Negotiating Brexit Under Extreme Uncertainty A game theoretic analysis of the UK’s threat of no deal Marit Fiksdal Master thesis in Political Science UNIVERSITY OF OSLO Spring 2018 II Negotiating Brexit Under Extreme Uncertainty A game theoretic analysis of the UK’s threat of no deal III © Marit Fiksdal 2018 Negotiating Brexit Under Extreme Uncertainty. A game theoretic analysis of the UK’s threat of no deal Marit Fiksdal http://www.duo.uio.no/ Print: Reprosentralen, University of Oslo IV Abstract The ongoing Brexit negotiations are the first ever negotiations about the withdrawal of a member state from the European Union. The result of the negotiations will determine the UK’s terms of withdrawal and the framework of the future relationship between the two. The outcome of the negotiations depends on the actions of both parties which are taken in an environment of extreme uncertainty as withdrawal negotiations have never happened before and the players’ preferences and the payoffs of the possible outcomes are uncertain. In this context has the UK government threatened that “no deal is better than a bad deal”. This thesis examines the role of the UK’s threat of no deal in the negotiations with the EU and, more precisely, the conditions for the threat to be efficient and coerce the EU to make concessions. To examine this problem the thesis applies a game theoretic model to assess the conditions of credibility and severity under different assumptions about the information available to the players. The conditions for the threat to be effective are less strict under the assumption of incomplete information than under complete information, as the former assumption opens up for misrepresentation of information by the two players. For the threat to be efficient under incomplete information the UK must make the EU believe that the threat is credible, and the EU must evaluate the threat to be sufficiently severe. I conclude that it seems unlikely, even under incomplete information, that the UK’s threat can meet the necessary conditions for the threat to be effective and a deal beneficial to the UK to materialize. This conclusion is drawn by evaluating the conditions deduced from the game theoretic model based on knowledge about the actual case of Brexit obtained from various sources, such as interviews with key informants, public documents and speeches. Word count: 33 956 V VI Acknowledgements I want to thank my two supervisors, Scott Gates and Øivind Bratberg, for their guidance and support during the work with this thesis. Their feedback has had a very positive effect on the quality of the final product and their encouragements have helped me keep the spirit up throughout the process. I am very grateful for all the help and advice they have given me. I am also very thankful to my interviewees who have taken of their valuable time to answer my questions, their contribution is much appreciated. I also want to thank Mari for great company at Blindern during the two years of Masters. A special thank you to Max for reading through the thesis and commenting on substance as well as language, and for being a great support through the writing process. Finally, I would also like to thank my friends and family for their support and encouragements. The responsibility for any mistakes in the thesis is entirely my own. Marit Fiksdal Oslo, May 2018 VII VIII Table of contents 1 Introduction ...................................................................................................................... 1 1.1 Objective of thesis and research question ........................................................................ 2 1.2 Literature review .............................................................................................................. 2 1.2.1 The causes of Brexit .................................................................................................. 3 1.2.2 The consequences of Brexit ...................................................................................... 4 1.3 Research design ................................................................................................................ 5 1.3.1 Method ...................................................................................................................... 5 1.3.2 Data ........................................................................................................................... 8 1.4 Structure of thesis ............................................................................................................. 9 2 Background ..................................................................................................................... 11 2.1 The UK and the EU ........................................................................................................ 11 2.1.1 Britain in the EU: the “awkward” member state ..................................................... 11 2.1.2 Elements of continuity in British policy toward EU ............................................... 13 2.1.3 The path to the Brexit referendum........................................................................... 14 2.2 The exit option ............................................................................................................... 17 2.2.1 The origin of the legal possibility to exit ................................................................ 17 2.2.2 The rationale of the exit option ............................................................................... 18 2.2.3 Relevance and consequences of the exit option ...................................................... 18 2.3 Negotiating under Article 50 .......................................................................................... 21 2.3.1 The undefined and uncertain nature of exit ............................................................. 23 3 Theoretical framework .................................................................................................. 25 3.1 Negotiations and the use of threats ................................................................................ 25 3.2 Threat theory – how to effectively threaten ................................................................... 26 3.2.1 The no deal threat assessed – can it be efficient? .................................................... 27 3.2.2 Strategies to make a threat credible ......................................................................... 30 3.3 Power, negotiations and tactics ...................................................................................... 31 3.4 Unitary actors versus two-level games ........................................................................... 34 4 Goals, strategies and outcomes ..................................................................................... 36 4.1 The players ..................................................................................................................... 36 4.2 The players’ policy positions ......................................................................................... 36 4.2.1 EU’s overall positions and goals ............................................................................. 37 IX 4.2.2 The UK’s overall position and goals ....................................................................... 38 4.3 Strategies and possible outcomes ................................................................................... 39 4.3.1 Strategies ................................................................................................................. 40 4.3.2 Possible outcomes ................................................................................................... 40 4.4 Costs and benefits of EU membership versus non-membership .................................... 42 4.4.1 Cost and benefits of EU-membership ..................................................................... 42 4.4.2 Costs and benefits of non-membership ................................................................... 44 4.4.3 Different perceptions of the costs of leaving the EU .............................................. 45 5 The formal threat game ................................................................................................. 47 5.1 The threat game .............................................................................................................. 47 5.1.1 The sequences of moves .......................................................................................... 48 5.2 Payoffs associated with the different outcomes ............................................................. 50 5.3 Preferences over outcomes ............................................................................................. 52 5.4 Equilibria under complete information .......................................................................... 52 5.5 Implications and conclusion ........................................................................................... 54 6 The threat game with uncertainty ................................................................................ 55 6.1 The uncertainties of Brexit ............................................................................................. 55 6.2 The threat game with incomplete information ............................................................... 59 6.3 Assessing credibility – uncertainty about UK’s type ..................................................... 60 6.3.1 The sequence of moves and