No deal is the best deal for Britain – and the EU too

Europe has a lot to gain from a thriving, independent Britain, says Matthew Lynn.

With only three months left, and with the Covid-19 crisis still absorbing our leaders’ energies, the chances of a trade deal as our transitional agreement with the EU comes to an end seem more remote that ever. Britain appears to have reconciled itself to leaving without any kind of arrangement. Most of the EU is slowly coming to the same conclusion. The gulf between the two sides looks too wide to be bridged. The EU wants Britain to remain within its legal and regulatory control, while the UK wants to make its own laws, and set its own standards. Both sides would prefer not to do a deal than compromise on those principles. 

Some much needed competition

That is reasonable. The British have rightly concluded that the cost of tariff-free access to the EU market is too high for the rather minimal benefits. Most of the tariffs are fairly minor, and can easily be absorbed by the exchange rate, and while there would be some benefits from eliminating them, that can more than be made up for by growing new industries free from European regulations. And, in truth, if it was thinking straight, the EU should see that it too has a lot to gain from a successful no-deal Brexit. 

First, the UK would provide some much needed regulatory competition. To listen to the centralising bureaucrats in Brussels you might imagine that a close neighbour with a slightly different regulatory, legal and tax system is a threat. It would lead to “social dumping” (code for “making things a little cheaper than the person next door does”), hand power to unchecked corporations, and undermine their labour and environmental standards. But that is not true. Competition is a good thing, and that is just as true of tax and regulation as it is of anything else. A free-market neighbour would be a check on the centralising ambitions of Brussels, and a model for innovation, which is just what the EU’s economy needs. It would make it slightly harder for eurozone governments to raise taxes and impose new rules, and it would force them to think harder about which ones worked and which didn’t. 

Second, a no-deal Brexit might well turn Britain into an offshore hub, with a deregulated, low-tax model. But would that really be such a terrible outcome? Much like Hong Kong for China, or Singapore for the rest of southeast Asia, a deregulated, freewheeling UK could funnel a lot of trade and investment into the rest of Europe while not being bound by its rules. Singapore and Hong Kong have done a lot to boost their whole regional economies. The UK could play the same role for the rest of Europe. 

Finally, surely it is in everyone’s interests for the UK to be as successful as possible after it leaves the EU. The UK is one of the largest markets for the rest of Europe, so the richer we are, the more we will import, which means EU companies will be able to grow more quickly as well. At the same time, with no deal, and with regulatory divergence, it is inevitable that some companies will have to move operations to different countries to stay within the EU and preserve full access to the single market. Those countries will gain some extra jobs that wouldn’t exist if there were a trade deal. 

Sure, there is a big downside to a successful no-deal outcome: it will show that leaving the EU can work. If the UK departs without any formal arrangement, and does so at least reasonably well, then it may well encourage a few other countries to wonder if they shouldn’t follow suit. To hardcore federalists in Brussels, that may be too high a price to pay, and they will remain determined that Brexit should be as catastrophic as possible. To everyone else, though, it should be clear that leaving without a deal should be hugely beneficial. The UK will be richer. It will be a conduit for investment into the rest of the EU. And it will discipline the EU’s mania for over-regulating and over-taxing its economy. The UK should start persuading the rest of Europe that an amicable no-deal exit is the best deal for both sides – and to concentrate on making an economic success of that.

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