Note: I have absolutely no internal contacts with the EU, Her Majesty’s Government or anyone else involved in the Brexit negotiations so this article is speculation based on public documents and news articles.

With that disclaimer out of the way, let me cut to the chase. I’m 99% sure the Brexit negotiations are going to collapse and the UK will thus be entirely separate from the EU. In the medium term that will be a good thing, but in the short term it will cause chaos for the UK, Ireland and probably much of Europe.

Why do I think this? because the EU leadership want to punish the UK for having the temerity to

  1. hold a referendum on the EU
  2. actually follow the popular wishes expressed in said referendum

Other nations have in the past had referenda on various parts of EU membership – France, Ireland and Holland come to mind as ones who have voted against the EU at various times. Whenever the vote has been against the EU, the population has either been told to do it again and this time get the “right” answer or the EU and national governments have simply ignored the vote and pressed on anyway.

The EU elites are simply in denial that a government would not do the same but the Conservatives are absolutely united on the principle that “Out means out” and that therefore the UK will be leaving.

Right now the argument is about the “non-negotiable” cost of leaving, which, as Tim Worstall points out, is really the cost of staying. The EU insists this has to be resolved before anything else and the lead EU negotiator has been really snarky about the UK position. He is of course wrong, only an idiot or a Eurocrat (but I repeat myself) would think it sensible to first agree the price and then haggle on what you get for the money.

A sane EU would first go for the obvious win-win points get them out of the way and then go for the trickier ones. For example no one wants a European version of Indian partition to take place across the English Channel so it is obvious that a) visitors who are non-workers and not entitled to benefits/healthcare etc. will be allowed to enter and live as freely as they do now and that b) current residents as of some defined date like the day the UK formally submitted its leave notification will also be allowed to work etc. etc.  Then you’d work on other easy things such as the academic research funding (the UK wants this and has stated its willingness to continue to contribute to it) before moving onto slightly trickier points like, say, the Irish border, customs inspections and how to avoid them by doing the paperwork properly and so on. Only once you’ve got the obvious stuff knocked out do you go to the contentious issues like payment, tariffs and so on.

In my opinion the fact that the EU is attempting to do the whole thing bass ackwards is a strong indication that they want it to fail unless the UK is humiliated. I’m fairly sure that HMG is not keen on the humiliation idea so therefore I expect they will prefer a hard Brexit with no agreement to some kind of deal where the UK pays a huge amount to not really escape the tentacles of Brussels other than in a few meaningless areas. This might also explain why Jean Claude Druncker spouts utter bollocks regarding the negotiations. On the other hand it is possible that this bass ackwards approach is because the payment issue is the most important thing for the Eurocrats personally. If the UK pays nothing then the EU budget will take a big hit and the generous Eurocrat lifestyle may have to go on a bit of a diet, not that the Eurocrat perks will likely suffer much, after all some of the top ones have nice lucrative side jobs, more likely there will just be less pork to spread around and thus the EU will become less popular with the populace. Either way the UK clearly needs to play hardball on the contribution issue and work on contingency plans for when the EU stomps off in a huff because it isn’t getting the money is wants.

The crudest response is to simply and unilaterally declare that the UK will allow tariff free entry of goods from the entire world and that it will look at ways to strengthen its position as a financial center. The former is obviously just a UK benefit, the latter part is potentially a weapon to wield in a war against the EU

For example the UK might, say, declare that it will not share tax information with countries with which it does not have a free trade deal in place or in the works. Since it is highly likely that it will have deals nearly ready to sign with much of the Anglosphere (as well as some of Asia) this will effectively mean the only developed nations that it won’t share tax information with are EU ones. This would make London a tax haven for EU entities which means that if EU citizens/companies want to stash their loot in London to avoid paying local taxes on it (because you can be fairly sure that the UK tax rates will be lower) the UK will not tell the EU tax authorities how much capital and income is involved. At this point you can watch a giant money vacuum appear in London that sucks liquidity from all sorts of EU financial institutions and associated nations leading to their economies going titsup.com.

This is of course speculative but it’s an interesting thought experiment to continue with. I don’t know exactly what a continent-wide bank run would look like but it wouldn’t be nice and the only way to stop it would be to implement capital controls and other similar rules from the economic boom times (ha ha) of the 1970s. Now while those capital controls might stop the outflow in the extremely short term they will also trash the EU economy even more, slash imports of just about everything from Russian natural gas to African bananas and eliminate inward investment (see how this has worked in places like Argentina or Venezuela). As a result they will be intensely unpopular and (see Argentina and Venezuela again) they won’t work because people will find ways to get their cash out and required goods in anyway. Worse, they’ll devote more energy to that than to doing productive work and so the economy will suffer even more.

Now this won’t be all smoothness and light for the UK. The EU nations, the French particularly, might decide to try and play hardball back and cut exports of electricity and food to the UK. In the longer term this won’t work as tariff free imports of food from places like New Zealand, Canada and the US will easily replace the EU sourced food in a fairly short time and the UK can get serious about fracking and build gas-powered generators to make up the energy shortfall but it would be painful in the short term. Of course cutting exports of food and power to the UK will also hurt the French economy badly and French farmers are not known for their restraint when it comes to seeing their incomes cut, so the French and/or EU authorities will have to spend even more money they don’t have propping up the sectors that are no longer making money by export to the UK and thereby destabilize their economies even more.

The Irish, assuming that the UK decides to not inspect traffic across that border, will undoubtedly continue to trade with the UK because they have to and indeed an adroit information campaign would make the Irish population extremely anti-EU when they then discover that they too are embargoed from trade with the rest of Europe as a result. Note that if they aren’t embargoed then all the exports that formerly went direct to the UK will simply take the indirect route via Ireland as will lots and lots of UK exports to the rest of the EU. For goods that might add a bit to the cost, but there will also be all sorts of more immaterial trade that will go via Dublin electronically for a pretty nominal fee.

Of course it is not clear that Mrs May will have the spine for this, but based on her actions to date I suspect she will turn out to once it becomes clear that the EU is negotiating in bad faith – which probably won’t take very long the way things appear right now. The EU appears to think that it can back Mrs May and her government into a corner and that they will be forced to capitulate. I think this is a serious misreading of Mrs May and the UK in general. In fact if HMG has sense it is already wargaming and simulating potential actions once the negotiations fail and, if I were in their shoes, I’d be spending a lot more time on that than I would on trying to negotiate with the blockheads from Brussels.