economic disruption of a hard Brexit would harm the UK much more than the continent (and the uncertainty is already taking its toll ), the absolute level of economic damage would be substantially larger among the EU-27.

Furthermore, as new research indicates, the costs to Europe are going to be much larger than previously thought. Using a model that studies existing values chains spanning across countries, economists from University of Leuven find :

  • Hard Brexit would cost 526,830 jobs in the UK, four times as many as a soft Brexit.
  • Hard Brexit would cost 1,209,470 jobs in the EU27, again, four times as many as for a soft Brexit.
  • Hard Brexit suggests a loss of 4.47 percent of UK GDP, again four times as much as a soft Brexit (1.21 percent).
  • The loss of UK value added would be about three times as large as for the EU27, which would lose 1.54 percent of EU GDP (0.38 percent for a soft Brexit).

Those are substantial numbers, which do not lend support to the complacent attitude reigning in European capitals. As the March 2019 deadline looms, the priority on both sides should be to avoid a hard, no-deal Brexit by extending the UK's membership in the EU in all but name for the foreseeable future.

The point is not only to give businesses more time to adjust but also to give British politicians some breathing space — possibly to put the Norway option back on the table or even to revisit the 2016 referendum altogether.

Dalibor Rohac is a research fellow at the American Enterprise Institute (AEI). He is also a visiting junior fellow at the Max Beloff Centre for the Study of Liberty at the University of Buckingham and a fellow at the Institute of Economic Affairs, London.