Finance: Research, Policy and Anecdotes

Brexit Trilemma Revisited

I did not plan to write on Brexit any time soon, as I was under the firm impression that it won’t be until November (or even December) that there would be some kind of political fudge/compromise that would allow the UK to exit with a deal and kick the debate on the future relationship down the road, leading to what has been referred to as Blind Brexit or Neverending Brexit.  Well, EU leaders did something this week completely new, almost unheard of in European politics: rather than kicking the can down the road, they took a clear and firm stance on Brexit, the Withdrawal Agreement and the future relationship between the EU and the UK.

 

And here we are back at the Brexit Trilemma I discussed earlier – and the North Ireland backstop has become the stumbling block, as some have predicted before. And while the current debate is seemingly about the Withdrawal Agreement, the North Ireland backstop (to avoid border between Northern and Republic of Ireland) forces the discussion on future relationship on everyone right now.  If backstop implies that Northern Ireland stays in Single Market and Customs Union (as EU insists on), then the only way that the UK can exit Single Market and Customs Unions is to have an economic border in the Irish Sea between Northern Ireland and the rest of the UK. If this is to be avoided, the whole UK has to stay in Single Market and Customs Union.  Theresa May tried to get around this by proposing regulatory alignment of UK with EU and a version of a customs union between UK and EU.  That’s where EU leaders put down their foot and said no to separation of the four freedoms (goods, services, capital and people).  While the expectation was for some kind of fudge in a withdrawal agreement with a declaration of intent for a future relationship, Theresa May clearly overplayed her cards. As always, a lot comes down to chemistry between people, attitudes and behaviour (remember Yanis Varoufakis’ behaviour at Eurozone Group meetings?) and Theresa May does not seem to have pulled it off. There might also be other reasons – the EU has a lot on its plate and does not want the Brexit debate to drag on for the next five years or so, making the agenda on EU summits a hostage of the whims of British politics.

 

Brexiters promised the British a free cake, 52% of the British people voted for the free cake and now the EU is refusing to deliver it. As much as the Brexiters want to take the UK out of the EU as quickly as possible, the EU wants to close the chapter on this tragicomedy and without any cake (or cherries).  It is up to the British government and political class to explain its electorate what has gone wrong (or better: what they did wrong!).

 

What will happens next in London?  It is hard to predict, but for sure there will be another increase in political temperature and tempers. There seems no obvious option left for Theresa May except for accepting an economic border in the Irish Sea (effectively losing her majority in the House of Commons, as the DUP will pull its support) or accepting membership in the EEA (which might have a majority in the House of Commons, as it should fulfil the Labour Party’s red lines but would result in a coup against her among Tories); either of the two might be the end of her time in office. There might be fresh elections (could be as early as November). And there might be – still an outside option – a new referendum. In any case, the next few months promise to be interesting for Westminster politics.

 

When David Cameron called the referendum on British EU membership, he wanted to resolve an intra-Tory conflict; he created a political civil war in the UK! Even before the actual Brexit, there have already been economic costs! One wonders when the British will finally come to their mind and rediscover their common sense!