Peter Morici: U.K. should leave Europe, join up with North America

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The flags of Canada, the United States, and Mexico.

Efforts to block Brexit in the U.K. Parliament could well require an election by yearend. The British should consider that the EU makes more sense as a free-trade area than a broader economic and political union, and the U.K. would be better off petitioning to join the North American Free Trade Agreement if Brussels won’t grant it simple free-trade status with independence from its regulatory net.

The euro EURUSD, -0.1645%   is chronically overvalued for countries like Italy in the South and undervalued for countries like Germany in the North. That hamstrings macroeconomic policies and — along with Brussels’ rigid regulations, national labor laws and German mercantilism — cripples growth.

The U.K. and other EU states enjoy mutually eased border crossings but absent consensus about immigration from the Middle East and Africa, that effectively means just about anyone Germany admits and grants papers can eventually find their way to the U.K.

To placate Ireland and discourage separatist sentiments elsewhere, the Germans and French appear determined to punish the U.K. They insist on a $48 billion exit tax and a free-trade arrangement that could indefinitely impose an absolutely open border with Ireland and the broader EU — and require the U.K. to follow EU regulations without a say in how those are written.

Those would frustrate Brexit’s purposes and are unnecessary. Canada and Mexico have duty-free trade with the EU without that regimentation. NAFTA permits easy movement of goods, service providers and daily commuters without compelling any one participant accepting another’s immigrants.

Irish hard liners argue the Good Friday Agreement, which ended the violent uprising in the North, requires a fully open border with Northern Ireland but it doesn’t.

Solutions are available to uphold the intent of the agreement.

For example, mutual recognition of product and health standards could permit the quick, duty-free movement of parts and manufactures certified by business to be of U.K. or EU origin—supplemented by electronic tagging and spot checks. Also, reasonable inspection of agricultural products and a Trusted Traveler program for European citizens, similar to the U.S. program.

Ireland is economically dependent on the U.K. If Ireland doesn’t get reasonable, it could be devastated by a hard Brexit.

The world has changed since the U.K. joined the EU in 1974. German heavy industry and automobiles and French wine don’t carry as much weight in global commerce. Britain has a vibrant high-tech sector but continental Europe lacks the universities and venture capital to support one.

For now, the U.K. should seek to keep its manufacturing integrated with the continent, but its future is really tied to the high-tech sectors in the United States, Canada and Asia.

If the EU insists on a messy divorce, Britain should just bolt—unilaterally offer to admit EU manufactures and components without tariffs and customs checks, supplemented by a system of electronic checking—if the EU then agrees to do the same.

For services, the U.K. can offer mutual recognition of licenses and standards as both London and Brussels enforce high levels of consumer protection.

British bankers worry that without EU passporting—a system that gives them better access on the continent than foreign banks—they won’t be able to compete. U.S. banks do quite well without that benefit because German, Italian and French banks are about as competitive as Peugeot was when it last sold cars here in 1991.

According to Moody’s, Britain’s financial houses will not be severely handicapped and only face manageable adjustments.

In addition to going it alone and free trade inside Europe, an independent Britain could petition for free trade with NAFTA. Through EU agreements with Mexico and Canada, it already has duty-free trade but not with the United States. However, the EU could lean on our neighbors to quit the U.K. after Brexit.

If the EU does not accept Britain’s free-trade offer or leans on Mexico and Canada, the U.K. should withhold the $48 billion payment.

That would get Chancellor Angela Merkel’s and President Emmanuel Macron’s attention.

American national interests require a strong and competitive Britain. And the United States is much more important to our immediate neighbors than trade with the EU—Washington can put on more heat on Mexico and Canada than the divided and weak gang in Brussels.

The Third Option—an independent Britain with strong North America friends.