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Brexit and the future of Europe - a game theory classification

The European Union (EU) is dominated by the Brexit vote. After the British government kept a low profile for a long time about the ideas and goals with which it intends to enter into negotiations with the other member states, the first cornerstones emerged after Theresa May's speech on October 2, 2016 at a conference of the Conservative Party. Regaining national sovereignty is high on the UK agenda, and with it control over immigration. That should mean the end of freedom of movement for people between Great Britain1 (GB) and the European Union - and thus also of British access to the EU's internal market; unless one of the parties agrees to a compromise.

The government's long silence was understandable, because even the supporters on the island were surprised, but above all completely unprepared. It was not clearly described what should actually be achieved with Brexit and what future cooperation with the EU could look like, nor was there a negotiating strategy. Even after the Prime Minister has now declared that she will submit the application under Article 50 of the EU Treaty by the end of March 2017 at the latest, and has drawn in control of immigration as a red line, it remains unclear how the future cooperation between the island and the Continent will look like in the end. The British can set the date on which negotiations will start, but the results are a matter of negotiation.

On the EU side, the changes in the relationship with Great Britain are also not in sight. The EU's need for reform existed long before the referendum and will persist even after the UK may leave. The Brexit is thus primarily a British phenomenon that was pursued by British politicians for domestic and party political reasons. It is thus fundamentally decoupled from the institutional reforms of the European Union - depending on which institutional connection the British will have with the EU in the future, however, there will be far-reaching consequences for the Union. Admittedly, the Brexit vote increases the political pressure on continental Europeans to forcefully tackle the already existing need for reform. Nevertheless, in order to clarify possible negotiating strategies for the UK's exit, it is important not to confuse the causes of both lines of action. Otherwise, an adequate political response will be unlikely to succeed.

Despite escalating uncertainty, the mood quickly calmed down, at least on the continent. You move on to the agenda instead of thinking about what the whimsical British are going to do and when. The lack of clarity in the future is exacerbated by the fact that, in view of Scottish concerns about leaving the EU, the cohesion of Great Britain after a Brexit is questionable. However, there is a certain time pressure if you take into account the fixed date for the upcoming elections to the European Parliament in spring 2019 and the preparation of the next multiannual financial framework for the period after 2020. If stuck to March 2017, the UK government will have withdrawn from the next elections and the next financial period.

Even after Theresa May's announcement, the whole negotiation process will only be able to begin once the British have submitted the application to withdraw under Article 50 of the EU Treaty and the two-year period begins. Immediately after the referendum, the representatives of the other EU states and the EU Commission made it clear that negotiations would only begin afterwards, and they ruled out any form of preliminary agreement. From the EU's point of view, this is wise in terms of negotiating tactics, because it initially requires the British to disclose the negotiation goals. There is therefore an asymmetry before the negotiations begin, which is likely to affect the course of the negotiations.

If one wants to develop an idea of ​​which negotiation results seem conceivable and plausible despite this mixed situation, then it makes sense to first identify the red lines on both sides in order to then identify possible solutions depending on the strategies chosen. The important thing is who has which potential threat and can thus defend his red lines more effectively. The reliable continued existence of the Union is essential for the European Union; anything that can jeopardize this will be non-negotiable for the EU side. In contrast, the British government will have to make sure that migration to the island can be noticeably contained. Without progress at this point, it will be difficult to stand before the electorate.

Only the otherwise threatened economic deterioration can have a mitigating effect. The general economic situation is able to soften the red line of the British. In the case of the EU, however, the dissolution of the community is likely to be linked to the expectation of less favorable economic prospects and to that extent harden its red line. This classification makes compromise solutions seem inadequate if they are based on the idea of ​​making an offer to the British quickly and reasonably generously in order to avoid short-term economic costs.2 Instead, the negotiations on Brexit are to be viewed for what they are: a strategic one driven, tactically formed game about asserting one's own interests. It is not about punishment or revenge, but about sober calculation.

Four possible negotiation solutions

Game theory can be used to analyze such a negotiation configuration. From their point of view, the search for the optimal negotiating strategy for Great Britain's exit from the EU can be presented as follows against the background outlined: Both players, UK and EU, simultaneously choose between two strategies for negotiating, one willing to compromise and one uncompromising. In this game-theoretic analysis, the possibility of mixed strategies is not taken into account for reasons of clarity. However, this restriction is plausible in view of the fundamental need for each negotiating partner to describe a starting position. There are only the two corner solutions "uncompromising" and "willing to compromise". In addition, a rational player is aware that his strategy has effects both in the short and (possibly different) in the long run. With the help of the level of their time preference, the players would summarize the effects in the present and the future and make their decision on this basis. Since this discount factor is not known for either the EU or the UK, the short and long term are considered separately in the following, which is synonymous with the two maxima of the discount rate of zero and one. It is also generally assumed that the negotiations will be conducted on the following issues:

  • Access to the European internal market (EU-BM),
  • Free movement of persons (PF),
  • Payments to the EU.
illustration 1
Game theory tableau
strategyuncompromisingwilling to compromise
GBuncompromising1. "Exit-WTO" Great Britain as a WTO member without institutional ties to the EU (no EU BM, no PF, no payments)

2. "Special solution-GB" Great Britain fully enforces its demands in the negotiations (EU-BM, no PF, no payments)
willing to compromise3. "Norway" Great Britain loses political participation in the EU, institutional connections remain (EU-BM, PF, high payments)
4. "Norway +" Similar to "Norway", institutional links remain largely in place (EU-BM, limited PF, low payments)

Source: own illustration.

The game theory tableau shown in Figure 1 with the four possible outcomes results from the various negotiation strategies and contents:

  1. Exit World Trade Organization (WTO): If both Europeans and the British lead uncompromising negotiations, the result is that the British will completely lose access to the European internal market by leaving the EU. Economic cooperation would then have to be organized in the same way as other WTO members. In this case, the British would neither have to grant EU citizens free movement nor make payments to the EU. The most clearly propagated goals of the Brexit proponents would be achieved, the price would of course be high: a complete loss of integration with a status as a WTO member that has yet to be negotiated; this solution is therefore not an automatic fallback position for Great Britain.
  2. Special solution-GB: If, on the other hand, Great Britain leads tough negotiations and the EU is ready to make concessions, Great Britain could enforce its demands completely. With this “special solution-GB”, the EU would grant its partner unrestricted access to the internal market without enforcing the free movement of persons or demanding payments in return.
  3. Norway: If the British were willing to compromise and the EU were adamant, the result would be similar to Norway's current status. Norway grants EU citizens full freedom of movement and makes payments to the EU. In return, the country has access to the EU internal market, but does not have a political say. In the period from 2014 to 2021, Norway is contributing almost EUR 400 million annually to the policy of economic and social cohesion in the EU. The UK's gross domestic product is six to seven times that of Norway. This would result in a hypothetical contribution of around 2.5 billion euros annually. This would be even higher if the different population sizes were taken as a basis; Great Britain has 65.1 million inhabitants, Norway 5.2 million. If you convert the contribution to the twelve times larger population, you get a British payment of almost 5 billion euros per year. That would be a high price; the UK's net contribution averaged around EUR 9.4 billion between 2010 and 2015. According to a study from the British House of Commons, the British contribution could be even higher in the "Norway" case.3
  4. Norway +: If both parties were willing to compromise in the negotiations, a so-called "Norway +" construct could result. Britain would then be in a similar but more comfortable situation than Norway is today. It would make lower payments if it did not have to guarantee the free movement of people in full, could participate fully in the EU internal market, but would not have a political say. Such a solution - possibly garnished with a political say for Great Britain in the EU without belonging to the European institutions and participation in public services of the EU4 - would justify the fiction of an almost undisturbed internal market at any price. The EU would accept virtually all British wishes and a new understanding of European integration. The negotiations would only have a purely technical character in order to implement the British requirements. The “Norway +” solution would have a certain similarity with the Switzerland option, in which contracts are concluded for desired topics and policy areas in order to integrate the British in a sector-specific manner with a lot of negotiating effort. What was created for Switzerland over a long period of time for historical reasons is hardly likely to make sense for a coherent negotiation process. The Swiss solution is therefore not considered any further.

If only the economic effects of these four alternatives for the two negotiating partners are considered and, for example, questions of national sovereignty in Great Britain and the possible internal conflicts there are disregarded, the changes to the status quo shown in Figures 2 and 3 become apparent after the implementation of the respective solution . The economic effects of the four solutions outlined here as conceivable differ according to the underlying time horizon of those involved in the negotiations. In the long term, the negotiation decision is based on the growth effects and thus on all economic effects of the chosen separation model. In the short term, the uncertainty effects and the attempt to reduce them dominate.

Figure 2
Game theory results in the long term
strategyuncompromisingwilling to compromise
-- -
GBwilling to compromise0
– 0

Note: For the respective scenarios, the pay-offs for Great Britain are shown at the bottom left and those for the EU at the top right. The best scenarios are highlighted in blue.

Source: own illustration.

Figure 3
Game theory results in the short term
strategyuncompromisingwilling to compromise
GBuncompromising-/-- --
GBwilling to compromise0
0/- 0

Note: The pay-offs for Great Britain are shown for the respective scenarios at the bottom left and those for the EU at the top right. The best scenarios are highlighted in blue.

Source: own illustration.

The possible pay-offs of the actors range from strongly negative (-), negative (-), neutral (0) to positive (+) to strongly positive (++) effects as well as intermediate values ​​from logical combinations of the effects. 5 In The figures show the pay-offs for Great Britain for the respective scenarios at the bottom left and for the EU at the top right. These pay-offs only indicate an ordinally scalable ranking of the effects and are not to be understood in the sense of a metric quantification of the differences between the effects.

Long term pay-offs: growth effects

With the "Exit-WTO" solution - cutting off practically all institutional connections and returning to the relatively high WTO tariffs between the negotiating partners - the EU and Great Britain would each lose an important free trade partner, with the currently frictionless trade to a very significant extent is operated. A whopping 10% is then added to Minis produced in Oxford when they are imported into an EU country, for example. Investors therefore considered twice whether they would like to build a plant on the island without access to the EU internal market. According to a statement by the Director General of the WTO, British exporters would be burdened with up to £ 5.6 billion annually. The search for top European workers would also be made more difficult and bureaucratised. In British industry in particular, one in ten employees comes from the EU, even more than in the international financial sector. In the case of the “Exit WTO” solution, this in turn would also be faced with the loss of the important banking license rights that currently allow British banks to offer financial services in EU countries without bureaucratic obstacles. According to a study by the City of London, this would result in a direct loss of around 70,000 jobs in the London financial sector. 6

In the long term, the uncertainty for both actors will disappear, the British would probably conclude free trade agreements with third countries again, but the new frictions on the markets for goods, services, workers and capital will persist. These negative effects have a greater impact on the UK than on the EU. Ultimately, the British would lose free access to at least 27 economies (-), the EU countries only to one (- / 0). The stronger negative effect for Great Britain is also based on the fact that British trade with economies that are then necessarily further away will be associated with higher costs according to the “law of gravity” 7. The tough negotiating tactics of the EU and the negative economic consequences reduce the incentives for Brexit free riders in the long term. The EU should be stabilized and the red line secured.

The implications of the "special solution GB" for the actors are contradictory. Furthermore, goods and services could be traded without friction, the banking license rights of the British financial industry would not be in jeopardy and the tax authorities could save around 9.4 billion euros annually Use the net payment to the EU for other purposes. Only restrictions on the free movement of people had a long-term negative effect on the British potential, but short-term mass layoffs of EU foreigners are not to be expected. The British government, which could achieve such a negotiation result, would probably be celebrated exuberantly at home. Internal market without the free movement of people and no further payments to the supposed bureaucrats in Brussels: The Exiter would have enforced all their demands, the EU would have given in.The internal market may be secured in a certain narrower economic understanding, 8 but the renunciation of the four fundamental freedoms - European standard since the Treaty of Rome of 1957 - would be a capitulation of the political idea of ​​European integration to the simple economic calculation.

In the long run, this outcome would attract imitators. The threat of uncompromising negotiations would have turned out to be meatless, other countries would strive for a similar result. At the latest with the exit of an important member state such as France or the Netherlands, the EU would end up and the European project would have failed. There would be massive economic upheavals in the EU (-). The collapse of the EU would also have negative effects for Great Britain (-).

The "Norway" solution is the result of the negotiations, which is often treated as the most realistic. The British would have to swallow what they had actually voted against: the free movement of people. One of the catchiest slogans of the Leave campaign formulated the fear of the migration flows: "take back control of immigration". In particular, Nigel Farage promised the EU opponents that in the event of a possible exit from the EU, they would be able to decide on immigration again. If it comes to the "Norway" solution, these statements would have turned out to be an illusion. In addition, payments of between EUR 2.5 billion and almost EUR 5 billion could continue to flow to Brussels. According to a study by the British Ministry of Finance and Economic Affairs in a favorable scenario similar to the “Norway” solution, the growth prospects would diminish in the long term by around 0.2 to 0.3 percentage points per year (- / 0) .9 In addition the European legislature would function without British participation. This would hardly have any direct economic implications for the economies of the EU. In the longer term, the lack of economic liberal impetus from the British would at most result in deviations from the status quo. Institutionally, this would be the case, for example, by shifting the pivotal swing player, which decides on the formation of a blocking minority in the European Council, to a country like France that tends to be interventionist. Less state intervention would then be blocked at the European level. The economic effects resulting from this are, however, of a very indirect nature, so that the Union’s growth prospects also remained unchanged in the long term (0).

If both players were willing to compromise, Great Britain would be transferred to a "Norway +" solution and, in contrast to Norway's status, would be better off. In the long term, the British could significantly reduce their net contribution to the EU budget from around 0.5% of GDP per year. In combination with the roughly 0.2 to 0.3 percentage points of GDP growth declines, the overall effect for Great Britain would be roughly neutral (0) .10 In addition, this negotiation result would presumably attract individual imitators. The threat of uncompromising negotiations on the part of the EU would still be credible in contrast to the "special solution GB". The Europeans have shown themselves to be willing to compromise, but only in response to a negotiation by the British that is willing to compromise. The EU could always claim that if Britain conducts uncompromising negotiations, it will also choose an uncompromising negotiating position. It is unlikely that many countries would trade political dependency without participation for slightly restricted freedom of movement and a discount on contribution payments. The first critical voices are also coming from the British Bankers Association: Under no circumstances do they want to have regulations and regulations from Brussels placed before them.11 The EU itself would very likely remain in place, but a few imitators would slow European growth in the long term (-). Norway, for example, would be predestined for negotiating better conditions.

Short-term pay-offs: economic uncertainty

In the short term, the economic effects will primarily be driven by increased uncertainty among economic actors, the effects of the restricted free movement of people are of secondary importance. The red line for the EU negotiating position - the stability of the EU - remains subordinate because in the short term the risk of the EU dissolving is dominated by the general uncertainty burden for the economy. With the “Exit WTO” solution, the high tariffs, in combination with the massive uncertainty among investors and consumers, lead to high negative economic effects (-) for Great Britain, which would greatly overshadow the discontinuation of payments to the EU budget. For the EU, the negative effect would be somewhat weaker (- / -) due to the lower level of uncertainty.

With the “special solution GB”, the economic effect - due to the continued access to the EU internal market and the fact that payments to the EU are no longer available - is even positive (+) for Great Britain in the short term. As unlikely as such a negotiation result may appear, some business representatives in particular are particularly demanding a compliant EU negotiating position. With a corresponding positioning, the EU would cut its own flesh. In the short term, it would only have to replace the contributions from Great Britain (-), but in the long term this negotiation result could lead to the worst case for the EU as described above, the red line would be broken.

In the short term, the “Norway” solution results in identical pay-offs as in the long term. These are determined by the fact that Great Britain has to pay relatively high contributions to the EU, suffers from a high level of uncertainty, but does not have to cope with any change to the European internal market relative to the status quo (- / 0). On the EU side, the lower payments from the island are of little consequence in the short term (0). With the “Norway +” solution, the negative effects of uncertainty and the greatly reduced payments to the EU would be roughly balanced (0). On the political side, however, the loss of political participation at the European level is a high price. The counterpart to this is the slight deterioration in the EU, which would have to forego contribution payments in the event of high uncertainty (0 / -).

Game theoretical equilibria

In game theory, the pay-offs defined in this way result in clear strategy instructions. Classically, one sets out to find the best answers to the other person's strategy. If the counterparty is assumed to be in a negotiating position, a player chooses the higher pay-off in his best answer. If the pay-offs are the same, the player is indifferent between his answers. If the best answer of one player coincides with the best answer of the other player, a Nash equilibrium is established. In Figure 2, the best answers are highlighted in blue. Accordingly, two blue pay-offs in one box result in a Nash equilibrium.

Figure 2 reveals quickly, in the long term the optimal answer from the EU, regardless of the negotiating position of the British government, is uncompromising negotiation: The EU is better off in the case of the "Exit WTO" solution than in the case of the "special solution GB" and in the case of " Norway "than" Norway + ". The uncompromising negotiation is thus a so-called dominant strategy that the EU should follow with a view to the long term. Such a dominant strategy can also be identified for the UK in the long term. Regardless of the EU's strategy, it is always better in the long term if it is a negotiator that is willing to compromise. The Nash equilibrium, in which the players find themselves, is therefore the “Norway” solution in the long term. This solution resulting from the three issues considered contradicts the intentions of the exit proponents and would thus lead to violent reactions in the domestic political world in Great Britain. It can also be argued that the red line for compromise options on the part of the EU dominates the corresponding red line for Great Britain. The reason for this is that the British are ultimately more dependent on the EU than the other way around. The asymmetry that was already in place before negotiations began is expressed here.

The situation is more complex in the short term (see Figure 3). The EU's best answer is to react to uncompromising British negotiations and to uncompromisingly oppose cooperative British negotiating tactics: For the EU, the "special solution GB" is more attractive in the short term than the "Exit WTO" model and "Norway" is more profitable as "Norway +". Great Britain's optimal answers also meet here: “Norway” is much more business-friendly than the economically disastrous “Exit-WTO”, and the “special solution GB” is preferred by the British over “Norway +”. This results in both "Norway" and the "special solution GB" as best-answer Nash equilibria in the short term.

Although the game shows a dominant “Norway” balance in the long run, the analysis of the short run shows the seduction of unsustainable economic pay-offs. Because if the British were allowed access to the internal market without the corresponding free movement of persons, the more economically damaging “Exit WTO” would be prevented, but the EU would then have to prepare for an existential political crisis. If the “Norway +” scenario is expanded to include the political dimension and the British are also given a say at the political level, the solution would be so attractive that imitators could choose the same path and the EU could also break up. This problem is overlooked by a current proposed solution, 12 which declares a so-called “continental partnership” between the EU and Great Britain to be the optimal solution. This “continental partnership” is characterized by Great Britain's access to the internal market, restricted free movement of persons, political say and lower budget payments to the EU and thus goes beyond the “Norway +” considered here.

It is by no means a matter of setting an example in Great Britain, just looking at the inconsistency of the European willingness to compromise in the long term means that no frivolous concessions may be made - the loss of credibility for future negotiations and the risk of the EU breaking up would be too great . This would result in massive economic upheavals in the long term. The EU's achievements must not be sacrificed to short-term economic interests.

Political conflict

Of course, the assumptions on which this analysis is based represent a considerable simplification. Because both the EU and Great Britain must take into account different interests and try to pursue these in their respective strategies. The task of persuading Member States to put long-term economic interests above short-term gains requires a certain degree of political unity and perseverance. The very fact that both the EU Commission (Michel Barnier) and the European Council (Didier Seeuws) have appointed negotiators to negotiate with the British suggests that the EU is not a monolithic bloc. Hardliners are likely to predominate in the Commission and in Parliament, but this is not always the case in the Member States. Therefore, the 27 member states (excluding Great Britain), which make important fundamental decisions in the European Council, must not be viewed as a single bloc. If the national elections in the two major economies of France and Germany in 2017 lead to stable majorities, this could strengthen the negotiating position and unity. In Great Britain there is a latent conflict between hardliners (Boris Johnson, David Davis and Liam Fox) and the more diplomatic Theresa May. In fact, there are a number of conflicts that can be traced back to different national interests and influences within the two negotiating parties:

  • There has always been a conflict between free traders and interventionists in the EU member states: Great Britain is one of the EU member states that are fundamentally free-trade oriented, as are the Netherlands, Ireland and the Nordic countries.13 There are also a number of member states that are more interventionist in terms of economic policy Follow approaches such as France and southern Member States. This also gives rise to different interests about the future relationship between Great Britain and the EU. The Nordic countries, but also Ireland, also have close economic ties with the British. You want to bind the island as closely as possible to the EU. 14
  • There is also a conflict of interest between old and new member states: the countries of Central and Eastern Europe that joined the EU in 2004 and thereafter benefit from the fact that Norway, but also Switzerland, participate financially in the policy of economic and social cohesion. They are therefore likely to have a particular interest in the UK making a large financial contribution in future as the prize for good economic relations with the EU. The new member states will also not be interested in the EU granting Great Britain concessions on the free movement of persons. In 2015, for example, almost 870,000 Poles lived on the island. Conversely, there are countries in which a comparatively large number of Britons live: 301,000 in Spain and 117,000 in Ireland.
  • Since the existence of the euro, views between euro states and non-euro states have also been in conflict: the group of countries that do not have the euro as their currency will lose an important ally if they leave. Conversely, the euro states will have to reckon with less resistance from the EU in future if they want to promote integration in the monetary union. Countries with strong domestic political forces that oppose the EU will negotiate differently than countries in which such parties play little or no role.
  • But in Great Britain, too, one cannot assume that there is a uniform interest group. First of all, the Scottish aspirations for independence should be mentioned: If Great Britain leaves the EU, it cannot be ruled out that the Scots will say goodbye to Great Britain in a second referendum. The less the UK remains linked to the EU after its exit, the greater the risk. There are already proposals according to which only Britain would leave the EU, but Scotland (possibly also Northern Ireland) would stay in - the so-called reverse Greenland solution; the country left the then European Community in 1985, but politically it still belongs to Denmark.15
  • The border between Ireland and Northern Ireland is also fraught with problems: political observers are warning of an external EU border between the Republic of Ireland and Northern Ireland that is linked to controls, since the overcoming of the border on the Irish island has contributed significantly to the peace process.
  • The courting for little Gibraltar is also becoming interesting: Spain could exert pressure in the negotiations with Great Britain by making political and territorial claims on this British exclave.
  • Conflicts of interest for Great Britain itself also arise from the fact that the British by no means voted to leave with a clear majority. Moreover, the EU opponents do not form a uniform camp either. On the one hand, there are political forces that are more protectionist and want to “protect” the island in particular from the influx of citizens from the EU. On the other hand, there are politicians who primarily want to “liberate” Great Britain from the bureaucratic regulations perceived in this way from Brussels and who would like to see the country on a cosmopolitan and free-trade line.
  • Finally: In the "Norway" solution, some players are not even at the negotiating table: Norway, Iceland and Liechtenstein (and Switzerland), who would have to agree to Great Britain joining the European Free Trade Association (EFTA) in order for the British to participate as EFTA members of the European Currency Area (EEA) and thus retain access to the internal market.

The assessment of which actor has greater bargaining power, depending on the institution and position, is based on a weighing of different aspects. For full WTO membership, the consent of the 163 WTO member states to the tariffs, quotas, subsidies and concessions proposed by Great Britain is necessary - thus every member of the EU also has an implicit right of veto.Although the country is currently indirectly part of the World Trade Organization via the European Union, membership would have to be reorganized upon leaving the EU, the free trade agreements with third countries such as South Korea, Mexico, Israel or South Africa, which also apply to Great Britain via the EU would have to be renegotiated. British experts are already admitting that negotiating WTO membership during the two-year Article 50 period could be difficult. Once accepted, Great Britain would become a partner in trade with the 27 EU states like any other country without a free trade agreement. This would mean that foreign trade duties would be due. As a consequence, the UK could try to move closer to the US. However, long-term, resource-intensive TTIP-like negotiations would also be required just for the conclusion of a free trade agreement.

A quick look at the political tensions between the many parliamentary groups involved shows that before the actual negotiation process can begin, a long search phase must first be run through. To what extent economic interests play a role in these preliminary negotiations is difficult to assess - the political motives could override the economic ones. The analysis of the economic pay-offs of different scenarios shows in each case that a certain economic temptation emanates from a European negotiation willing to compromise. In the long run, however, this risks a break-up of the EU with devastating economic and political consequences.

  • 1 For reasons of linguistic simplicity, the term “Great Britain” in the following stands for the entire United Kingdom of Great Britain and Northern Ireland.
  • 2 J. Pisani-Ferry, N. Röttgen, A. Sapir, P. Tucker, G. Wolff: Europe after Brexit: A proposal for a continental partnership, Bruegel, 2016, uploads / 2016/08 / EU-UK-20160829-final-1.pdf.
  • 3 House of Commons Library: Leaving the EU, Research Paper, No. 13/42, July 1, 2013, p. 22,
  • 4 J. Pisani-Ferry, N. Röttgen, A. Sapir, P. Tucker, G. Wolff, loc.
  • 5 The intermediate values ​​are strictly better or worse than the other values.
  • 6 O. Wyman: The Impact of the UK's Exit - From the EU on the UK-based financial services sector, 2016, the-UKs-exit-from-the-EU-on-the-UK-based-financial-services-sector.pdf.
  • 7 T. Sampson, S. Dhingra, G. Ottaviano, J. Van Reenen: How "Economists for Brexit" manage to defy the laws of gravity, Center for Economic Policy Research, 2016.
  • 8 J. Pisani-Ferry, N. Röttgen, A. Sapir, P. Tucker, G. Wolff, loc.
  • 9 HM Treasury: HM Treasury analysis: the long-term economic impact of EU membership and the alternatives, 2016, -impact-of-eu-membership-and-the-alternatives.
  • 10 Ibid.
  • 11 BBA - British Banking Association: UK exit from the EU: an orderly transition for banking, London 2016.
  • 12 J. Pisani-Ferry, N. Röttgen, A. Sapir, P. Tucker, G. Wolff, loc.
  • 13 Global Counsel: Brexit: the impact on the UK and the EU, 2015,, p 15.
  • 14 T. Etzold, C. Opitz: Northern Europe after the Brexit vote, SWP-Aktuell 57, 2016, /article/nordeuropa_nach_dem_brexit_votum.html.
  • 15 O.V .: We want to be Big Scotland, in: Financial Times, 2.7.2016, European edition, p. 7.

Title: Brexit and The Future of Europe - a Game Theoretical Approach

Abstract: After the Brexit referendum’s leaveoutcome last summer, the new relationship between the UK and the EU has to be shaped institutionally. For the two bargaining parties the question now is which negotiation strategy to take. In order to choose the optimal strategy, the players have to factor in their time preferences. A game theoretical approach yields that the EU - no matter what is economically feasible in the shortrun - has to play a tough negotiation strategy if they care about the longrun. This result is not a question of punishment but of pure economic rationale.

JEL Classification: C7, F13, O52