19 May 2020

Ignore the Delayers, we must seal our exit from the EU in December

By Patrick Minford

The Remainers are at it again. ‘Look’, they say,’ haven’t we got enough on our hands with the virus crisis? Let’s not add to it the costs of breaking up messily with the EU!’

But once again they have got it the wrong way round. The extra mess would come from staying in the EU’s clutches for another year; and if one, probably at least two.

Hoping the Remainers will succeed in their campaign, the EU is being awkward in the negotiations, making ridiculous demands for us to submit to future EU regulations and to let the EU keep the same fishing rights in our waters that it has now. Of course the EU wants us to stay as long as possible so that they can pocket our budget contributions and control our trade. But we would be mad to agree to any of this. They simply do not see us as a sovereign state.

Faced with the EU’s absurd demands, the only way to bring about a fair free trade agreement is to be willing to walk away, trade under WTO rules, and take back control of our trade, our regulations, our money, our borders and our fishing.  As it happens that would bring us big gains.

We can fix free trade deals with the US, and with Commonwealth and Asian countries eager to work with us. These would bring down our prices and create competition, benefiting our consumers and raising productivity. We can bring in new regulations that suit us, reinforcing UK innovation and competitiveness. We can run our own immigration focused on bringing in the skills we need and not on subsidising unskilled workers who push down UK wages.

As for the EU, WTO rules would stop any nonsense at the border, including false illegal claims we do not meet export standards we have routinely met for 40 years, and inspection hold-ups that conflict with WTO seamless border’ requirements.

Yes, with no trade agreement, they will impose tariffs on our exports, and we will impose our tariffs on their exports to us. But with current EU tariffs our tariff revenues would be £13 billion pa, £8 billion a year greater than theirs. However, in parallel, we would agree FTAs with the rest of the world resulting in the UK market trading at world market prices that, on average, are about 20% lower than EU prices. This means that EU exporters would have to absorb our tariffs in order to sell into the UK market. So, our consumers would not be hurt.

What is more, our exporters would raise their EU prices to pay the EU tariffs on top of the world market prices prevailing here, but they would not be hurt because they can sell here or anywhere else in the world at these prices and, even after adding the EU tariff, they would remain competitive thanks to the EU market’s high, protected prices.

So imposing tariffs benefits us at the EU’s expense.

When you add all this up, we gain a big plus to our economy from leaving the EU on time under WTO rules. No mess there at all. Instead, we calculate a boost of about 7% of GDP coming in over the next ten to 15 years.

But now look at the other side of the coin: the effects if we extend the transition period and delay our exit. How long would this be for? Would the EU and the Remainer lobby not just ensure that we extended the transition for the maximum time of two years? Even though, under EU rules, it can be extended only once, would we possibly find that ways of extending again are conjured up by the Delayer cronies? Are they not simply playing for not leaving at all or a ‘Brexit in Name Only’? If there is no EU agreement now that avoids leaving under WTO rules, why should there ever be one? If we are not tough enough with them to leave now, why should the EU not continue their blackmail ad infinitum?

We are therefore looking at an alternative world where delay could well be for at least two years.

What would this world look like? First, we can kiss goodbye to free trade agreements with all our non-EU friends, who will be exasperated by our delay and indecision, and unwilling to invest time and goodwill in us. This would lose us those gains from trade in lower prices and higher productivity.

Second, we would continue to be ruled by EU regulations; that is, all EU laws and we would have no voice in setting them. The costs could be huge. The EU has big ambitions to introduce new taxes, including on our vital financial services industry; it wants to bring in carbon taxes and control our industry’s emissions, at big costs to consumers; it wants to put limits on innovation with a blanket safety-first approach; it will stop us boosting the competitiveness of our industries via state aid rules. The list goes on.

Then, there is the budgetary cost we must pay and the loss of control of immigration.

When you add all these losses together compared with leaving on time, you come up with the cost of a two year delay of about £400 billion, as explained in the Centre for Brexit Policy paper, ‘Brexit Delayed is Brexit Denied‘. This figure is a minimum because the EU would be free to impose new damaging rules and trade demands on us that we would have no power to resist. And, if the two year delay meant losing Brexit all together (as the Delayers intend), the long term cost could be in the trillions of pounds.

But finally, you come to the most frightening part if we extend the transition period. How much might we have to pay for a bailout of the Eurozone and its iffy banks, whether in the virus crisis or some Euro crisis yet to come?

EU banks are stuffed full of their own governments’ mostly dubious bonds; and the ECB is also stuffed full of them, as it has printed euros to buy them in great quantity to prop up the Eurozone economy. Yet countries like Italy and Spain have to borrow massive amounts to deal with the corona virus crisis; and Germany and other northern EU countries are refusing to help them out. If markets push up the cost of their borrowing, they could well go bust, and with them their banks. The meltdown would be appalling. And, if we were to remain in the Transition Period, we have to take a share of it under EU emergency budget mechanisms; that share is not clearly limited, and we would have no voice in setting the share out rules.

For example Italian debt is growing towards 150% of GDP, once the cost of the virus bailout is factored in. With a GDP of around £1.6 trillion, that implies a debt level of £2.4 trillion. Supposing Italy defaulted and we were faced with covering 12% of this amount (roughly our share of EU GDP), it would cost us just under £300 billion, about 15% of our GDP. We simply must not be trapped in such a dangerous situation.

The harsh truth is the contrary of Remainer propaganda: if we do not leave on time in December, we face serious costs and worse dangers. We must stick to our deadline and then there is every chance the EU, faced with its own terrible crisis, and its own costs of no deal, will agree to a fair and sensible departure agreement.

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Professor Patrick Minford is a fellow at the Centre for Brexit Policy.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.