Why a €45bn EU divorce bill is still a bargain for UK

UK prime minister Theresa May has provisionally agreed to pay about £40bn (€45bn) as part of the country’s exit from the EU, writes Fergal O'Brien.

Some people in Britain are up in arms about the tab, but analysis by Bloomberg Economics shows it’s a price worth accepting if it helps the UK win favour with EU negotiators and secure a trade deal that’s beneficial to the economy.

In fact, it would pay for itself in less than three years by limiting damage to output, even if the UK only secures what Bloomberg Economics describes as a “relatively unambitious” agreement.

“The conclusion, from an investment perspective, is simple; taking even a relatively unambitious trade deal is worth it. Clearly, the motives for leaving the EU don’t solely reflect economics, but those trusted with writing the next chapter in the UK’s economic history should consider what’s at stake,” said Dan Hanson and Jamie Murray at Bloomberg Economics.

The new research comes as the UK government debates what kind of trade deal it will seek, before talks on the future relationship start in March.

Given the UK’s so-called red lines on getting control of EU immigration and breaking free from the rulings of European judges, the EU side has said it can only offer a trade deal similar to the one it gave Canada.

That accord was the best in its class, but would be a downgrade from the access Britain now enjoys, particularly for the financial services industry.

As the terms of the future trading relationship become clear, there’s a risk of rebellion in the pro-Brexit camp, which is already uneasy about the size of the divorce bill.

Mr Hanson and Mr Murray earlier this month said the cost to the economy if Ms May fails to secure an EU agreement would be a 6.5% hit to GDP by 2030.

That’s compared with projections for growth if the UK stayed in the EU. They noted at the time that anything that helps trade would soften the blow.

The benefits of some form of trade pact are echoed in the latest research. With no clear sense yet of what will actually be agreed, Bloomberg Economics compared the no-deal scenario, where the UK ends up on World Trade Organisation rules, with a Canada-style settlement.

Calculations based on a discounted loss of output show the cumulative total at £40bn by the end of 2021 in a no-deal scenario.

That’s less than three years after the exit.

Roll forward to the end of the decade, the sum amounts to £290bn. According to Bloomberg Economics, the “benefit of a trade agreement makes the divorce bill a bargain”.

KEYWORDS: UK, Theresa May, EU, Brexit

 

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