If only Theresa May had given this speech 13 months ago at Lancaster House

Oh, for a credible Brexit plan. Keir Starmer’s “six tests” for a Brexit deal, which Labour set out fully a year ago, were a mixture of the vacuous and the aspirational. The Prime Minister’s “five tests” are equally vacuous. Hands up those in favour of a deal that is bad for jobs or security, or one that drives the country further apart?

Still, the tone was positive and conciliatory, which was perhaps surprising given the fury the European Commission had provoked with its draft withdrawal agreement on Wednesday. It would have been all too easy for the Prime Minister to court domestic cheers by wrapping herself in the flag. And there was a recognition that cake cannot always be had and eaten.

To give more credit where credit is due, Theresa May provided far more detail than either of us had expected. She specified areas such as state aid (Jeremy Corbyn’s bête noir) where Britain would commit to abiding by EU rules.

And she suggested associate membership as a means of overcoming the problems associated with non-membership of EU agencies.

So far so good, but there remains little evidence that the Government has heard the EU reciting (ad nauseam) its own red lines. And this applies particularly to the centrepiece of the Prime Minister’s speech: the government’s plan for “advanced managed divergence” between the UK and the EU.

Supposedly, this would allow us a choice between the sectors where we’d want to have our cake – remaining aligned with EU rules and regulations and maintaining “frictionless trade” – and those where we’d like to eat said cake, by diverging, while recognising this would result in new barriers to trade.

On this point, around the economics, the “convergers” have clearly won the argument. The Prime Minister has to date conspicuously failed to mention a single area of regulation where there would be significant benefits from divergence.

This is particularly notable when it comes to some of the specific examples of burdensome regulation advanced by the Leave campaign. Take the REACH Directive on chemicals, much maligned for being cumbersome and unwieldy. Yet it turns out cumbersome and unwieldy are better than being left out.

Business and industry have made it abundantly clear that, whatever their worries about the EU’s regulatory approach, the last thing they want is the potential cost, disruption and trade barriers that divergence would mean.

Nor does anyone, with the possible exception of Liam Fox, really take seriously the argument that the gains from future trade deals with third countries outweigh the potential losses of trade with the EU. The Prime Minister conspicuously failed to make this argument.

Indeed, how could she, when the government’s own internal modelling shows in cold figures that this is fantasy, reinforcing the existing consensus among independent trade economists. We seriously plan to build cars with Australia instead of Germany?

The only dissent comes from the frankly laughable “Alternative Brexit Economic Analysis”, which – among other errors – concluded that the impact of new border controls on trade would be zero, by the simple expedient of assuming that the cost of any new controls would be zero.

However, and crucially, the “divergers” have largely won the political argument. The Prime Minister’s proposal is structured around the fundamental principle that the UK must have the freedom to diverge in future, even if we can’t come up with concrete examples of areas where it will make sense to use that freedom.

That, in turn, drives the need for the UK to be outside the EU’s legal and regulatory structures; not just the European Court of Justice.

These are the first order issues the Prime Minister ducked. How to convince the EU to allow us a differential relationship across sectors, and how to ensure effective governance. In order to make this work, a whole new set of mechanisms – to manage and maintain convergence, and to deal with divergence when it happens – will need to be constructed.

And even if the EU is prepared to accept this in some sectors – which looks a lot like “cherry-picking” – the terms of any such arrangements will be complex and asymmetric, as they are with countries like Turkey and Ukraine.

Moreover logic suggests that the sheer volume and complexity of regulation in a modern, service-based economy means that, unless we are very actively committed (as, for example, Norway is) to accepting a subordinate role as a “rule-taker”, there will be limits to the extent to which we can, in practice, maintain convergence, economically advantageous as it may be.

The EU certainly has good practical reasons to avoid a messy situation in which different sectors are governed by different mechanisms, leaving the door open to complex litigation from businesses in the event of disputes.

This, rather than any supposed principle of the inviolability of the single market (which the Commission itself proposes to violate to solve the Irish border issue) is enough to severely limit Mrs May’s chances of achieving such a deal.

So where does all this leave us? The speech was billed as an opportunity for the Prime Minister to be “honest with the public.” There was certainly some progress in recognising the trade-offs. And had this been the speech given at Lancaster House 13 months ago, it would have been a constructive opening to the negotiations to come.

But time is running out. And this still looks like a strategy directed more at a UK than a European audience, and driven by politics rather than economics.

The danger is that, in her desperation to craft a strategy that satisfies her Cabinet, the Prime Minister will saddle us with a deal that leaves us both hungry and cakeless.

By Professor Anand Menon, Director of The UK in a Changing Europe and Professor Jonathan Portes, senior fellow of The UK in a Changing Europe and professor of economics and public policy at King’s College London. This piece originally featured in The Telegraph

Disclaimer:
The views expressed in this analysis post are those of the authors and not necessarily those of the UK in a Changing Europe initiative.

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