Finance: Research, Policy and Anecdotes

Brexit - the first phase is over

The first phase of the Brexit negotiations has concluded and I think it has become clear which strategy has won: it was not the Brexiters’ strategy of “an afternoon tea in Berlin” or “we’ll pay our way into a great new relationship” or “the EU can whistle away”, but rather the more formal if not formalistic approach the EU has taken: long-term commitments made before have to be honoured, people’s lives and rights have to be protected, and the Brexit cannot create new political hotspots.

 

There were three main agreements: first, the rights of EU citizens in the UK and UK citizens in the EU being protected after Brexit (with a prominent role for the EJC – here goes the first red line of the Brexiters); second, payment by the UK for existing EU commitments: if you leave the restaurant after the third course of a set five-course menu, you are still expected to pay for the whole menu, no matter how much you whistle; third, the Irish border has to remain a soft one.  This turned out to be the trickiest but also most consequential one. The compromise seems to imply that the UK will stay in all but name in the Customs Union and (possibly) Single Market, for a simple reason – if you want to avoid a hard border between Northern and the Republic of Ireland, they have to be part of the same market.  If you want to avoid any border in the Irish Sea (between Northern Ireland and the rest of the UK), this would by extension imply that the whole of the UK stays in customs union and single market, but without having any say in making the rules.    There might still be a way out of it, courtesy of modern technology, but it would for the UK government to propose such a solution.  A third solution – more decentralization and allow Northern Ireland go a separate way – would be possible, but politically difficult, as it would open the floodgates for the Scottish independence drive.

 

 

If the past nine months have revealed anything new than it is the utterincompetence of the Brexiters.  Suggestions such as “let’s just leave the Irish border open” are so far from reality that one wonders whether these people have any clear idea on basic international law. Similarly, declaring the first phase agreement is a letter of intent rather than a binding agreement is quite amazing for a country, which has established the concept of sovereign credit worthiness, and now considers defaulting on such commitments. On the other hand, lots of red lines have turned pink for the better of the UK’s future.  But behind it is a more general mistake of populists: win with easy promises and leave the details to others.   Taking back control for a mid-sized economy (even one with nuclear powers) is not as easy as promised.

 

The question remains when will the British political class finally have the courage to tell voters the truth: that the myth of taking back control is simply that: a myth; and that the cake either has to be had or has to be eaten.   Will it be in a few days, when the British government for the first time discusses what kind of Brexit it actually wants? No, this is not a typo – the British government has so far not agreed on what kind of relationship it wants with the EU after Brexit apart from generalities including lots of pluses and minuses, such as Canada plus plus plus or Norway minus minus.  Will it be in the final days of the Brexit negotiations when even the Morduch media will realize that the cake is gone and there will be no taking back control? Or will the government manage to go all the way to the next General Elections before the fraud is revealed?  

 

And what will the reaction be by electorate and hardline Brexiters – a push for a No Deal Brexit, which might send UK into the diplomatic desert or breaking one of the agreements – the first phase agreement or the Good Friday agreement?  The fall of the May government, with possible new elections?  It is this uncertainty that will make the European Union reluctant to go all in and will push all participants into a compromise, but it will also put pressure on the UK economy until this uncertainty is resolved.