With only a few weeks left until the triggering of Article 50, the UK looks to be opting for a "hard Brexit". Over the past week, Prime Minister Theresa May has started to put flesh on her bare bones "Brexit means Brexit" position. Over a series of interviews, she has made it clear that she favours leaving the single market and probably the customs union as well. She will prioritise control over immigration over everything else. If the EU is willing to do a deal with us after we leave, then great. If not, Britain can simply fall back on World Trade Organisation rules.
The markets are understandably nervous about that. The result may, however, not end up being a bad as they fear. Why not? Because going for a hard Brexit may well be the UK's best opening gambit in the negotiations to come. Once we trigger Article 50, we have some leverage with the EU, but not a great deal. The other 27 members are in no mood to compromise, and the entrenched bureaucracy in Brussels would specifically like to punish us as a way of deterring other countries from leaving as well.
So far, they have been adamant that we can't pick and choose which bits of EU membership we would like. If we won't accept the whole package, then we can't have anything. The result? If we go into the negotiations saying we want full membership of the single market, then they are likely to drive a very hard bargain. We will have to accept free movement of labour, and probably very steep budget contributions. The price is likely to be a high one.
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But it doesn't take a huge knowledge of game theory to work out that if our opening gambit is that we are completely relaxed about a hard Brexit, then the negotiation changes dramatically and in our favour. In those circumstances, there is nothing we really want from the other 27 members. They can threaten us with tariffs, but only up to the limits imposed by WTO rules. We can simply shrug, and say fine. At that point, there is nothing we want from them, and nothing they can offer us.
But there are still two big things they want from us. Our budget contribution. And access to our market. The importance of those should not be dismissed. The UK makes a total contribution to the EU budget of £13bn. It gets £4.5bn back, so the net contribution is £8.5bn. The expenditure of the EU is £123bn, so that £13bn is about 10% of the total, and the net figure is about 7% of the total. The UK is the second biggest net contributor after Germany so the contribution we're making will have to come from somewhere. It seems unlikely that Germany will want to pay all of it. Several countries will have to become net contributors for the first time. That is not going to be easy or popular.
We also have a huge trade deficit with the EU. Britain is the largest market for German cars, which also happens to be its largest industry. It is a huge export market for the Netherlands, Belgium, and most of all Ireland 36% of Irish exports by volume go the UK. Tariffs hurt everyone. But they hurt the surplus country more than the deficit country. So that is not going to be easy either. If we offer a few billion a year to the Budget, and tariff-free access to our market, while arguing there is nothing we want from Europe, them a compromise should be possible.
If we go in prepared for a hard Brexit, we are far more likely to come out with a reasonable deal. The City can breathe easy. So can business. In the end we will probably get a deal we can live with and a better one than if we had asked for membership of the single market to start with.
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Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
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