1. Power 3rd May 2017 XL Catlin, 20 Gracechurch Street, London, EC3V 0BG
Brexit and the UK Martin Wolf, Associate Editor & Chief Economics Commentator, Financial Times
Power
3rd May 2017
XL Catlin, 20 Gracechurch Street, London, EC3V 0BG

2. What lies ahead for the UK
Post-referendum economy
Negotiations
Costs
Conclusions

3. 1. Post-referendum economy: output
EXAGGERATED PESSIMISM

4. 1. Post-referendum economy: inflation
INFLATION SURGE

5. 2. Brexit negotiations: UK approach
The UK prime minister has rejected freedom of movement and surveillance by the European Court of Justice:
This means leaving the single market and rules out membership of the European Economic Area
It does not rule out membership of the customs union. But that would also preclude new trade deals at least in goods
The result is a UK demand for a “tailor-made” deal on goods and services. This will take a lot of time
So a transition will be essential. But a transition to what?

6. 2. Brexit negotiations: UK as weaker party
The UK enters the negotiations as the weaker party:
In 2015, 44 per cent of UK exports of goods and services went to the EU. But only 7 per cent of EU exports of goods went to the UK
The UK runs a large trade deficit in goods and a smaller surplus in services. The former gives leverage.
But the UK deficit in goods is also concentrated in just a few countries, notably Germany and the Netherlands.

7. 2. Brexit negotiations: trade dependence
IMPORTANT TO BOTH SIDES, BUT UNBALANCED

8. 2. Brexit negotiations: vulnerable services
SCALE AND DIRECTION OF UK EXPORTS

9. 2. Brexit negotiations: complexity & timing
Article 50 was designed to be unusable – and it is:
The Brexit negotiations will be highly complex and political. They will involve 29 parties on the EU side: member countries, plus Commission, plus European Parliament
And they are to be completed in very little time – even less time than appears to be the case
Given the need of time for ratification and for businesses to plan ahead, negotiations will need to be completed at least six months before the deadline

10. 2. Brexit negotiations: divergence
UK wants to move fast:
Nothing is agreed until everything is agreed;
Transition plan needed early
UK leverage disappeared once Article 50 was triggered
UK will be desperate for a deal as the deadline approaches
EU wants to play for time:
Divorce first, post-divorce relationship later;
Uncertainty means relocation, so play for time
EU leverage now grows over time, so again play for time
EU probably wants a deal, but not desperately so

11. 2. Brexit negotiations: hopes and fears
The best outcome would be an agreed exit, an agreed transition and a clear view on a final deal
It now seems likely that, even under this best outcome, passporting for services will have gone and so will membership of the customs union
The more likely outcome is failure: the UK would then be at ground zero for trade policy and confront an administrative and policy mess

12. 3. Costs of Brexit
Whatever happens in the negotiations, the UK will lose its current favourable access to its most important markets
It will have to shape a new trade policy
It will also be impossible to replace what it has lost, especially in services
It will have to reshape its domestic economy

13. 3. Costs of Brexit: lost trade
THE EU MADE THE UK FAR MORE OPEN

14. 3. Costs of Brexit: lost trade
IMPACT ON TRADE OF LEAVING THE EU

15. 3. Costs of Brexit: short and long run
POSSIBLE ECONOMIC COSTS TO THE UK

16. 4. Conclusion An agreed Brexit will be “hard” and incomplete
But no agreement at all is quite likely
Both the uncertainty and the costs created by the latter are likely to be high
Trade deals with the rest of the world will not offset the loss of market access to the EU
The UK will be poorer and less influential outside the EU