Michel Barnier has a strong mandate but little room to negotiate © Bloomberg
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UK politicians are bickering over whether a breakdown of Brexit negotiations — and thus “no deal” — is better than an expensive and extended transition into some future arrangement similar to the status quo. This has pitted Brexiters against Remainers in the Conservative party, and has led the shadow chancellor to make the strange claim that Labour would not countenance a no-deal Brexit.

This is a sterile debate. The more relevant question is how the EU views the situation. Both the structure and the content of the negotiations so far suggest that a no-deal Brexit is the EU’s unacknowledged preference over any plausible compromise agreement.

First, the structure of the talks dictated by the EU militates against early progress. By insisting on sequenced, rather than parallel, negotiations and by prioritising the biggest win/lose issue first — namely the exit bill — it is inevitable that agreement on this will be very difficult.

Complex negotiations normally start with the easier win/win issues to build trust and momentum. The more difficult issues need to be addressed in parallel so that trade-offs can be found where each side gives something in one area to gain something in another. Because the EU has insisted that it will not discuss future trading arrangements until the UK has met its demands for an exit payment and agreed terms on two other issues, the negotiations are at risk of a breakdown long before the deadline in March 2019.

Second, the inflexible remit agreed by the 27 EU members provide Mr Barnier with a strong mandate but little room to negotiate beyond that opening position. Thus, even with simpler win/win issues such as the residency rights of EU citizens currently living in the UK and vice versa, the accommodating proposal from Britain was rejected on the grounds that it did not meet all the demands of the EU’s mandate.

As far as we know, the EU has offered no further ideas or attempts to move towards a compromise, probably because to do so would require a renegotiation among the 27 remaining member states.

Third, as Wolfgang Munchau pointed out, in the EU “deadlines are never deadlines”. A no-deal outcome in reality means an even longer extension of post-divorce uncertainty while both sides regroup for further negotiations after Brexit takes effect. This would be advantageous for those EU countries hoping to attract British businesses, jobs and skilled workers who decide that relocation is better than continued uncertainty.

Fourth, one cannot ignore the knock-on political effects of these negotiations. From the EU perspective, the first-best outcome is that Britain accepts all of its opening demands, including a large exit payment. This is Mr Barnier’s remit.

A second-best, but more feasible, outcome is a negotiated agreement where both sides gain some of their objectives and compromise on others. But that carries political risk for the EU. Any agreement that appears favourable to the UK in the eyes of other member countries could encourage political agitation to follow Britain’s example. Thus, a no-deal Brexit may well be preferred by the EU to a “good” deal for Britain.

Game theory provides many examples where the outcome of a negotiation is worse for both sides than a mutually beneficial compromise. A no-deal Brexit would have costs to the EU beyond the loss of Britain’s budgetary contribution. EU exports to the UK are 30 per cent larger than Britain’s exports to the EU. The number of EU citizens living in Britain is roughly three times as large as the number of British citizens living in the EU.

Both sides would benefit from a balanced deal. But for the reasons given here, a no-deal Brexit may be the route the EU determines. This makes it all the more imperative that the UK government embarks on serious preparation for World Trade Organisation regulated trade and new unilateral immigration policies that benefit the national economy post-Brexit.

The writer is a former member of the Bank of England’s Monetary Policy Committee

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