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Brexit: an experiment in game theory

Published in Newsroom Pro (Wellington), 25 September 2018

The hills were not alive with the sound of music last Thursday. That is when British Prime Minister Theresa May met with the European Union’s 27 other national leaders in the Austrian city of Salzburg.

Promoted as an informal summit to allow the two Brexit sides to overcome their schisms, the summit only reinforced them. But maybe that was the whole point.

The longer the Brexit negotiations drama goes on, the more observers might wonder what kind of game is being played here. Is it a game of chicken in which the two sides are waiting for the other to blink first? This is how it is usually portrayed.

Or might it even be a game in which one side rationally aims for a catastrophic outcome?

It is worth thinking about the Brexit talks in these terms. So let us look at the two sides and their motivations. And let us start with Britain for it is the easier side to analyse.

The British government’s motivation in the Brexit talks is straightforward. It knows that going back on the 2016 Brexit referendum would cause a political earthquake that could wipe out their political system.

Any British Prime Minister must go through with Brexit, almost irrespective of what the EU offers in negotiations. The British government has no exit option from Brexit. This weakens their position. All it can hope to achieve are favourable conditions along the way.

Even so, from a British perspective, Brexit could produce positive outcomes: It might allow the UK to trade more freely with the rest of the world. It could mean more control over domestic affairs, not least on immigration. It could also remove Britain from the influence of the European Court of Justice. But while doing all that, Britain still wants to trade freely with its European neighbours, for they are their chief trading partners.

The problem for Britain is these goals are mutually incompatible. The more Britain wants to regain control over its trade or migration, the less it can remain in any closer arrangement with the EU.

Let us now look at the EU. The worst that could happen to the EU is already determined: Britain will leave next year, and there is no way of holding back the Brits (see above).

Given these circumstances, what should the EU be concerned about?

It could be concerned about the impact of a disorderly Brexit, which locks Britain out of the Common Market. No doubt the results would be bad for Britain. For the rest of Europe, they would not be pretty, either.

However, the EU is diversified regarding its trading relationship with Britain. If you are Germany, you would be highly concerned about the car industry’s exports across the channel. But we are also talking about the remaining EU of 27 countries, and not all are as deeply linked with Britain as Germany. And we are talking about an EU Commission that must care for its organisation’s survival.

What would spook the EU far more than any immediate trade fallouts from Brexit are therefore the strategic implications of a smooth and successful Brexit.

Just imagine what kind of result might be achieved if both Britain and the EU only thought of Brexit in strict economic terms. In their mutual best economic interests, they would find themselves in a comprehensive free trade agreement. This agreement would barely need negotiating since it would just continue Britain’s existing access to Europe’s markets under a different name.

The EU would then accept Britain to take control of its migration policy. Because let’s face it: Free trade agreements are never about guaranteeing personal mobility. It is possible to separate migration from movement of goods, capital and services despite the EU’s solemn proclamations to the contrary.

If Britain and the EU agreed to such a deal, the economic outcomes would be positive for both sides. There would be no disruption in the trade relations, Britain could still find new trade partners outside Europe, and Brexit would be a relatively minor event.

But for the EU, Brexit is primarily not an economic issue. It is a political threat.

If Brexit was an easy, successful and minor event, other EU members might wonder what their EU membership is good for. You could just as happily exist outside the EU as inside it, and the value of membership would no longer be obvious.

Given that in past referenda on European treaties, Ireland, Denmark, France and the Netherlands voted ‘no’ on further integration, a smooth Brexit could well set a precedent for future departures.

For countries like Italy or Greece, it may just be the signal to reconsider their own positions. Even more so when both Italy and Greece suffer under their EU membership much more than Britain ever did. That is because both are also members of the Eurozone and have to submit themselves to the rules of a currency union that does not work for them.

Seen this way, the EU would be foolish to make Brexit easy for the Brits. It would only encourage the others. Instead, the EU would want a British post-Brexit recession, queues of trucks at British ports, and ideally some further disruptions to amplify its message: Don’t try this at home!

Making Brexit tough has little to do with punishment for the Brits and everything with sending a strong warning to any other European country.

The Brexit negotiations are therefore not a game of chicken. Worse, they are a calculated plot to show that a withdrawal from the EU may be legally possible but practically undesirable.

The only chance to avoid this outcome would be if those EU members with strong trade links to Britain exerted their influence to allow Britain more favourable conditions. At this stage, however, it does not look likely that such concerns will sway the outcome.

When Theresa May complained after the Salzburg summit that the EU showed no respect towards Britain, she was right. But she overlooked that the EU’s attitude is not due to accidental impoliteness but a core part of its wider strategy.

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