Hard exit wouldn’t be too bad
Anyway, let’s talk about where the economics of Brexit seem to stand now.
The long-run economics of Brexit still look mostly the same way they did when I and others began analyzing the prospect back in 2016.
Exit from Europe’s customs union would substantially raise transaction costs on roughly half of Britain’s trade. This would impose a cost on overall British real income that most estimates put at a low single-digit percentage of GDP — say, 2 to 4 percent.
This wouldn’t be the economic deliverance some Brexiteers envisioned, but maybe the more important point here is that the effects of Brexit after a few years have passed don’t look catastrophic.
How confident can we be that it wouldn’t be too bad? Quite confident, because other countries have managed decently without customs unions despite close economic ties to a much larger neighbour.
Put it this way: A post-Brexit UK would be to the EU pretty much as Canada was to the US before the US-Canada Free Trade Agreement (which came a few years before NAFTA.) In fact, even the share of cross-border trade in GDP would be similar. And Canada wasn’t a howling wasteland.
We might also note that there would be some winners from Brexit, even within the UK. The EU has been good for London’s role as a financial center, but this role has kept the pound high, hurting the industrial North.
Brexit would mean a persistently weaker pound, which would mean a bigger manufacturing sector, which would be a benefit to industrial regions (although diluted by higher consumer prices.) A significant number of people in Britain might consider this worth it.
Short run could be ugly
However, while the long-run effects of Brexit would probably be moderate (although 3 percent of GDP is actually a big deal compared with the effects of most economic policies), the short run could be much worse — both for Britain and for the EU.
The reason the short run could be so ugly is that after almost 45 years in the customs union, neither Britain nor its trading partners have in place the infrastructure that you need to operate a border, even a friendly one.
If you aren’t in a customs union — if goods have to clear some kind of border procedure — you need to have a sufficient number of customs inspectors, an adequate computer network, and so on.
Without those you’ll experience massive delays — hence the plans to use highways near Dover as massive parking lots to handle the backlog of waiting trucks.
Because that infrastructure isn’t in place, the initial drop in UK-EU trade could be much larger than the long-run effect, and also disorderly, with no guarantee that the highest-priority goods make it through.
This kind of disruption at the border is what underlies the huge losses implied by the Bank of England’s worst-case scenarios.
We’ve known about this prospect for quite a while; I’d be curious to know what steps the UK government has taken to limit the damage.
They’re aware of the issue, so they must be making adequate preparations, right? I mean, you can’t imagine the US government being completely unprepared for a predictable disaster. Oh, wait.
EU risks look larger
What’s new, I think, is that the short-run risks for the rest of Europe now look substantially larger than they were even a few months ago. Obviously EU-UK trade is much smaller relative to the EU economy than it is to Britain’s.
But it so happens that a hard Brexit, if it happens, will coincide with what appears to be the worst slowdown since the euro crisis of 2011-12.
That crisis ended with a dramatic monetary intervention, Mario Draghi’s “whatever it takes.” It’s hard to see anything comparable now; in fact, the ECB already has negative rates, so there’s no room to cut. And adding a disorderly Brexit to the mix is the last thing Europe needs.
I might add that while I hope and expect that the British civil service has made contingency plans for a sudden hard Brexit, I’m far less sure that the EU has done the same.
The thing is, an ugly Brexit should be easily avoidable. If the border infrastructure isn’t there, then just postpone the event until it is — or, if that’s impossible for some political reason, settle for minimal enforcement, basically a customs union in practice though not in principle, while things get sorted out.
And there’s no reason not to believe that things will in fact be worked out — no reason, that is, except everything that has happened between Britain and the EU so far.
The New York Times