Four reasons why Brexit negotiations are harder than you (or the Cabinet) might think

We're not all economists, the EU has other concerns, and the structure of the negotiations allows small blocking minorities.

Today the Cabinet meets at Chequers in an attempt to move beyond the platitudinous "Brexit means Brexit".

We don't know what options will be discussed, except that the UK may be looking to preserve passporting for its banks, which has already been described as unlikely.

My best guess is that many people in that meeting are likely to over-estimate Britain's ability to secure a good deal both on (a) the terms of exit; and (b) Britain's subsequent trade relationship with the EU. I'm not saying this because I've read over the different issues which might be at play during the negotiations, but because of the way this negotiation is structured.

First, I think we should be wary about attributing a particularly form of short-term economic rationality to other European Union member states. You'll often see what I call the Volkswagen Opening (although it works just as well for any other German manufacturer):

  • Volkswagen want to sell cars to the UK;
  • If the EU put up barriers to trade, then the UK would retaliate, which would make it more difficult for Volkswagen to sell cars to the UK;
  • Therefore Volkswagen (and Germany) will not permit the EU to put up barriers to trade.

You can find this kind of thinking in an IEA blog post (written before the referendum), in which Len Shackleton writes that whilst "[i]ndividuals may cut off noses to spite faces… politics doesn’t necessarily work like this".

The problem is that, from the perspective of the European Union, this is exactly what Britain has done — it has chosen to damage its economy in the pursuit of other goals, such as reducing immigration and reclaiming sovereignty. If we are not über-rational economisting utility-maximisers, why should anyone else be?

Second, even supposing that it was in the EU's short-term economic interests to offer a high degree of access to the single market, it might not be in the EU's strategic interest. In an iterated prisoner's dilemma game, where parties can secure benefits by co-operation, co-operation usually emerges. In these games, the most successful pure strategy is called tit-for-tat — if you renege, I'll punish you in the next round of the game. In this instance, it's the UK which has reneged first. If the rEU were collectively playing tit-for-tat, it'd be their turn to tit for our tat.

The rest of the EU isn't a unitary actor, and so the comparison is flawed. But there are long-term reasons why the EU would have reasons to punish Britain. It may want to do so to ensure co-operation on the part of future trade partners or accession countries. Alternately, it might want to deter exit by current member states.

Third, I think too few people understand the reversion point in these negotiations, and how it differs from the status quo. In EU politics, the status quo is very robust. It takes a lot of concerted effort to shift policy from the status quo. In predicting the outcome of policy disputes, it's usually reasonable to predict that the final outcome won't be that far from the current outcome.

This might lead people to think that the UK could secure a deal which is quite close to the deal it has presently. The problem is that under Article 50 the reversion point — the outcome if no agreement is reached — is very different from the status quo. The reversion point involves the UK trading with the EU on the basis of WTO rules, which would be very bad for the UK. This means that recalcitrant member states (i.e., member states who would see the UK trade on terms closer to WTO rules than the status quo) can block outcomes which seem as though they should be reachable starting from the status quo. Deals which might seem doable turn out not to be — because "you can't get there from here".

Fourth, I also think that too few people understand the decision-making rules used in these negotiations. Britain's exit from the EU will be decided by a qualified majority vote in the European Council, with the consent of the European Parliament; and Britain's future trade relationship with the EU may be decided by unanimity in the European Council, with the consent of the European Parliament.

This means that rather than reasoning from German preferences, or the preferences of the average European Union member state, we need to think far more pessimistically. We need to line countries up, from most to least well-intentioned towards the UK, and walk almost to the end of that line.

This has implications for the Volkswagen Opening mentioned above. We don't just need to be concerned about Germany — we need to be concerned about countries which have limited exposure to the UK, but which see an opportunity to benefit from Brexit. It doesn't need to be in the interests of all or even a majority of EU member states for Britain to be given a hard time — it just needs a small awkward squad. At least Euroskeptics know about those.