Brexit Now Binary

 

For some weeks now I have imposed a ban on myself not to mention Brexit as I feared folks in the UK cannot take much more. Being in Italy, the  ban has been easier to observe as the Italian Press gave up long ago trying to understand what the Brexiteers wanted so badly that they want to leave the world’s largest trading block. Of course, Italians are different as many of my friends keep telling me after visiting Tuscany, Venice or Rome: they should check out Puglia, Calabria or Sicily if they really want to find differences. Of course, Italians have not won as many wars as we Brits despite, having fought many more over the centuries. Nor do they have the perfect blend of democracy that has been working so well in the UK over the last 3 years. Anyway, the Italian view of Brexit has proved to be prescient albeit not welcome to many Brits.

Figure 1 Discredit where discredit is due

Source: YouGov via Statista Chart

 

For me, the key result of the ‘Chequers Coup’ is the emerging into full view of what has always seemed to most European commentators to be a binary choice: either the UK leaves the EU and becomes a third country trading on WTO rules after an orderly (and probably quite cordial) transition period spent negotiating a raft of complex divorce settlements or there is no Brexit at all. My reasons for saying this are probably tediously familiar to regular readers:

  1. ‘No deal’ is off the table as it would be a logistical and commercial catastrophe. The latest evidence of what could occur includes government plans to stockpiles canned foods and also to install emergency generators to keep the lights on in Northern Ireland. The EU leaders are aware of this too despite the ECB, EBA and other agencies warning of a 50% chance of ‘no deal’.
  2. Any deal would be damaging to the UK economy in the short -term and, as Mr Trump gets into his stride, in the long-term too. The German, French, Benelux and Nordic economies would also be badly affected. The variables are the extent and duration of the damage.
  3. The scope for cherry picking/’cakeism’ by the UK is very limited not so much because of EU machismo but because of governing treaties that can only be changed by unanimous agreement of member states, some of would need to hold referendums of their own, which is the last thing they want to do.

The ‘Chequers coup’ confirms that Mrs May has fully grasped points 1 and 2 and sort of got point 3 while still hoping to cut a small slice of cake and buy more time to eat it. However, the Prime Minister has taken a long time to get to this position and her government  is rightly fingered as the main culprit by the 64% of respondents to a YouGov poll who think Brexit is ‘going fairly or very badly’ (Figure 1). Warnings from the civil service, industry, EU leaders and, of course, pesky economists have been consistently ignored. The premature triggering of Article 50 betrayed reckless ignorance and the general election campaign an extraordinary disingenuousness.  Not quite as culpable is the Labour leadership who are clearly in the pro-Brexit camp and has conspired with the Government to conceal from the public the likely consequences of any form of Brexit while still whipping their reluctant MPs to cause maximum mischief (in contrast, to their credit, Labour peers have consistently provided responsible opposition).  It seems fair enough to cast blame on pro-Remainers as they have clearly blocked Mrs May’s initial dash to the exit and also on those in the media who appear to have re-trained at the Trump school of journalism. Intriguingly, few respondents blame business, which after an initially restrained lobbying campaign appears to have played the crucial role in persuading Mrs May to face reality. Perhaps the best summary of the post-referendum chaos came this week from Rachel Sylvester writing in ‘The Times’: The Leave campaign was a protest movement that suddenly found itself in power but disruptors are more comfortable in opposition. You could see the fear in the eyes of the Brexiteers on the morning after the referendum — they only intended to shake things up, they never really meant to win.

Chart 2: Global Britain: non-EU trade balances with the UK
Source: UK Trade Policy Observatory

 

Although belated and already under attack from many quarters, Mrs May’s White Paper has the principal and probably only virtue that it is something that can be negotiated with Michel Barnier and his team. From a purely economic point of view, the biggest weakness is leaving the Services Sector up in the air. Nobody (not even Philip Hammond but perhaps only for now) seems to care about the Financial Sector despite its accounting for roughly the same proportion of GDP as Manufacturing but the Services Sector as a whole accounts for 80% of GDP and, more immediately relevant, for 44% of Exports (about £100bn per annum). That the UK has a surplus with other EU countries is well known and Table 2 shows that this also the case with 29 more countries vs. a deficit with an intriguing list of 10 others. (As an aside,  the US deficit with the UK in both Goods and Services helps to explain Mr Trump’s anti-diplomacy yesterday!) The Government’s optimism over negotiating stand-alone Services agreement around the world is not shared by Professor Alan Winters the UK Trade Policy Observatory who points out that none have yet been agreed by any country or trading block. Professor Winters argues that most countries are more interested in agreements over trading goods and, ‘moreover several of the partners that the UK might prioritise for services negotiations already have agreements with the EU. Some of these agreements contain Most Favoured Nation (MFN) clauses on a substantial share of services policies. These mean that if, post-Brexit, the UK were to negotiate more favourable access to their services markets than it has already as a member of the EU, this would have to be extended to the EU – a six-times larger economy – ‘for free’. This makes it even more unlikely that these countries will extend any new concessions to the UK.’

The political challenges are even greater (too great, in fact) with a fair amount of ‘cakeism’ included in the Chequers deal, even if only as sops to the pragmatic Brexiteers, as well as major concessions on sovereignty and freedom of movement.‘ Vassal state’ may be  too strong  a description but any deal in between WTO rules and Remaining, no matter how much lip-service for the UK’s being able to discuss EU policy, is bound to diminish the UK’s influence and economic prospects. This is something that the more perceptive Brexiteers  have concluded. Meanwhile the EU can only welcome the prospect of the UK’s staying on board and having to toe the line (EEA membership would do nicely….for the EU). However, the biggest political challenge and which may yet prove decisive is the border in Ireland: only the WTO and Remain options avoid an Irish veto or a UK constitutional crisis.

Which of the binary options the UK ends up choosing is still wide-open. The EU leaders will want to steer Mrs May gently back towards her pre-Referendum stance of reluctant Remainer but they need to help her get through the Tory Party Conference in October just as the Tory Brexiteers will be trying to undermine her with guerilla tactics inside and outside Parliament. Tory Remainers will want to humour her unless they see a no deal cliff-edge appearing. Frankly, her Chequers deal is most unlikely to come to fruition but Mrs May is in the extraordinary position of being the Prime Minister most likely to take the UK out of the EU in March as well as being the most likely one to keep the UK in. The Tory Brexiteers dare not move a vote of no confidence as the other parties will be only too happy to weigh in and a Corbyn Government could transpire while both Tory and Labour Remainer MPs risk deselection if they try to block Brexit too early or keep pushing EEA membership. What will definitely be wanted by everyone, except the diehard Brexiteers, is more time to weigh up the binary options. The EU already seems to be planning to invite the UK to withdraw the Article 50 Notice at least for a while, which would probably receive the support of a large majority in Parliament, with or without Mr Corbyn’s assent. This could be justified to ordinary voters even if Tory Party members are outraged. Much, much more difficult would be for Mrs May eventually to wring her hands and say that after much deliberation Remaining is on balance the better option. It would be difficult for the other parties to vote against this but they would almost certainly insist on holding a second referendum with the two choices of WTO and Remain. These are what should have been the choices in June 2016 with explanations for voters to understand what is entailed.

Chart 2: Global Britain: non-EU trade balances with the UK
Source: UK Trade Policy Observatory

 

By Alastair Winer

alastair.winter@danielstewart.co.uk

To read the FULL story please fill out the contact form.