Deal or no deal, Brexit has already proved to be a costly misadventure

With still two weeks left to go before the two-year Brexit negotiating period is due to expire on March 29, it is too early to rule out the possibility that U.K. Prime Minister Theresa May will finally secure approval for her much-unloved Brexit deal.

However, even if she does manage to avoid the United Kingdom from crashing out of Europe without a deal, it is not too early to conclude that Brexit will have proved to be a very costly economic mistake for the country.

{mosads}While, to be sure, Theresa May’s Brexit deal has now been defeated twice in parliament by unprecedentedly large majorities, she still has time to call for two more votes on her deal before the March 29 Article 50 deadline.

Improving the chances that she could now succeed where twice before she has failed so miserably is the fact that parliament has agreed that, in the event that she does not secure passage for her deal, the U.K. would ask Europe for a lengthy extension of the Article 50 negotiating period.

That possible extension might be sufficient to concentrate the minds of the deal’s eurosceptic opponents that it is better to accept May’s flawed deal than risk losing Brexit altogether by opening up the possibility of a second referendum or a general election.

Even were May to succeed in securing approval for her deal, we would not be at the end of the Brexit process. Rather, as Winston Churchill might have put it, at best we would be at the end of the beginning of that process.

Still to be negotiated would be the very much more vexing issue of what type of economic relationship would the U.K. want with Europe after the transitory customs-union arrangement under May’s deal would come to an end.

Would the U.K. want a Canadian-style Free Trade Arrangement with Europe? Would it want a Norway-style single market arrangement? Or would it want a bespoke U.K. style arrangement? These issues still need to be decided by the U.K. government and negotiated with the European Union.

In those negotiations, Europe would once again likely have the leverage over the U.K. as it has done to date in negotiating May’s deal. 

While it is difficult to make long-run economic forecasts, it would seem clear that, to date, Brexit has not been kind to the U.K. economy. Indeed, since the Brexit referendum in June 2016, the U.K. has gone from being the Group of Seven’s (G7’s) fastest-growing economy to its slowest.

Of particular concern is the fact that while over the past two-years both U.S. and German investment has increased by around 10 percent, that in the U.K. has virtually stagnated.

Over the past two years, the main thing that has held the U.K. economy back has been investor concern about future access to the European single market, which buys as much as 50 percent of the U.K.’s exports.

This has raised concerns about whether the U.K.’s supply chains with Europe would be disrupted and whether the City of London would still be able to seamlessly sell its services to Europe.

In the event that the U.K. were to crash out of Europe without a deal, those investor concerns would be greatly heightened. It is for this reason that both the Bank of England and the International Monetary Fund (IMF) have been warning that a no-deal Brexit could see U.K. output decline by as much as 7 percent over the next 12 months.

{mossecondads}Even if May were to secure approval for her deal, there is still reason to think that the U.K. economy will lag behind the rest of the G7 economies for the next few years. Not knowing what the end-point of the U.K.’s post-Brexit arrangement with Europe will be, investors will still struggle with uncertainty as to the U.K.’s future access to the single market.

That investor uncertainty has already been a drag on the U.K.’s economy since the 2016 Brexit referendum. Thus, it will likely continue to be a drag through 2020 as the U.K.’s future arrangement with Europe is negotiated.

Hopefully, before the end of the month, May will succeed in getting her Brexit deal approved. At least then we will have been spared a real U.K. economic meltdown that would be in neither the U.K. nor Europe’s economic interest. 

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.