Quite often in tabloids and newspapers like the DailyMail, you will see a sentiment expressed in the comments that we should just walk away from the EU without bill payment, since any deal they give us is likely to be a bad one. Theresa May herself has said that "No deal is better than a bad deal", whilst the EU retorts that, "Britain won't walkout on Brexit talks because it can't afford to leave without a trade deal"

Clearly from a negotiating perspective, both sides would say that in order to claim they have leverage. However, going beyond political bravado, it would seem that "No Deal" would in fact almost certainly be worse than a "Bad Deal".

Each of the 27 members of the EU has veto power - Individual countries can’t veto a treaty governing the UK’s withdrawal from the EU, but could veto a treaty establishing Britain’s new relationship with the EU. Therefore it stands to reason that each EU member would use that veto power to gain some concessions from the UK in their own self interest. Thus, the final deal would inevitably be skewed in the EU's favour.

It is often at this point that the trade deficit between the UK and the EU is quoted: "We exported about £230 billion worth of goods and services to the rest of the EU in 2015, according to UK data, while the rest of the EU exported somewhere around £290 billion to us." It is true then that the EU benefits with revenue and jobs from trade.

However, "Only 8% of the EU’s exports go to the UK, compared to the well over 40% of UK exports that go to other EU countries. Whether the 8% is correct depends on how you treat exports between EU countries. Looked at another way, you can get 17%." Trade is mutually beneficial, so whilst the EU benefits from increased jobs and revenue, the UK benefits from reduced prices to the consumer, and reduced costs of production where factor inputs are imported. This also translates to more competitive exports where factor inputs for exports are being imported. Combining this with the fact that the EU represents an economy with a GDP 8 times the size of the UK's, it becomes clear that any consequences resulting from increased barriers to trade (both regulatory and tariff/quota based barriers) would have a much more significant impact per capitta in the UK than in the EU. Thus the balance of leverage is firmly in the EU's favour, as the UK has much more to lose.

If the UK were to depart without payment of the 'divorce bill', then trade would revert to WTO rules, which would include extremely high tariffs. The resulting scenario would likely also see the UK adhering to the EU's Common External Tariff. The resulting economic impact of the reduced trade would dwarf the 'divorce bill'.

It is in the EU's interest to ensure that the final deal reached, is clearly better for the UK than no deal. Trade benefits both parties, and so the EU would ideally like to retain this trade. I therefore come to the conclusion that the final deal reached will be clearly skewed in the EU's favour, whilst also being significantly better than 'no deal'. I am curious if there has been any rigorous studies examining the possible scenarios and most likely outcomes. I would be very interested to read any answers to the question (I included my own answer just so people could scrutinise it if they wished to - feel free to ignore it).

  • This might work on the economics site – user1605665 May 24 '17 at 22:32
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    One can always imagine a deal proposed by Brussels which is worse than No Deal: just imagine a deal which gave Britain nothing better than No Deal but gave the rEU everything they have now. Such a deal would be absurd, but there is obviously a crossover point between a deal that's worse than nothing and one which isn't. – user1567459 Apr 22 '19 at 9:41

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