Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 11 January 2018

Does Brexit end not with a bang but a whimper?

Most media commentary on Brexit makes a huge mistake. It focuses on what the UK government may wish to do or should do. The first stage agreement told us one thing that we should have known the moment Article 50 was triggered: the EU is calling the shots in these negotiations. [1] But the fact that the UK agreed to the text, and particularly the parts on the Irish border, has told the EU something important: the current UK government is not going to walk away with no deal, and even if it did the current parliament would almost certainly stop it.

That in turn tells the EU that it can get, to the first approximation, the agreement it wants. So what we should be asking is not what the UK’s next move will be, but what the preferred outcome for the EU is. My guess would be that their preferred outcome is a formalisation of the transition arrangements. This satisfies their three criteria: it avoids a hard Irish border, it imposes no additional trade restrictions, and the UK is clearly worse off as a result of leaving (because it has no control over the rules it must obey).

As Martin Sandbu points out, the first criteria could be satisfied by a deal that kept the UK in the Customs Union and Single Market for goods, but not for services. As the UK exports more services than it imports to/from the EU, the EU’s second criteria might still be roughly satisfied by such a deal. If the UK avoids accepting free movement as part of the deal, whether the third criteria is satisfied becomes debatable. Still it would be a possibility. Anything beyond this would mean a hard border in Ireland. It is difficult to imagine why the rest of the EU would want to seriously harm relations with Ireland by agreeing to such a thing.

Suppose something between these two alternatives, of staying in the Single Market and staying in it just for goods, does become the final deal. I think the Labour leadership could live with it if they are in government when the deal is done. Perhaps a majority of Conservative MPs could. But it means that dreams of doing trade deals with other countries would no longer be possible, and for that and other reasons a large part of the Conservative party would not be happy. The Conservative’s Europe problem would not be solved.

The fact that the Brexiters will still be agitating for a more pronounced break from Europe will be one reason why the UK will still suffer in economic terms (albeit much less than with No Deal), and this will be increased if we are no longer in the Single Market for services. Firms will always be reluctant to locate in the UK because trade might be disrupted if the Brexiters win again. Less immigration from the EU will also hurt the economy. And of course the Brexiters will remind everyone that the UK is having to accept rules on trade that it plays no part in creating.

All that suggests any deal will not be sustainable in the longer term. Norway and Switzerland may be able to tolerate being out of the club but obeying its rules because they would probably reason their impact within the club would be small, although what Ireland will achieve with the Brexit deal is a counterexample. An economy with the size and more importantly the history of the UK will find that more difficult to accept this. 

Does this mean that any deal will just be the first stage of breaking away from Europe? The Brexiters will agitate for this, but I doubt it will happen. The Brexit is essentially a project of the old. It seems far more likely to me that as time passes a majority for rejoining will emerge, and Brexit will come to an end. This mad period of UK politics, and all the political and economic harm it has done, will be a complete dead end, a colossal and damaging waste of time. 

This is my best guess at how Brexit will end, although I take no pleasure in that. [2] Not with the bang of a second referendum or a parliamentary vote, but slowly over time. The vote that rules them all today will gradually be seen not as the liberation and empowerment that so many now believe, but instead as just the machinations of a small number of hollow men. Hollow men who dream of empire renewed, and as a result are casting their country from the world stage. Hollow men who dream of personal power, and who instead turn out to be powerless. Their day will soon pass, as wind in dry grass.

[1] Here I think informed analysis, from commentators like David Allen Green for example, got it right. As I wrote: "Anyone who actually wants a good deal from the EU when we leave should realise that the UK’s negotiating position becomes instantly weaker once Article 50 is triggered."

[2] The Brexiters will not let the government propose a second referendum. A majority of MPs will not vote for one unless public opinion becomes much more anti-Brexit. Without something like a major recession, which looks unlikely, I fear a shift in public opinion will not happen in time for 2019. The post-Brexit Remain campaign has not ‘broken through’ because the tabloid press, and broadcasters following the wishes of politicians, will see Brexit through to completion because they made Brexit possible.


Would things be different if Labour campaigned for a second referendum? In terms of public opinion, that would make a difference to how broadcasters treated the issue. But Corbyn will only consider that if he could be sure that enough Conservative would back him, and by making the issue party political he cannot be sure of that. It is the fact that too few Conservative MPs are prepared to stand up against their leadership, and the 'will of the people', that makes leaving inevitable.      

21 comments:

  1. Great post and really plausible. I'm just left with one question though - what happens at the point that all this becomes clear? Will the mood shift when many realise that what they were sold won't happen and when both Remainers and Brexiter's denounce the outcome?

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  2. In the 2nd to last paragraph, is there a typo?
    "This made period of UK politics" was intended to be
    "This mad period of UK politics"?
    --
    rps

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  3. Couple of typos, stiff for still and made for mad (I think).

    Very interesting article to me as a non-economist, I will be following you by email, thanks, Bernie

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  4. LOL at seriously harm relations with Ireland -- have you learned nothing from their treatment under the Eurozone rules? Great Recession unemployment peaked at 9% in the UK, and 15% in Ireland!

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  5. Like Farage, I think a second referendum is a very good idea.

    How could we possibly repeat the error of allowing 71% of all MPs on the broadcast news programmes in the campaigning period, whether leave or remain, being from the Tory Party?

    How could the hypothetical Leave position of 2016 be strengthened by the government having negotiated a concrete deal on which to vote by 2019?

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  6. You closing paragraph is deeply disturbing - how much havoc can be wreaked by so few.

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  7. Excellent post. This is the most succinct summation of the most probable course of events.

    I only think that you under-estimate the speed with which opinion can change back to pro-European.

    Thanks!

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  8. Doesn't the end of free movement of people necessitate some sort of border controls in Northern Ireland?

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    1. It does mean more enforcement of those rules at the border, but there already is e.g. August 2001 to February 2002, the Republic of Ireland kept 300 people out, since non-EU citizens are not entitled to freedom of movement in Ireland. If free movement for EU citizens ends, then enforcement would haven to be substantial since there are today a very large number of EU citizens in both parts of Ireland.
      http://oireachtasdebates.oireachtas.ie/debates%20authoring/debateswebpack.nsf/takes/dail2002021200276

      Whether we leave the customs union and single market is more economically important and would mean border checks even for those entitled to free movement of people.

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  9. Given the EU's evident fear of May being replaced by a hardliner we could equally say that the EU is desperate not to have a no-deal result.

    As long as there are no bilateral tariffs and product regulations are sufficiently 'aligned' so as to render standard compliance superfluous the Irish border question does not imply the UK must remain in the Customs Union.

    Attempts to use the porous Irish border to exploit differences in external tariffs are unlikely to affect the Continental EU significantly. The EU's tariffs are generally low, and by the time the product has gone from its origin to Belfast, been smuggled over the border to Dublin, shipped in sealed containers to Holyhead, driven to Dover, shipped to Calais, and driven to Amsterdam, it'll probably have been much cheaper just to import to Rotterdam and pay the tariff, especially when you would have to make it worth the smuggler's risks and while.

    Some smuggling may occur within the island of Ireland itself, but there has always been smuggling across this border because of differential domestic tax rates on things like diesel and tobacco products. Both diesel and tobacco are likely to be rendered obsolete over the next 20 years or so due to the development of far less polluting electric products that do the same thing. If smuggling due to differential external tariff rates rises over the same period then smuggling as a whole is likely to remain within the bounds that today and for a long time prior have been considered not to justify border checks.

    It's likely that at every UK-EU border route except those on the land border with Ireland there will be no tariff or product compliance tests, only rules-of-origin ones. On the Irish border these checks will presumably be replaced by cross-border police cooperation, checks at importers etc.

    The period until 2030 is likely to see the percentage of UK exports to the EU decline significantly due to faster growth in RoW (PwC estimated it would fall to 30% by then); and to see the EU either consolidate as a eurozone club or face major structural problems. The rationale for rejoining would be weak.

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  10. While the Sandbu scenario might seem possible I don't think it will happen for 3 reasons:

    1. As the way Sandbu presents it, it could conceivably be presented as the UK having its cake and eating it, something the EU is keen to avoid since that does not fulfill the third criteria (the UK should be clearly worse off for leaving - under this scenario that's highly debatable and in fact the UK might be better off)

    2. The agreed text on the Irish border says in Article 49 "In the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all-island economy and the protection of the 1998 Agreement." Note the bit in bold. As well as protecting the 1998 Agreement. The all-island economy in Ireland and the 1998 Agreement would necessitate a free market in the services that span the island. As had been noted elsewhere, the UK and European Commission had drawn up a list of 142 cross-border activities that could be disrupted on the island of Ireland by Brexit. For there not to be a hard border on the island, then none of these 142 areas should ever really be disrupted. But that includes health services (ambulances being free to cross the border to attend to emergencies - if there was a divergence, then you would need to stop ambulances at the border; hence border posts; patients being able to fill prescriptions anywhere on the island), the all-island electricity market (electricity services), animal health (veterinary services) and so on. At best this might leave open the ability of the UK to diverge in services which aren't a major part of the economy of the island or Ireland (or which don't feature in that economy at all), but then that leads to point 3....

    3. Services would include financial services. Any single market in goods only would mean that there is a hard brexit for the financial services industry - so no passporting and the need to set up subsidiaries and move jobs over to the continent and losing business to New York (after all, why should American financial corporations continue operating from London, when effectively London is no different from New York in terms of access to the EU? At that point they would just open subsidiaries in Frankfurt, Paris, Dublin, Amsterdam, Rome etc and move most operations out of London to the USA, leaving behind only the subsidiary necessary to serve the British market only). As is rightly pointed out, services constitutes the majority of the British economy. And services benefit greatly from the still incomplete internal market in services. Financial services especially. There is no way under that scenario that the financial services industry simply keeps quiet and accepts the customs union + single market in goods only scenario. If the supply chains of manufacturing have a good claim for avoiding disruption the financial services industry will have a much, much stronger claim to avoiding the disruption inherent in a loss of passporting.

    So once services (due to the Irish factor and financial services passporting) is included in the final Brexit agreement there wouldn't be any scope for dropping free movement of persons as a quid pro quo for no free movement of services.

    As you rightly noted though, even if the UK signed up for an indefinite extension of the transitional arrangements (which is what that would amount to) it would be badly damaged as firms would be wary of setting up shop there in case the Brexiteers win again and a more complete break ensues. In fact this holds true even if Brexit was cancelled and the UK remained in the EU. No firm would feel truly secure in the UK if their aim was to be in the EU's single market.

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  11. «The Brexit is essentially a project of the old. It seems far more likely to me that as time passes a majority for rejoining will emerge, and Brexit will come to an end. This made period of UK politics, and all the political and economic harm it has done, will be a complete dead end, a colossal and damaging waste of time.»

    Oh there! I guess that time and reflection have delivered to you what was immediately obvious: that "Remain" will win in the long term, but "Leave" in the short term is politically unbeatable because it is shout of grief about the loss of the english empire, and certain things have to burn themselves out before people and nations can move on. As such it won't have been a total loss.

    «It is the fact that too few Conservative MPs are prepared to stand up against their leadership, and the 'will of the people', that makes leaving inevitable»

    I note that this is a gigantic change from blaming Corbyn for "Leave", Blair-style. As to Conservative MPs and “the 'will of the people'” the overwhelmingly majority of them represents heavily "Leave"-oriented constituencies, many of them vulnerable to UKIP splitting the right-wing vote.

    «Norway and Switzerland may be able to tolerate being out of the club but obeying its rules because they would probably reason their impact within the club would be small»

    All four nearly-in countries are out simply because they have a magic money tree that they are afraid they would have to share with the grubby rest-of-Europe if full members: fisheries for Iceland, oil for Norway, text evasion and money laundering for Switzerland and Liechtenstein. As long as they are rich from their special magic money tree, they don't care much about representation.

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  12. «So what we should be asking is not what the UK’s next move will be, but what the preferred outcome for the EU is. My guess would be that their preferred outcome is a formalisation of the transition arrangements.»

    Amazingly the government of these "lucky" isles has boasted only a couple days ago that during nearly a year of formal negotiations they never asked the EU27 representatives what kind of deal they wanted, and claimed that they now would want an answer.

    They need not have bothered because M Barnier has been exceedingly clear about it in several speeches and interviews, both in the UK and in the EU27, and there are two different answers for exit and post-exit:

    #1 The EU27 are aiming for an orderly hard-exit, followed several years later by CETA style terms covering trade in goods only. As M Barnier said several time "brexit means brexit". A full and clear implementation of A50 in other words, as per the treaties all member countries signed.

    #2 For the EU27 a disorderly hard-exit ("walk away"/"go whistle" by the UK) would be acceptable even if rather disliked, and it would be followed by WTO-only terms covering trade in goods only. This is something that so far has not been widely understood by the english public.

    #3 If the "red lines" are dropped, then hard-exit is not longer an EU27 aim, and the two preferred outcomes by the EU27 are Norway++ terms (EEA and CU membership aka non-voting EU membership), or Norway+ terms (EEA and CU but only for trade in goods), preceded by 2 years of Norway++ terms to allow for EEA and CU treaty changes.

    The one key detail is this: there will be no "passporting" and free trade in services without both free movement and regulation of financial markets by the EU27 institutions.
    On that the EU27 can be expected to be totally rigid.

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    1. «The all-island economy in Ireland and the 1998 Agreement would necessitate a free market in the services that span the island. As had been noted elsewhere, the UK and European Commission had drawn up a list of 142 cross-border activities that could be disrupted on the island of Ireland by Brexit. For there not to be a hard border on the island, then none of these 142 areas should ever really be disrupted.»

      But I read somewhere that the wording is cleverly made so that it refers to the Good Friday Agreement which lists 6 areas of cooperation: agriculture, education, environment, health, tourism, transport, listed on page 9 of:

      http://data.consilium.europa.eu/doc/document/XT-21055-2017-INIT/en/pdf

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  13. what the EU is not an Empire ruled by hollow men? Not elected by the way

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  14. You have a good point about the presentation of the eventual EU-UK agreement. Both sides have an incentive to play down the differences and the drama and say that it’s a compromise. That will take the sting out of much of the hype that has been put about in the media. You’re right also that it is much more likely to reflect EU priorities than UK ones.
    But I think you are missing a point about the EU position : you mention three criteria, but neglect the one that the EU has put most emphasis on - the integrity of the single market. Maybe you don’t believe it, but you don’t really explain why.
    The one Member State that has most insisted upon including services in the single market is the UK. The EU in the end adopted this position, intrinsically linked to free movement of people, and is not ready to give it up because the UK is walking away.
    So the idea of a partial single market is unrealistic.
    More likely is a free trade agreement largely limited to goods, maybe with some sort of customs facilitation agreement. Anything more than that is too complicated for the EU to handle at the moment, and there is no incentive for them to agree to this.
    Including services in the trade agreement will depend on the extent to which the UK allows something close to freedom of movement for EU citizens. It will also depend on the extent to which the UK accepts to be bound by future changes in the EU acquis, including interpretations of this by the European Court of Justice. Neither is likely.
    The Irish issue is overplayed. The English establishment has never cared about this, and is only temporarily interested in the question because of its dependence on the DUP for votes in Parliament. There are already controls on the movement of some goods across the Irish Sea. Introducing a few more will not really be a problem, and will go towards the Irish position of a more united island. The price of a few more controls on the land border may be worth paying - a fudged border will be more acceptable than either a hard one or UK membership of the customs union.

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  15. So the options are:

    (i) abandoning the benefits of propinquity by going it alone and being the external 'other' against which the EU can unite whenever there are internal wrangles that threaten to compromise unity;

    (ii) remaining a feudatory state in some sort of external association with the bloc (perhaps via an indefinite transition) - which was de Gaulle's proposition in response to Wilson's application (his way of gradually leeching the UK of its economic and political vitality and ensuring its subjection to France); or

    (iii) being re-admitted without any opt-outs, meaning that we go back to the highly inequitable budget contributions of the period 1973-84 (a sure way of guaranteeing public antipathy) and, more especially, having to accept the euro, with all that will entail; moreover, since we would probably have to accept the euro we will need to meet the necessary criteria and demonstrate a sufficient level of communautaire behaviour before being allowed back in (unlikely, given what has occurred - and I think that many policymakers in the EU would resist our readmission or would be willing to challenge the notion that we can simply withdraw our Art. 50 notification: we were a gangrenous limb they are happy to see amputated).

    Choose your poison.

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  16. As on previous occasions you seem to think that all the changes will come from the UK and not the EU to bring the UK back into the fold.

    This is extraordinary. The Euro cannot work in its current form and the changes which would be required to make it work (fiscal and political union) would not be agreed within the EU - by a very large margin.

    There is also mounting discontent in EE concerning issues such as immigration which are again increasing the centripetal forces within the EU.

    The fact is that these forces will play out over the next 30-40 years and the assumed angst of the UK, leading us back into the path of righteousness as you would see it, is very minor in the scheme of things. Both will change substantially and I could see that the UK might well want to rejoin a European project at some point in that time scale, but it would not be as a supplicant, which is what you seem to assume, nor would it be the EU as we know it but a body that is substantially different to the one we now have.

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  17. So you're essentially saying that the U.K. is like a patient who lies etherized upon a table? That this state of affairs is nothing more than the love song of the old, longing for Old Empire?

    My apologies.

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  18. Sounds like Farage has come to the same conclusion.

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  19. Hello to ALL.
    I Wish to PLEAD with everyone that is reading this to realise that brexit is a TERRIBLE proposal and a sabotage on our economy. We have worked hard for everything we have. We know where we stand. "If it ain't broke don't brexit". If it happens the government will need lots of money to pay for all the new measures they will have to install and redesign - amongst all the uncertainty and indecisiveness both for the whole of the U.K., Scotland and of course Ireland; and the world. Where will WE stand? What will we do? What will they do? What will happen? It will effect us all differently but be assured it will effect us ALL negatively and this is a researched fact established by the U.K. treasury ITSELF through data research studies and international studies have ALL also proven this to be a definate outcome and I quote will be "Detrimental to the economy of the U.K." to be apparent.
    Think about what this will cause. Many will suffer as a result due to poor financial circumstances.

    Please heed this warning. Please.
    I have no personal gain from this plea, only knowing that if we all show our strength against "brexit" and stand united, we CAN stop this nonsense and we will not have to explain to future generations why we let it happen. We must show we are strong and won't be bullied into something that is bad for us blindly. And it feels like bullying when your screen is plastered with recurring visions of the brexit movement in action and all the negatives associated with it. IF IT ain't broke don't brexit!!!!!!!!!!
    Copy and paste this to all your family, friends and loved ones.
    We STILL have a Choice. Join hands and unite. SHARE this.
    Thank-you good-hearted folks for your passion for a brighter future. We do not need any more complications or stress in today's world.
    Thank you.

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