Brexit: let the ‘games’ begin

President Macron is surely right when he frets that the negotiations have been so mismanaged by the UK Government that it is possible to think in terms of  the Prisoners’ Dilemma where there may yet be a lose-lose outcome. We are certainly in a new phase of playing two games in particular: first, to avoid being blamed for a damaging divorce and second, the purely domestic (parochial?) contest to gain the keys to 10 Downing Street. These games involve carefully choreographed official statements, ‘off-the-cuff’ remarks, leaks and rumours: some designed to win public support and others to wrong-foot adversaries. It is possible to be cynical about all this but it is how democracies, when deeply divided, have to build a new consensus in order to reach difficult decisions. Disentangling the UK politically, economically and socially from long-term partners and allies is proving an almost impossible task and UK public opinion is more polarised than it has been since the 1970s and early 1980s, including the 3-day week, Winter of Discontent  and the Battle of Orgreave.

Still binary

Regular readers will recall that I have consistently predicted binary outcomes for the Brexit end game:

  • The whole of the UK outside the Customs Union and Single Market negotiated under ‘WTO rules’ with  some ‘bells and whistles’ added to the current  EU- Canada trade agreement plus significant military and security collaboration. This deal to be negotiated relatively amicably over a period of up to 3 years followed by a further transition period.
  • The UK remaining completely in the EU or downgrading to EEA membership.

The Party Conferences, far less the ‘to-ings and fro-ings’ of the last week, have failed to make me change my mind. Accordingly, I remain convinced that there will be no falling off a cliff-edge next March, despite the melodramatic and sometimes farcical preparations on both sides of the Channel. For me, the reductio ad absurdum came in the latest UK Government advice to companies with extensive businesses in the rest of the EU to consider setting up local overseas subsidiaries and in the case of Ireland explicitly to consult Dublin: negative Foreign Direct Investment is certainly an unusual economic concept!

Will Terri pull it off?

It seems Mrs May could be a good European after all in apparently considering adopting a new strategy of kicking the can further down the road. More time is definitely needed for the detailed arrangements and she seems anxious to avoid at all costs a rupture next March. It is, of course, a major source of relief that reality has dawned on her in respect of practical implementation, albeit rather late in the day, but it is still unclear where Mrs May is ultimately heading. Her actions hitherto have suggested that Tory Party unity is her key priority and that points to her preferring the WTO option. On the other hand, as a Remain voter and after moving from her bunker in the Home Office, she must have become more aware of the economic, commercial, legal and regulatory complexities.

Kicking the can through extending the post-exit transition period has two immediate attractions for her: first, the EU is likely to deal and second, the UK would no longer be a full member of the EU. To be fair, she has consistently vowed to deliver on both. A third attraction might be that the transition period would in reality become a negotiating period when all the hitherto neglected serious practical details can be ‘properly settled’. A fourth and less clear attraction would be that it would be the sort of deal into which she might be able to bounce her backbenchers and the DUP: ‘take it or have Jeremy Corbyn or Boris Johnson as Prime Minister’ and this appears to be the line that Dominic Raab is currently pursuing in Parliament..

Party poopers

Can-kicking is in the EU’s DNA and an extended transition period could be a potentially handsome consolation prize after failing to keep the UK as a full member. Not least of the attractions would be the UK’s being in an even weaker negotiating position than it is now and eventually deciding- willingly or in desperation-to stay indefinitely in the Customs Union and Single Market. It would also deliver on the pledges to Ireland, even if there might have to be some backtracking later. The problem is that the UK might eventually take the WTO option with all the entailed dislocations to the UK and EU’s economies and businesses. A short-term political benefit of giving Mrs May an extension is that it avoids the EU’s appearing inflexible. On balance, therefore, the EU is likely to sign up.

The real threat to Mrs May comes from within. Some 30 Tory MPs are thought to be ready to vote against anything Mrs May comes up with other than a complete rupture while reneging on the commitment to pay the UK’s dues. The problem for them, of course, is that if Mrs May’s loses the vote on her deal a chain of events could lead to a second referendum and/or General Election that resulted in the abandonment of Brexit. If these 30 MPs stick to their guns Mrs May is likely to fail as Labour, SNP, Plaid and the redoubtable Caroline Lucas would cheerfully join them in the voting lobbies. Worse than that, the DUP is likely to smell a rat and realise that ‘loyal’ Brexiteers in the Government (Messrs Gove, Fox, Raab and the Three Graces) are probably willing to cut loose Northern Ireland (and Scotland, for that matter) during the extended transition/negotiation period. The hard core of Tory Remainers including some who are still ministers may well not need to show their hand yet but some surely will (Mss Soubry, Morgan, and Wollaston, and Dominic Grieve). In short, the Prime Minister will not pull it off.

After May

Mrs May is likely to resign once the Commons reject her deal but she could well have deliberately left the vote until as late as February in order to try to intimidate her wavering backbenchers. Any new Tory leader, even Boris Johnson, would have no choice but to seek to withdraw the Article 50 Notice and Parliament is likely to insist on it. The EU would almost certainly to agree but not without attaching a time limit beyond which the UK would have to commit to one of the binary options of WTO or Remain. Both major UK parties would find it tricky to campaign in a second referendum but may feel that holding one would be the least bad course to follow. If the Tories advocated Brexit and the second vote was to Remain the Government would almost certainly have to resign. Whoever won the ensuing election would probably have to abandon Brexit altogether or accept the offer of EEA membership.

Beyond Westminster

It is, of course, heartening that the UK economy has held up remarkably well during this period of uncertainty since the Referendum. One somewhat depressing explanation is that most consumers have not thought much about the implications of Brexit although that appears to be changing, especially amongst younger adults. A hiatus in Business Investment has been the main measurable economic consequence and this seems unlikely to end until more companies are convinced all will be well. Both major parties claim to be committed to increasing public spending but it remains how expansionary that might be if taxes are also to be increased. It is probably reasonable to expect GDP growth of 1.5-2% for the next 2-3 years without much domestically-generated inflation. The Bank of England is likely to be able to start gently raising interest rates from Spring 2019. The pound and UK equities, especially those that are domestically-oriented, have been held back by Brexit uncertainty. They stand to gain as confidence grows that there will be no cliff-edge in March 2019 and that even if the WTO option eventually prevails there will be more time to prepare for it. Lest I end on too sanguine a note,  public services and how to fund them will surely now emerge as the UK’s biggest challenge but at least the same can be said of all the major developed economies.

 

By Alastair Winer

alastair.winter@danielstewart.co.uk

To gain first access on our mailing list please fill out the contact form.