Russell Lynch: Theresa May is right to play hardball as Europe has a lot to lose too

Leaving the EU became more than an abstract, way-off-in-the-future concept when Theresa May set the timetable this week, shredding the pound with hints that Brexit might be a lot harder than most financial types thought.

The City was horrified, but maybe our premier is just a better negotiator than I suspected.

Although talks won’t officially start until next March at the earliest, May’s first conference speech was, of course, the opening move; and not a bad one.

Her strong words on controlling immigration and determination to ditch the European Court of Justice — along with a pledge to win “maximum freedom” to trade in the single market — are examples of what behavioural economists call “anchoring”. Making that high opening shot is the equivalent of the car salesman sticking the exorbitant price on the windscreen; he might not get the cash on the sticker, but the big number can subconsciously affect the rest of the negotiation.

May also sounded like a fan of one of the fathers of modern game theory, the Nobel Prize-winning economist Thomas Schelling, and a foreign policy expert who advised film director Stanley Kubrick 50 years ago on his classic Dr Strangelove.

Schelling developed the significance of “pre-commitment”, when a negotiator chooses to limit his options in advance, making his or her own threats more credible. In war, it’s when bridges are burned by an army to prevent the possibility of retreat. May has effectively done the same here on immigration; saying “I can’t concede, so you’ll have to”.

Battling over the economic ties between the UK and the EU post-Brexit isn’t quite as extreme as the nuances of Cold War deterrence. But it will still involve brinkmanship by both sides, both of whom have huge stakes riding on the negotiation.

A former Schelling pupil, the US commentator Michael Kinsley, described his theories in terms of being chained to another person on the edge of the cliff. One gets a big prize if the other concedes. Apart from threatening to push him off — which will doom you both — how do you win? “You start dancing, closer and closer to the edge. That way, you don’t have to convince him that you would do something totally irrational: plunge him and yourself off the cliff. You just have to convince him that you are prepared to take a higher risk than he is of accidentally falling off the cliff. If you can do that, you win.”

Arguably the “hard Brexit” rhetoric offered up by May this week is her way of dancing closer to the edge of that cliff.

EU president Donald Tusk stresses the inviolability of the four freedoms of the EU — including freedom of movement — and responded that the bloc will “engage to safeguard its interests”. But in Paris, Berlin and Brussels they at least know they’re in for trench warfare. May also reeled off a list of countries — Canada, China, India, Mexico, Singapore and South Korea — who have said they would welcome free trade agreements, the classic “other options” ploy in any negotiating strategy.

Let’s be clear: Brexit is a world of risks and not good news for the UK economy. But don’t underestimate the desire of the EU team to limit their own pain as well.

As Deutsche Bank’s analysts have pointed out, the UK represents around 8% of the average EU member’s exports. As a bloc, around 16% of their exports come to us. As our economy slows and those exports weaken, the knock-on effect will weaken trade within the EU too. And if we don’t reach a trade deal with the EU two years on from Article 50 being triggered and revert to World Trade Organisation tariffs, that hurts EU members as well. Ireland, Belgium and the Netherlands would be most affected, according to Deutsche.

Yes, the City of London will lose out if May can’t cut a deal on passporting rights, but the Square Mile and its array of supporting industries such as law and accountancy are still a huge draw: and after all it’s been around for about 400 years before the Common Market.

The only other country to leave the EU was Greenland and, with all due respect to our Nordic cousins, we’ve a little more clout as the fifth-biggest economy in the world. So the EU won’t be running over us in these talks because they have plenty to lose themselves.

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