Brexit: no-deal contingency plans could encourage a deal being struck

LONDON CORRESPONDENT:   As the Christmas truce approaches, the EU and UK have set out their respective plans for how they will respond if the UK leaves the EU on 29 March next year without a withdrawal agreement.  The announcements are proof of the increasing likelihood of ‘no deal‘ Brexit; they also have the potential to drive the parties towards the very outcome for which they are the contingency.

The EU preparations bear a passing resemblance to the War of the Roses battle cry of “kill the nobles, spare the commons”.  Steps will be taken to avoid inconveniencing individuals by keeping flights running, protecting the rights of UK residents of the EU and so forth, while going slow on measures to help UK businesses to deal with the flood of new obligations – like border and veterinary checks, licensing requirements, tariffs etc – that will descend overnight.

The hope is that the disruption, and in some cases stoppage, of trade will show the UK government and electorate the error of their ways and ideally bring them to heel.

But the mere fact of announcing its strategy has exposed latent differences inside the EU.  The Irish PM has flatly said he will not impose the required checks at the Irish land border.  Other member states are taking active steps to prevent the envisaged disruption and even to profit from it.  The Dutch, for example, are making a play for Rotterdam to take over from Calais as Britain’s main port of entry to the continent, hiring 1,000 new border officials to speed up checking.

In the longer term, the EU is hinting it will improve on these ‘bare-bones‘ temporary arrangements. The Times suggests that the EU will ask for specific payments to fix the disruptions in areas like road haulage or aviation (in some cases the amounts have already been quantified in the draft withdrawal treaty).

How far they can push a strategy of ‘you pay us for access to our (bigger) market but we get access to yours for free’ is unclear.  At a certain point, one expects the little guy to reject unequal treatment and focus on more open markets elsewhere.  That point gets closer with a ‘no deal’ Brexit and becomes more attractive as businesses dependent on Europe shrink and new businesses grow.

On the UK side, the approach is less punitive and more precautionary.  The government has said it will spend another £2 billion on getting ready.

While the headlines have focused on its contingency plans to avoid physical disruptions to imports from the EU, particularly of food and medicines, the underlying approach is for the UK to try to preserve temporary access for EU businesses and citizens, in the hope that makeshift arrangements can be a bridge to something more permanent.

The preparations also indicate that the UK government is wisely thinking about the transition to more open future trade patterns.  For example, Britain imports about half of its food, and 60% of this from the EU. Rather than just slapping an 11% average tariff on the EU imports (which would increase prices), the government is looking to reduce the overall tariff level on all food imports.

In rough equilibrium, you would expect this to offset the price increases while generating the same amount of customs revenue (added bonus – this would go to the British Government, and not the EU).  It would also shift UK consumption away from higher-cost EU producers to lower cost alternatives (no names here).  Perhaps they could be even more radical and think about getting rid of the tariffs altogether.

This new line of thinking may be an important signal.  To date, British policy has been based on the assumption that the benefits of undisturbed access to the EU market outweigh more open access to the rest of the world.

That is perhaps the main reason why the British government agreed to such a poor deal trade-wise with the EU.  The new thinking suggests liberal economists might be winning more policy battles and that politicians are gaining a little more confidence in their ability to manage a ‘no deal’ Brexit.

Christmas will give the participants time to reflect on how ‘no deal’ preparations have clarified the end game.  While there is still vigorous debate over a wide range of options, in reality the field has narrowed sharply.

Britain’s government has negotiated an unpopular withdrawal deal that would actually leave the UK embedded in the EU. So far its only supporters are two party factions: those who want to remain in the EU and those frightened of the consequences of radical change (this is the Conservative party, don’t forget).  It does not have  have a majority in parliament.

So the government deal can only get a majority with strong support from opposition party MPs.  Although they mostly favour close ties with the EU, they do not see the deal as best for Britain nor for themselves personally.

Some on the Labour side hope for a new government or a second referendum to steer Britain back into the EU; some Scottish nationalists see ‘no deal’ as the catalyst for Scottish independence.

The hard decision point comes in the first quarter of 2019 when other options fall away and the choice becomes binary: vote for the government deal or endure a ‘no deal’ exit.  Opposition MPs will find neither choice attractive and both likely to cost them votes.  But failure to back the deal will leave the Government free to drop it and leave without a withdrawal agreement (provided it can keep its potential rebels onside).

There is one other possibility worth mentioning.  At the last minute, the EU offers some really significant concessions to the British Government – say a guaranteed end to the transitional arrangements and heads of a trade agreement. The sort of concessions it has sworn it will never ever offer.

From an EU perspective these would reduce the deal from a clear triumph to a mere success.  But in the environment of poverty of expectations, it could be enough to carry the deal over the line, transform Prime Minister Theresa May from Neville Chamberlin into Winston Churchill, and deliver her party a thumping victory in the election she has pledged not to stand in.  The fact that most everyone, and particularly the EU, rules out this not-entirely-implausible ending might encourage punters to put on a few dollars at very long odds.

Our Brexit reporting to date has dwelt heavily on the difficulties for Britain’s government.  Labour party leader,

Jeremy Corbyn, has just reminded us that it’s also hard for the opposition.

Corbyn won’t support the deal negotiated by the Government.  If he was in power, he says, he would push on with Brexit (in part because the EU’s competition and state aid rules hamper the industry subsidies necessary to build the socialist paradise).  There would be more negotiations, requiring a timetable extension (which would take away Britain’s current leverage, the threat of ‘no deal’ exit on 29 March).

Corbyn’s preference would be a bespoke customs union with the EU (with the EU agreeing that Britain would not have to follow the customs union’s rules to ensure fair competition.  If agreed, this would leave the UK still closely aligned with the EU for trade and business regulation purposes (so quite like the government’s proposal and not so much like Brexit then).

If you think Corbyn’s thinking is a little wishful or even inconsistent, then you probably also think there is little to be gained by extending the current negotiations.  You might conclude that the best course is in fact the one into which the government seems to have stumbled:  use the fixed exit date of 29 March to force everyone to put forward their best and final offers and force the people’s representatives to choose.  Then you fix the problems.

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