The Corner


Brexit, ‘No Deal’ and the Perturbation Multiplier

Britain’s prime minister is still claiming that “no deal is better than a bad deal,” nonsense wording of a type that has become something of a Theresa (“Brexit means Brexit”) May trademark.

In a piece on CapX today (on an old favorite, the Norway option for Brexit) I noted this:

Theresa May has repeatedly argued that “no deal is better than a bad deal”, a mantra that could — in indicating a willingness to walk away from the table — be defended as a negotiating tactic, but only if the EU is convinced that May is actually ill-informed enough to believe what she is saying. Unfortunately that could well be the case, but awkward reality cannot be wished away. No deal would be bad for the EU, but disastrous for Britain, triggering major economic (and probably not just economic) difficulties at home and, Tory ultra-Brexiteers please note, opening Number 10’s door to Jeremy Corbyn—or some equally sinister successor.

Supporters of ‘no deal,’ which would be the hardest of hard Brexits, argue that it would not be so bad as all that: The U.K. could simply trade with the EU under WTO rules.  That sounds pleasantly reassuring, but as EUReferendum’s Richard North demonstrates in this monograph (a PDF from 2016, but updated) the reality of the WTO option is nothing that anyone can contemplate with much pleasure. 

In a more recent post, North cites work done by JP Morgan and the World Bank highlighting how destructive ‘no deal’ might be.

The World Bank:

In terms of value added trade, the decline ranges from 6 percent [with] the “Norway” scenario to 28 percent [if] no agreement.

Infallible? Of course not, and it should be noted that these declines are over time, nevertheless….

Over to Reuters:

Failure to reach a deal would be the worst outcome. Most UK exports would need to be checked before crossing the border. British lorry drivers might no longer be allowed on Europe’s motorways. And that’s just physical goods. More than a quarter of UK services exports to the EU would be lost, JPMorgan reckons.

Again, just another forecast, but still….

I was also intrigued by this comment by Dr. North:

In some respects, a walk-away Brexit will have effects similar to the 2011 Japanese earthquake, in terms of its disruption of supply chains and trade generally.

Such major perturbations require businesses to undertake emergency mitigation, which tends to be expensive. Once in place, they will want to recoup costs and will be reluctant to repeat the exposure. On that basis, an intense short-term event can have effects in the medium- to long-term which are several magnitudes higher than simple projections would indicate.

The point here is that manufacturers which switch suppliers to overcome short-term problems may be reluctant to return to their original suppliers, even when the original impediments have ceased to exist. Hence, the overall damage to UK suppliers could end up being a multiple of the short-term cost.

This is known as the “perturbation multiplier” which has the potential to double or treble initial losses. And the problem is compounded by the fact that there no model on which forecasters can rely. This is a unique scenario, with political rather than economic drivers. These do not follow predictable paths.

Too pessimistic? Possibly, but I had never heard the term ‘perturbation multiplier’ before, and as I read those words I could not help thinking of some of those gloomy comments — chaos theory and all that — made by the character played by Jeff Goldblum in Jurassic Park….

Looking on the bright side, however, I see no chance at all that the WTO option will unleash carnivorous dinosaurs on a sometimes misty island just off the European mainland. 

Meanwhile (via Reuters):

Britain must negotiate a staggered departure from the European Union in the next few months or risk seeing thousands of finance jobs move overseas, the policy chief of London’s financial district told Reuters.

The City of London, home to global foreign exchange, bonds and fund management operations and to more banks than any other financial centre, faces upheaval as firms decide whether to shift jobs to continental Europe to keep serving customers there after Britain leaves the EU in 2019.

Catherine McGuinness, in practice the political leader of the historic financial district’s municipal body, says Britain and the EU must agree the outlines of any transition before the end of the year or it will be too late.

Britain and the EU began a first round of Brexit negotiations on Monday.

McGuinness, a financial lawyer and finance industry veteran who is in regular contact with the government over policy issues, said some firms in the sector have started relocating parts of their businesses overseas amid frustration at the lack of clarity about what any Brexit deal may look like