Comment

EU leaders risk snatching a Brexit defeat from the jaws of victory

Johnson's deal bears little difference to no-deal, so it is Brussels that has everything to lose if negotiations fail

Union flag and EU flag shaking hands with a split in the middle
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Lest we forget, Brexit was never about the merits of one trading formula over another. The Referendum was a decision on the fundamental question of who governs this country.

Lord Frost reminded everybody of this awkward detail on Monday, warning that the only possible deal on the post-Brexit relationship is one that is “compatible with our sovereignty and takes back control of our laws, our trade, and our waters.”

Brussels is taking a risk if it continues to push hard for an extraterritorial droit de regard over the British economic system, treating Great Britain as if it were a regulatory and legal satellite whilst at the same time offering a trade arrangement that is only marginally better than WTO terms.

The calculus by academics for UK in a Changing Europe is that UK per capita income under a no-deal would be 0.8pc lower a decade later than it would be under Boris Johnson’s “Canada plan” (in reality Canada Dry). Even under its dynamic scoring model – with contestable estimates on productivity loss – the gap is just 1.7pc.

This is statistical noise in the long run. There is a powerful incentive for Boris Johnson to walk away and embrace the full package of sovereign freedom should the EU overplay its hand over the final two weeks.

Prof Anand Menon from King’s College London says there are all kinds of “swings and roundabout” effects that take the sting out of a no-deal for British companies. “You don’t have to worry about the extra encumbrance of rules of origin if you are on WTO terms. You just pay the tariffs instead,” he said.

This already happens with Nafta. Canadian firms exporting to the US often find it easier to pay a tariff – even though trade is “free” – rather than bother with rules of origin paperwork.

France and the EU’s hardline bloc must be careful not to overegg demands for state aid oversight and level playing field clauses. It courts fate to keep insisting on “historic” levels of fishing access to UK waters since the issue so clearly touches what it means to be a sovereign nation. It offers political cover for a walkout if the Prime Minister is so inclined.

Fishing is the one area where the EU is self-evidently in the wrong, both because the Common Fisheries Policy has been an ecological scandal, but also because the spectacle of EU “cakeism” is most nakedly obvious. Emmanuel Macron cannot argue with a straight face – though he tries – that everything changes as a result of Brexit, but that French trawlers have an eternal right to 84pc of the catch off Cornwall.

The EU has already won a hamper of concessions, arguably more than it should have. The UK has accepted glaring asymmetry in the trading framework: one that preserves the EU’s £95bn bilateral surplus in traded goods, without offering compensating access for the UK service industry.

Europe has yet to reciprocate “equivalence” for finance and banking. It has not agreed “adequacy” for data flows or signalled what it will do on these thorny subjects. The UK is being told that reciprocity will come later provided it behaves well.

Should Britain refuse to buckle, the EU will face multiple shocks. Exorbitant farm tariffs will price a swath of EU food exports out of the UK market. They will be undercut by the likes of South Africa or Latin America. Global rivals will clean up.

The same will happen with cars. European Automobile Manufacturers Association warned in September that trading on WTO terms would have a “catastrophic impact”, both through lost sales and broken supply lines.

Korean, Chinese, and Japanese producers would swoop in. There would be import substitution. Nissan might activate its contingency plan, doubling down on output from its Sunderland plant to pursue UK market share, while closing its plant in France.

Prime Minister Boris Johnson wants to rehabilitate Brexit Britain as an open, tolerant, and reliable state Credit: AFP

While it is extremely regrettable that Ireland has been caught in the cross-fire, it is undeniable that a maximalist ideological line by the EU at this juncture would be tantamount to throwing the Irish rural and agroindustrial economy under a bus.

Brussels would have to decide whether to order Dublin to erect a visible North-South border on the island, a move that would precipitate a showdown with the Irish government, since no Taoiseach could survive such a decision.

Jill Rutter from UK in a Changing Europe said there is a perverse short-term temptation for Downing Street to force a no-deal because there will be a bout of disruption in January whatever happens as the country adapts to the new regime of customs clearance.

“If there is a no-deal, you can at least blame it all on the Europeans, instead of owning it yourself. The thing about Brexit is that benefits accrue over the long run but all the bad stuff is crystallised up front, and a pandemic is a great time to disguise it,” she said.

“There is the danger of a big misunderstanding. The EU has assumed all along that the UK just has to do a deal. They can’t believe that we would add to our problems when the economy is already suffering so much from Covid,” she said.

Michel Barnier’s taskforce undoubtedly understands that the political calculus is finely balanced. Whether the rest of the EU political class grasp this point is less clear. Most have interpreted the Cummings purge as a signal that Downing Street is about to roll over. They think that the defeat of Trumpism clinches the argument.

There is certainly a landing zone in view if the EU does not overdo the triumphalism. The Prime Minister wants Brexit out of the way. He does not want it to poison the UK’s showpiece leadership of the G7 and the COP 26 climate summit this year, or to set the path for years of bitter recrimination with Europe. He wishes to avoid a calamitous start with Joe Biden.

In short, he wants to rehabilitate Brexit Britain as an open, tolerant, and reliable state, and he wants to refind his old magic as the likeable, liberal Mayor of London.

Mujtaba Rahman from Eurasia Group is convinced that a deal is already in the bag and that the final days of brinkmanship are a choreographed ritual. “It is all tactical: the French understand that they will have to move on fish, and they will move,” he said.

A formula will be found that gives the fishermen of Eastern Scotland a vastly increased catch. “Boris will use this as a weapon against Nicola Sturgeon,” he said.

In exchange, the UK will beef up the enforcement powers of an independent competition regulator, which is what Brussels really wants. This is scarcely a sacrifice for London since Britain is the least dirigiste of the big West European states and is likely to remain so. It will be a UK regime under UK courts. The niceties of sovereignty are respected.

“There will be a trade deal by the end of November and people claiming there won’t be a deal don’t know what they are talking about,” he said.

If Mr Rahman is right, the currency markets have seriously mispriced sterling. Some hedge funds will make a lot of money over the next two weeks.

Personally, I am inclined to this “optimistic” view. But never underestimate the ability of Europe’s political leaders to misjudge British politics. They may yet snatch defeat from the jaws of victory.

Read more: Perfect sovereignty under Brexit will come at an economic cost