Asymmetric risk can be a very good thing – when the rewards outweigh the risks – or it can be a very bad thing – when the risks outweigh the rewards. Investors spend their time looking for the former and steering clear of the latter. For that reason, the successful ones usually aren’t the high-rolling adrenaline junkies they are caricatured as. They tend to be a lot more cautious. And a lot more boring. As Warren Buffett once put it, he “waits for the fat pitch to swing”.
It is worth thinking about asymmetric risk when it comes to Brexit, a subject on which level-headed analysis of the pros and cons of Britain’s various options has been in short supply lately. (By the way, I write as someone who voted Leave, and would vote Leave again.)
Today, the cabinet agreed to spend £2 billion on no deal preparations and send advisory letters to 140,000 firms who trade with the EU.The move is confirmation – not that it is needed – that a no deal Brexit remains a very real possibility. Indeed, 11 cabinet ministers are reported to favour a “managed no deal” if May’s deal is voted down.
So the calculation MPs must make over Christmas, as they mull the meaningful vote that awaits them in January, needs to include an assessment of a no deal Brexit. Crucially, any responsible member of Parliament must include in their calculation not only their preferred version of a no deal Brexit but the range of no deal outcomes that may come to pass.
A non-catastrophic version of no deal is certainly possible. And MPs can ignore some of the more outlandish claims made about crashing out. For example, the only correct response to someone planting vegetables in their garden because of Brexit is derision.
But the comfort that comes with talk of a “managed” no deal is, at best, limited. For Britain alone doesn’t get to choose how managed the process will be.
If the Article 50 clock runs out without a deal being agreed, the UK technically defaults to third-country status. At which point, managing means striking a series of small deals with the EU; deals the EU doesn’t have to accept.
In such a scenario, common sense would dictate the swift agreement of arrangements between the UK and the EU to avoid queues at ports, grounded flights and some of the other more nightmarish eventualities associated with no deal, or perhaps even a broader standstill agreement. After all, no deal is not pretty for EU member states either.
But anyone willing to bank on common sense winning the day is not someone who has been paying attention to the negotiations so far. (One of the paradoxes of the hard Brexiteers’ argument is their belief that the EU is a deluded political project run by people who will stop at nothing in their pursuit of ever closer union, while simultaneously basing so many of their assumptions on what economic self-interest dictates.)
At this late stage, the unavoidable fact is that accepting no deal means accepting the possibility of a wide range of outcomes, ranging from a manageable set of short-term and small-scale costs to an economic hit and political humiliation few governments would survive.
That, of course, is only half the picture. What about the upsides of no deal? What could make this trade off worth it?
There is the economic upside: the freedom to strike trade deals with the rest of the world and diverge from the single market, both of which would not necessarily be possible under May’s deal.
This argument is unconvincing for a number of reasons. First, Britain does not appear to be a country champing at the bit to capitalise on the freedoms that would come with a clean break from the EU. Consider the productivity-boosting tools already at our disposal that we refuse to use. The EU isn’t stopping us from overhauling a planning system that chokes off economic growth. That is the fault of the electorate’s own political preferences. Are British politicians willing to expose British farmers to unfettered foreign competition? Or assure British voters that chlorinated chicken – to take one headline-grabbing consequence of a trade deal with the US – is perfectly safe? The answer is almost certainly no.
Second, May’s deal leaves open a route to an outcome where Britain wins substantial freedoms in these areas. Assuming Britain can find an answer to the Irish border – something most Brexiteers are confident exists – and escape the maddening backstop, then the Political Declaration on future UK-EU relations outlines that a Canada+ style deal is possible. That is the preferred option of former Brexit Secretary David Davis and other prominent clean Brexit advocates.
The biggest purported advantage of rejecting the Withdrawal agreement and taking seriously no deal, however, is not economic but political. It is that unquantifiable but crucial thing called leverage. The strategic case against May’s deal, which centres on the Irish backstop and money, is that Britain is surrendering its bargaining chips. The fact that the Withdrawal Agreement contains no formal mechanism for Britain to unilaterally escape the backstop is — as I have argued before — maddening, self-defeating, unfair and highly undesirable.
But the no deal advocates’ mistake is to think that their alternative course of events changes the dynamics of the negotiations for the better.
As Peter Foster, the Telegraph’s astute Europe Editor puts it, no deal “will not change the fact that the UK will need a trade deal of some form with the EU, given the bloc remains the destination for 43 per cent of UK exports. Negotiating that is tough; negotiating it from a position where the EU can impose costly and disruptive frictions on the UK economy will be tougher still”.
In other words, no deal’s upsides are very limited and fairly easy to foresee. The downsides, by contrast, are much harder to predict and have the potential to be very costly indeed. It is an example of the wrong kind of asymmetric risk. And that is why it just isn’t a chance worth taking.
