Think of East Germany before you get lulled into the fantasy of no-deal

We would be an outsider looking in (as East Germany and other Soviet bloc nations were during the Cold War)
Stephen King
Alamy
WEST END FINAL

Get our award-winning daily news email featuring exclusive stories, opinion and expert analysis

I would like to be emailed about offers, event and updates from Evening Standard. Read our privacy notice.

You might not recognise the connection but those in favour of a no-deal Brexit have quite a lot in common with the leaders of the former German Democratic Republic. Like the Soviet satellite, they’re endangering our relations with the rest of the world while threatening to split our own country in two.

No-dealers seem to think the UK can walk away from existing international arrangements with little in the way of what might be described as collateral damage. “Don’t worry”, they say, “we can simply adopt WTO rules,” as if countries elsewhere in the world have done exactly that. They mostly haven’t. World Trade Organisation rules are mainly for those who can’t do any better: they betray a total lack of international ambition.

Most other nations have trade agreements that extend far beyond what is in WTO rules, covering standards, regulations, labour conditions and much else. On day one of a no-deal Brexit, the UK would be excluded from these arrangements, both with the EU and pretty much everyone else (to date, the UK has signed only 10 post-EU “continuity” trade agreements, from Switzerland through to that major economic heavyweight the Faroe Islands). We would, in effect, be an outsider looking in (as East Germany and other Soviet bloc countries were during the Cold War). It would not be a happy experience. The EU would likely apply tariffs on imports from the UK. And while we could slash tariffs on imported products from all over the world in a bid to benefit British consumers, cheaper imports might leave British workers without jobs.

The main East German issue, however, is borders. One of the biggest problems that undermined Theresa May’s proposed deal is the so-called Irish backstop. No one wants a border between Northern Ireland and the Republic. The UK, however, wants to leave the single market while the EU wants to preserve the market’s integrity. It’s a wish list fraught with inconsistency.

There’s been a lot of hokum expressed regarding a “technological” solution to the Irish border question — in which goods that originate outside the EU will be “tracked” to limit the threat of smuggling into the single market. For the foreseeable future, however, that technology is just a pipe dream. Hence the Irish backstop. The EU’s idea is to protect the integrity of the single market by keeping the UK in a customs union until and unless a technological solution is forthcoming. Doing so, however, will curtail our freedom to negotiate trade deals with countries elsewhere. It’s why many on the Tory Right are so relaxed about a no-deal arrangement.

Combining an open border with different economic systems is, however, a recipe for disaster. To understand why, it’s worth reflecting on the history of East Germany. In 1949, Germany politically split in two: in the west, the Federal Republic of Germany and, in the east, the German Democratic Republic. Berlin, surrounded by the GDR, also split.

Stephen King
Alamy Stock Photo

For a while it was relatively easy for Germans on either side to saunter across the border. Not surprisingly, many East Germans had no real enthusiasm for the Soviet nirvana they inhabited, preferring the bright lights of the “decadent” West. Voting with their feet, East Germany began to suffer a brain drain. By the beginning of the Sixties, more than 3.5 million East Germans had fled, with the vast majority crossing the imaginary border between East and West Berlin. The East Germans decided to stop the flow. They called it the Anti-Fascist Protection Rampart. The Berlin Wall — as everyone else knows it — became the ultimate symbol of the Cold War.

Using the German analogy, let’s think about the consequences of no-deal. Having left the EU and opted for WTO rules, goods from all over the world with potentially dubious providence could enter the UK. With the border between Northern Ireland and the Republic still open — everyone wants to uphold the Good Friday Agreement — many of those goods could flood across the Irish frontier. Indeed, overseas companies seeking an opportunity to sell into the EU market — in some cases, illicitly — would simply build large warehouses north of the border. Northern Ireland would become an enormous “import/export” depot, from Brussels’ perspective an unwelcome conduit between the rest of the world and the single market. In the absence of unicorn technologies, this situation would surely be unsustainable. A border would eventually have to be created. One option would be in the middle of the Irish Sea, cutting off Northern Ireland from the British mainland, thus increasing the chances of eventual Irish unification (unthinkable, from a British perspective). Another would be between the British Isles and the Continent, effectively separating the Republic from the rest of the single market (unthinkable from a Irish and European perspective). A third — the most likely — would be between Northern Ireland and the Republic. The Good Friday Agreement would then be in tatters.

Those who defend no-deal typically do so by trying to undermine the views of everybody else. The Confederation of British Industry is, apparently, a hotbed of “vested interests”. Union leaders who recognise the dangers associated with no-deal are no more than dinosaurs from the Seventies. City of London financiers who fear a world in which Britain can no longer be a driving force behind the creation of an eventual single market in European financial services are regarded as scaremongers. Even Parliament is dismissed, apparently full of fifth columnists with no intention of heeding the “will of the people”.

It is, of course, the classic response of populists, focusing on the alleged hidden agendas of everyone else in a bid to turn the spotlight away from their own dubious arguments. In reality, no-deal is likely to seriously damage the fabric of the economy and our relations with our neighbours (and, lest we forget, our closest allies). If so, perhaps Boris Johnson’s desire to “f*ck business” should be taken seriously. And why not? It worked so well for the East Germans.

Stephen King (@kingeconomist) is HSBC’s Senior Economic Adviser and author of Grave New World (Yale).

Create a FREE account to continue reading

eros

Registration is a free and easy way to support our journalism.

Join our community where you can: comment on stories; sign up to newsletters; enter competitions and access content on our app.

Your email address

Must be at least 6 characters, include an upper and lower case character and a number

You must be at least 18 years old to create an account

* Required fields

Already have an account? SIGN IN

By clicking Create Account you confirm that your data has been entered correctly and you have read and agree to our Terms of use , Cookie policy and Privacy policy .

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged in