Imagine the British people vote to quit the European Union in the referendum David Cameron has promised to hold by 2017. What happens next What, if any, special relationship would the UK seek to retain with the EU Would it be able to negotiate what it wanted And how would the economic damage unleashed by years of uncertainty be kept to the minimum
These questions arent just troubling British businesses, the vast majority of which want to stay in the EU so they can enjoy full access to its single market. They are also worrying some eurosceptics who are concerned that, even if it would be good for Britain to quit the EU, the process of getting from A to B could be messy.
Hence, the launch of a 100,000 euros prize by the Institute for Economic Affairs, a UK eurosceptic think-tank. It will announce later this month the shortlist for the best essay to answer the question of what measures are needed to ensure a free and prosperous economy after an out vote in a putative referendum.
But dont get your hopes up. The last time British eurosceptics launched a high-profile essay prize, the Wolfson Prize, it was to work out the best way for a country such as Greece to quit the euro. The winner, Roger Bootle, who is incidentally one of the judges of the IEA prize, came up with a not terribly realistic scheme based on maintaining secrecy until the last minute.
The main reason to worry that leaving the EU could be messy is because it wont be clear after an out vote what relationship the British people will want to keep with their former partners. In particular, it wont be obvious whether the electorate wants to stay in the EUs single market or to leave that as well as the European political framework.
Losing full access to the single market would be economically damaging. After all, nearly half of the UKs trade is with the EU. Many companies invest in Britain not just because of its flexible labour markets and English language, but also to use it as the spring-board to sell across the whole EU. Thats why big investors such as Goldman Sachs and Nissan have been arguing that Britain shouldnt quit.
So, why not retain access to the single market while quitting the EU That may be possible. After all, Norway has such an arrangement by virtue of its membership of the European Economic Area. The snag is that, in return for access, Oslo has to follow the single markets product and social regulationsand it doesnt even get to vote on them. Not surprisingly, many eurosceptics want to go the whole hog and pull out of the single market too.
Unless Britain had a multiple-choice referendum or two referendums, the people would not have made clear which of these two radically different options they preferred. How then would the UK government decide which to plump for
Answering this question would be made even more complicated given that Cameron, if he was still prime minister, would probably have urged the people to stay in the EU. In such a scenario, he would be under huge pressure to resign. His successor would probably be somebody who had campaigned to quitperhaps telling the electorate that it would be easy to retain access to the single market without following its rules.
Lots of British eurosceptics believe this is possible. The rest of the EU, they reason, enjoys a big current account surplus with Britainexporting 267 billion pounds of goods and services to it last year while importing just 222 billion pounds. As a result, the EU will be desperate to do business with Britain and will agree to a relationship much more attractive than what Norway has to put up with.
If Britains post-referendum prime minister bought this line, he or she could be in for a shock. Of course, the EU wouldnt want a trade war. But it would be in a far better position to withstand one than Britain because its economy is six times as big. The EUs exports to the UK may be large, but they amount to only 2.5% of its GDP. Britains exports to the EU amount to 14% of its GDP. If London tried to play hardball, it would probably be sent packing.
Under the Lisbon Treaty, a country can notify the EU of its intention to quit. It ceases to be a member two years later. The two sides are then supposed to negotiate an exit deal. But theres no guarantee that an agreement will be reached. If that happened to Britain, the default position would be that it would quit both the single market and the EU.
An out vote in a referendum would therefore probably trigger a political crisis and a long period of economic uncertainty. In the intervening period, many businesses based in Britain would stop investing. That would be bad for the economy. If the divorce negotiations got particularly acrimonious, financial investors might even decide to stop buying government bondsleading to a sterling crisis.
Polling data suggest that the British people would narrowly vote to quit the EU if there was a referendum tomorrow. Hopefully, the prospect that the divorce would be really messy will concentrate their minds if and when it actually comes to a vote.