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Dawning consequences of Leave

by Niels Thygesen

Dawning consequences of Leave

The Leave vote’s economic and political consequences for the UK are dawning. Most visible are the short-term reactions on financial markets. More significant are downward revisions to the economy’s prospects for the next few years. Most important is the longer-term loss of income.

The precision with which official and private sources evaluated this loss during the referendum campaign was ridiculed. But the conclusion the UK will suffer a major loss of income is inescapable – particularly if one takes into account Leave advocates’ (politically logical) rejection of continued participation in the single market.

Voters legitimately allow expectations of sovereignty gains to outweigh the likely costs. In the UK’s case, the latter are not just economic, but primarily political.

A second Scottish independence referendum has moved closer. Northern Ireland appears unlikely to accept border controls with its southern neighbour. The two main UK political parties are torn by strife.

A double gamble by David Cameron, the British prime minister, has backfired.

An effort to avoid drawing the implications of the vote by not invoking Article 50 of the European treaty would lead to an impasse – for two reasons.

Sympathy for variable geometry

The first is that the vote rejected not a normal European Union membership, but the exceptionally accommodating position long enjoyed by the UK, further consolidated by Cameron's February renegotiation.

While many in the EU have expressed sympathy in the past for flexibility in membership rules – so-called 'variable geometry' – 'Brexit' has damaged the prospects for this model: it did not work. Experience suggests that renegotiations with a government based on that government's expectations of a subsequent vote are very hazardous.

A second, more formal, reason to start the review of the terms of exit is that this is a prerequisite for starting to clarify the UK's longer-term relationship with EU members. The latter negotiations cannot be brought forward and merged with the exit review. In particular, the EU cannot negotiate new trading arrangements in detail while the UK is still a member.

So it is the duty of the 27 EU member states, not a sign or arrogance of bitterness, to press for early exit moves in order to get to the longer-term agenda without undue delay. However, as only the UK government can take the formal step, there are incentives to express such views in the meeting room rather than in public.

Other EU governments could use the interlude to evaluate where their respective national interests lie in the subsequent negotiations, which should not focus primarily on whether particular steps are more or less favourable to the UK.

We all have a major stake in the outcome. Help to facilitate the UK transition must depend on whether it also in the interest of each of the other 27 EU members.

Niels Thygesen is Emeritus Professor of Economics at the University of Copenhagen and a Senior Adviser to OMFIF. A longer version of this article first appeared in Danish newspaper Børsen.