The European Union is hardening its terms on Brexit. There is a new hint of hostility in the language. The tone is peremptory.

Those of us who hoped that Germany would push quietly for an amicable settlement can no longer be so confident. We now learn from Handelsblatt that the German finance ministry insisted on some of the most unfriendly changes to the EU's latest working documents.

Berlin stipulated that Britain must honour "all obligations" (Verpflichtungen) for divorce payments, a tougher wording than the earlier, gentler talk of legal and budgetary "duties" (Pflichten).

It demanded that Britain desist from tax dumping and financial deregulation that would “jeopardize the stability of the union". This demand is almost insulting. British regulators have led efforts to recapitalize banks. It is the eurozone and Germany that have dragged their feet on tougher capital rules.

There is no longer any attempt at diplomatic tact. The document states that the European Commission will "determine" when the UK has made "sufficient progress" as it jumps through the hoops, the way it handles accession talks for supplicants hoping to join. It reads like an imperial curia discussing a colony.

The French too have stepped up their demands, insisting that financial services be excluded from the trade deal. The City of London must respect the "regulatory and supervisory standards regime" of the EU in any future arrangement, suggesting that Britain will have to accept the sway of the European Court.

And:

Adam Posen, head of the Peterson Institute in Washington, said Britain would face a rough time with no EU trade deal but at least such a plan has creative allure. "It is far more credible than other options," he said.

The current dismal narrative on Brexit would be transformed overnight.  Britain would suddenly be seen by the rest of the world as pioneering nation at the forefront of globalism, reasserting Thatcherite audacity, rather than a crabby islanders in decline. "People's jaws would drop," says Professor Patrick Minford from Cardiff University.

Pure free trade cuts through the Gordian Knot, eliminating the need for an army of technocrat negotiators and for yet more of those supra-national tribunals that so proliferate, eviscerating democracies and sapping consent for globalism.

Prof Minford says the hide-bound political class has yet to give such clear blue sky proposals a serious airing. "It is so unfamiliar. It takes a mental somersault to break free of mercantilist thinking," he said.

Economists for Brexit - now Economists for Free Trade - certainly got off on the wrong foot last year by suggesting that the UK would be positively richer under such a model. This invited a blizzard of criticism.

My own view has always been that there will be a negative shock from Brexit and withdrawal from the single market, with effects on GDP at best neutral by 2030 with the right policies.

Professor John Van Reenen, a trade expert at MIT and a vocal critic of the Minford plan, says retreat to the WTO would cost roughly 2.5pc of GDP compared to remaining in the EU, with losses rising over time to 8.5pc due to productivity effects.

He agrees that unilateral elimination of barriers is the best WTO variant since it at least mitigates damage to supply-chains entering Britain from the EU. "It offsets some losses but the politics of all this would be very hard," he said.

David Fuller's view

Projections as to what will happen to the UK economy by 2025, 2030, or whenever in the event of a Plan B hard Brexit are pulled out of the air and therefore a complete waste of time.  We don’t know what the EU will be like at those future dates, or even if it will still exist as anything other than a rump of nations effectively controlled by Germany.

What we do know today is that the EU remains in turmoil due to its own failings.  Consequently, its bureaucrats are angry, vindictive, self-destructive and envious of the UK.  This is a loser’s mentality and I hope it will change.

Meanwhile, the best that Britain can do now and over the lengthy medium term, is to continue the development of our economy, into a highly competitive, entrepreneurial and productive entity, which attracts talented people who wish to invest in the UK and trade with us. 

As to Brexit negotiations, we know what we are likely to face.  Consequently, we should be focussing on Plan B, assuming that it will be our only sensible course, rather than hoping that the EU will change its colours and negotiate constructively in our mutual interests.  Britain will succeed either way, so long as it holds its nerve.  

Here is a PDF of AE-P’s article.