BEFORE the campaigning for Britain’s referendum on the European Union hit its stride, some people quaintly imagined that it might settle things once and for all, lancing the boil of an argument that has been festering for the best part of a generation. Fat chance. A victory for Remain would leave Britain divided, the losers embittered and political life coarsened (see article). A victory for Leave, which is what the latest opinion polls predict, would see economic turmoil and political strife as the winning side learned that, for all it might have talked of taking back control, it remained at the mercy of economic forces and the members of the union it had spurned.
David Cameron says that if Britain votes to leave he will immediately invoke Article 50 of the Lisbon treaty, which sets out the rules for negotiating a member state’s departure. That would give the two sides two years to finalise a deal—a timetable that can be extended only with the consent of all concerned. If no agreement were reached Britain would have to fall back on trading with the EU under World Trade Organisation (WTO) rules, which would imply tariffs and no special deal for financial services.



Mr Cameron also says he will stay on as prime minister and represent Britain in those negotiations; some in the Leave camp, such as Michael Gove, the justice secretary, say that they, too, would like him to stay. But it is hard to imagine that the victorious Leavers would really be happy seeing the leader of the Remain campaign negotiating Britain’s new deal with the EU. The odds are that the Tories would be looking for a new leader within days.
All or nothing at all
What sort of deal might that new leader try to get? Some want no deal at all. A group called Economists for Brexit (EFB) suggests simply abolishing all import tariffs. The ensuing rise in trade, it says, would boost GDP by 4%. Yet this prediction relies on small changes in trade costs having implausibly large effects on how much trade goes on, say researchers at the London School of Economics. Besides, the EFB assumptions are politically implausible.
At the other end of the range of options is a deal in which Britain, while leaving the EU in accord with the will of its people, remains part of the EU’s single market. This is the arrangement Norway has, by dint of the European Economic Area; Switzerland, though not a member of the EEA, has something similar. In Norway’s case the deal means accepting the free movement of labour and observing almost all EU regulations while having no say in writing them. And it contributes heavily to the EU budget for this privilege.
The Leave campaign’s strongest cards are the public’s distaste for immigration, its desire for self-determination and its dislike of sending money to Brussels (see article). This suggests that the Norwegian option would be unacceptable to the pro-Leave majority of the Tory rank and file, who will get the final say in the choice of the next party leader. The prospective leader who wins their support is likely to have to promise blocks on the free movement of labour. That probably means getting nothing more than a bespoke free-trade deal for some sectors at best, with WTO rules the fallback option.
Once that leader becomes prime minister, though, he or she will have to deal with the will of Parliament. Fewer than 150 Conservative MPs and only a handful from Labour are openly backing Leave; even if some others are playing a waiting game, that suggests a large majority for Remain among the 650 members of the House of Commons. Those MPs might well prefer a Norwegian option to WTO rules. If push came to shove—and the campaign has shown a marked tendency for pushing and shoving—a Tory leader committed to a right-out-of-the-single-market version of Brexit might not be able to win a vote of confidence. An autumn general election could then follow.
Whether MPs go that far will depend in part on how dire the economic response to a Leave vote turns out to be; the worse things look, the more important it will seem to try and stay in the single market. Estimates of Britain’s economic growth this year have already dropped to 2%, barely above what is expected of the euro-zone (though were Brexit to come about, the euro-zone’s growth would be hit, too). Investors have been selling sterling assets at the fastest rate since the financial crisis of 2007-08; the pound has dropped by 7.5% over the past 12 months. This is part of a broader move into safer assets (see article), but it also reflects Brexit fears.
The National Institute for Social and Economic Research (NIESR), a think-tank, predicts a 2.9% fall in GDP in the short run and worse in the long run, brought about by factors like lower trade and falling foreign direct investment. The knock-on effects would hit productivity and wages; a further fall in sterling would push up prices. Tighter controls on migration would make things worse.
Wonks are poor forecasters, say Brexiteers. Indeed, the Leave camp claims that recent data suggest Brexit might help the economy. In April exports rose to their highest level for three years in nominal terms. A Brexit-induced slump in sterling, the argument goes, would boost the economy further. This is not necessarily true. Foreign orders do not respond instantly to depreciation—which also raises the cost of imported inputs. The hit to confidence and credit from Brexit would hurt exporters more than a weak pound would help. In 2008-09, when sterling slumped, exports barely responded.
On June 14th George Osborne, the chancellor, said that in light of these likely effects a Leave vote would necessitate an emergency budget to raise taxes and cut spending. Mr Osborne’s announcement feels more like an attempt to frighten voters—or perhaps a scorched-earth strategy—than a politically plausible plan. But at some point a deficit swollen by Brexit would have to be dealt with.
The severity of the prompt economic fallout may determine what sort of deal Britain tries to get. But the results of any negotiations will depend on how generous its EU partners would be. The terms of any new trade deal would have to be agreed on unanimously, which could make the complexity of the negotiations overwhelming. Donald Tusk, president of the European Council, says it might easily take seven years. And the three biggest economies, Germany, France and Italy, while all wanting Britain to remain, are not willing to let it leave unscathed.
France is the foremost scold. Although its president, François Hollande, has kept quiet during the referendum campaign, for fear of provoking greater pro-Brexit feeling, he made his views clear at a Franco-British summit in Amiens in March. “I don’t want to scare you,” he said, but a Brexit vote would have “consequences”.
The kindness of soon-to-be strangers
French politicians see playing hardball in the negotiations rather as Voltaire saw the execution of Admiral Byng following his loss of Minorca; the sort of thing that has to be done “pour encourager les autres”. The worse Britain does on its own, the more it will encourage others to stick with the EU. This includes the others at home; France’s populist National Front is promising voters their own referendum. In 2005 the French voted down the draft EU constitution, shocking their political leaders. Today they are second only to Greece in their Euroscepticism. A new Pew poll finds that 61% of French voters have an unfavourable view of the EU; the British figure is just 48%.
The French government is also working on ideas to breathe life into the European project that will focus on defence and security co-operation. There is irritation in Paris that the government has put European initiatives on hold for many months to avoid upsetting British voters. “This can’t go on for ever,” says one minister. France wants to present these ideas to the European Council at the end of June and hopes for Germany’s support. Thomas de Maizière, the German interior minister, sat in on a French cabinet meeting on June 15th; Mrs Merkel was due to watch the Germany-Poland football match with Mr Hollande at the Stade de France the next day.
Like the French, German politicians are cautious in discussing Brexit for fear that foreign warnings could boost the Leave campaign. But the country is keen for Britain to stay. Germany wants the EU to move in a broadly Anglo-Saxon direction (see article). It would like it to concentrate on cutting bureaucracy, returning powers to governments (while limiting state intervention) and co-operating more in foreign policy rather than pushing deeper integration. “In Berlin everyone’s keeping fingers crossed,” says David McAllister, a German member of the European Parliament who has a Scottish father. If Brexit wins, he says, he will cry for days.
Wolfgang Schäuble, Germany’s finance minister, has warned that Britain cannot expect favourable treatment after an exit vote. “In is in. Out is out,” he says. But many expect Germany, which has a big trade surplus with Britain and would not want to damage its own exporters, to take a softer line than France. “Germany will play the good cop, and France will play the bad cop,” says Yves Bertoncini, director of the Jacques Delors Institute. But this does not mean Germany will truly be on Britain’s side, any more than good cops really side with crooks. The National Front and Frexit frighten Germany, too.
Matteo Renzi, the Italian prime minister, has played down Brexit, saying that it would be a disaster for the British, but not a huge drama for Italy and the EU. But Italy would definitely like Britain to stay. For one thing Mr Renzi often finds himself on the same side as Britain in the council; he would feel more isolated without it. There is also scarcely a middle-class family in Italy’s big cities that does not have a child working or studying in Britain.
And, as in France, there is a fear that Brexit would encourage Euroscepticism at home, both in the xenophobic Northern League and the populist Five Star Movement. Given the sick state of Italy’s economy, which has barely grown since it joined the euro, they might easily be convinced to leave.
Would Mr Renzi’s government join others in taking a tough line? “We are not particularly tough. It is not in our DNA,” says Marta Dassu at the Aspen Institute, who is also a former junior foreign minister. “But I think we would wish to align our positions with those of France and Germany. We would want to stay in the core.”
If Brexit means that this core fears for its continued cohesion, or is unable to persuade all the other members of the EU to accept a new trading arrangement, the chances of Britain getting a good deal from its former partners will be slim indeed.