by Frank Schnittger
Tue Jan 3rd, 2017 at 04:10:22 PM EST
The British Government appears to be blithely proceeding on the basis that it will be able to cherry pick the parts of the EU it wants, whilst at the same time achieving the freedom to do many things that it claims the EU is now preventing it from doing. When you are building an opening negotiating position it is no harm to put forward what you would regard as an ideal outcome of the negotiations. In theory it increases your chances of actually influencing the negotiations in that direction. In practice it may very much disillusion your supporters when they discover that the final outcome falls some way short of their ideal outcome.
But there is also the danger that in hyping your version of how a successful negotiating process should proceed you end up antagonising the other party to the negotiation still further. The EU 27 might well conclude that the UK is living in cloud cuckoo land and that there is no great point in engaging in a serious negotiation at all. Such a response may be amplified if the British media then go on a rampage ridiculing the antediluvian, obstructive, and inflexible EU bureaucrats who simply refuse to see the utter sensibility of the UK proposals. Negotiators are only human after all.
One of the more amusing spectacles of recent times is seeing Leave campaigners argue that they really have the best interests of the EU at heart, and that what they are proposing is in the best interests of all. After all the EU needs access to the UK market as well, they argue, and a continuation of a free trade zone including the UK can only help economic growth in Europe over all. But what if the negotiations were to go seriously off the rails and no substantive Brexit deal of any kind were to be agreed? What would a worst case scenario look like both for the UK and the EU? Follow me below the fold for a sneak preview...
Theresa May is currently labouring under a number of weaknesses. Firstly, she has no personal mandate from the British people as Prime Minister. Secondly, she presides over a Parliament a majority of whose members are unconvinced of the merits of Brexit. Thirdly she has no precise mandate as to what to actually look for in the Brexit negotiations. To a very real extent, her government have been making it up as they go along.
In an ideal world, she might actually like to engineer a parliamentary defeat so that she could go to the country in a general election. This could potentially give her a personal mandate as Prime Minister, weed out any parliamentarians in her own party whose loyalty is suspect, add at least another 2 years to her Government's period in office, and provide her with a more precise mandate as to what to seek in the Brexit negotiations. She could put her Brexit wish list to the people and then fetch up in Brussels saying that these are the democratically declared wishes of the British people, and that it would be undemocratic for Brussels to reject them.
Perhaps a Supreme Court finding that Parliament must support the invoking of Article 50, or even a finding that the Good Friday Agreement requires the support of the people of N. Ireland before their constitutional status can be changed would provide her with a sufficient pretext to call an election. She can argue that the final decision on A.50 and on her negotiating mandate should be made by a Parliament elected after the referendum and not before. She can engineer her own defeat by telling her own backbenchers to vote against an A.50 invocation if they have any misgivings about Brexit and then make a run to the country...
A General election would have the added benefits of exploiting the divisions in the Labour Party under Corbyn and a UKIP party riven by internal shenanigans. Only the Lib Dems represent an option for disillusioned Remain voters, but they are more likely to eat into the Labour vote. Indeed the Lib Dems could replace Labour as the main opposition party if they manage to gain a majority of the 48% of voters who voted Remain. Oh the joys, from a Tory perspective!
In any case, given the peculiarities of the British first past the post voting system, May could win an overall majority with as little as 35% of the vote, provided the remaining 65% is scattered between Labour, the Lib Dems, UKIP, the Scots Nationalists and the Welsh and N. Ireland parties which generally don't matter in the Westminster arithmetic. Easily enough done, especially if voting Tory can be painted as a patriotic imperative to strengthen the British hand in the Brexit negotiations. Cue Land of Hope and Glory!
Strangely enough, the EU 27 may see things somewhat differently... Firstly, they showed that they have no compunction in overturning a national mandate when they peremptorally dismissed the results of the Greek referendum on the bail-out. Secondly, they may argue that what the British people want is their own business. The job of the EU27 Leaders is to represent their own countries, and the nakedly jingoistic tone of the British referendum (and perhaps a general election) makes this more, not less, important. Finally, they may conclude that what is good for British Tories is precisely what is not good for their own political futures and could only help their far right political opponents at home. The proximity of the Dutch, French and German national elections could exacerbate this process on the EU side.
Thus, far from clarifying things, the political processes used to reinforce opposing negotiating mandates may help to transform the Brexit negotiating process from a rational process aimed at maximising mutual economic advantage to a political process required to keep domestic political oppositions at bay. Instead of trying to resolve differences, negotiators will be instructed to see the negotiations as a war between competing national interests where any concessions could be construed as a sign of weakness at home. The resignation of the UK ambassador to the EU, Sir Ivan Rogers, may be an early straw in the wind that this will indeed be the case.
The almost inevitable outcome of this process will be no substantial Brexit deal of any kind. At best there might be a largely technical deal on administrative details, and even this may fail to muster a majority on the European Council if major issues (such as any outstanding UK contribution to the EU budget) remain unresolved. Countries such as Ireland, with the most to lose from Brexit, will be marginalised in the larger political dynamics at play. The best Ireland can hope for is a deal ensuring that any customs controls will be implemented at air and sea ports in N. Ireland and not at the 500 Km land border with the Republic which even 10,000 British troops couldn't seal off at the height of the troubles.
This would create the anomalous situation whereby N. Ireland itself would remain within the Customs Union even as it left the EU and lost access to the CAP and other EU programmes vital to its economy. It would also create the unusual but not unprecedented* situation whereby Irish/EU customs officials would have to operate within UK territory at N. Ireland air and sea ports to ensure that whatever tariffs or customs controls enacted after Brexit were implemented to the satisfaction of the EU. (*The US Immigration service currently operates a pre-clearance service at Shannon and Dublin Airports).
The EU has long tolerated anomalous situations with respect to Greenland, Liechtenstein, the Chanel Islands and smaller economic entities deemed not to matter too much in the greater scheme of things, and avoiding a return of the Troubles might be considered a prize worth compromising for by both the UK and the EU.
In any case, avoiding a return to border outposts along the 500Km land border would be a red line issue for any Irish Government which would face defeat at the hands of Sinn Fein in any subsequent election if they were complicit in such a decision. A Sinn Fein led Government would probably refuse to implement such controls at the border even if they had been agreed by a previous government and an Irish stand-off with the EU would result. Thus any Brexit agreement, no matter how insubstantial in other respects, would have to make such a provision for N. Ireland. EU leaders could hail it as a victory for peace and common sense, and it would take the bare look off a Brexit agreement almost devoid of substance in other respects.
But what would be the consequence of such a minimalist Brexit agreement for the UK and EU as a whole? There appears to be a general presumption that WTO rules will apply if no EU/UK trade agreement is negotiated. However the UK is currently only a member of the WTO as part of the EU membership and so would have to renegotiate its WTO trading quotas, tariffs and rules in its own right. In addition, any current WTO member with an interest in those deals would have to agree those quotas, tariffs and rules and so the UK could, quite literally, be out in the cold with no established legal framework for trading with anyone if another WTO member with a grudge chose to veto. Negotiating separate and new trade agreements with all its main trading partners could take many years and place the UK in a very weak negotiating position if it were seen to be desperate for deals of any kind.
And what of EU/UK trade? One consequence of no substantial Brexit deal could be a very substantial further devaluation of Sterling relative to the Euro. EU exporters simply couldn't live with a situation where Sterling was devalued by say 30%. Many Irish food exporters to the UK operate on very thin margins and have already been seriously damaged by the current c. 10% devaluation since the referendum. Meanwhile UK exporters to the EU could make hay with a 30% trading advantage.
One logical response by the EU would be to impose a substantial, say 20%, tariff on UK goods, to prevent dumping and protect their own industries. This could be further justified if the UK failed to honour its outstanding obligations to the EU Budget or there were other major matters still in dispute. Such a move would be quite straight-forward if the UK had not yet negotiated its WTO terms of trade. This could have the effect of devaluing Sterling still further and necessitating even more substantial tariffs for EU companies to retain a competitive position.
If the UK retaliated, a trade war could result, and this would hit the UK at least 10 times harder than the EU, as 44% of UK exports go to the EU and only 4% of EU exports are destined for the UK. It is easy to see who would be the eventual winner here, even if the highly exposed Irish economy would suffer huge collateral damage. The Euro would probably also be substantially devalued against world currencies in that scenario, mitigating any damage to the EU economy as a whole.
It is important to note that the above scenario could unfold even without any undue political ill-will between UK and EU leaders; each simply protecting their own political and economic interests. The dynamics of the Brexit process itself could lead to a spiralling conflict with both sides increasingly distant from each other and any post-Brexit trade deal becoming increasingly unlikely. EU leaders would simply be seeking to keep their own domestic hard right nationalist forces at bay, protect their economies and preserve the integrity of the EU as a whole. Tory leaders would be desperately seeking to avoid a monumental political defeat, a sustained economic slump and humiliation abroad. Looking to Trump as their saviour doesn't seem a very promising strategy, given his "America First" priorities and anti-trade deal views, and in any case UK US trade is much less than UK EU trade.
So the overall outcome might be a mild slow down in EU growth, mitigated by the capture of some of the City's financial services business, the substitution of British imports by EU manufacturers, the return of skilled immigrants from the UK, and the development of markets elsewhere facilitated by a relatively slight but still substantial Euro devaluation.
For the UK the consequences could be much more severe:
- A sustained multi-year economic slump only slightly mitigated by increased foreign investment due to Sterling devaluation and lower corporate taxes;
- Huge increases in unemployment created by the decline of businesses dependent on access to EU markets;
- A collapse of tax revenues resulting in increased debt and further public sector cut-backs and austerity;
- An invasion of up to a million elderly British expats living in the EU as they lose their EU health and residency benefits resulting in severe housing shortages and overwhelming the NHS as it struggles to cope with financial cutbacks, the loss of skilled immigrant staff, and the increased demand these expats create;
- An exacerbation of regional and class tensions within the UK and the possible loss of an independent Scotland which will result in a hard EU/England border at the Scottish English border further disrupting both economies;
- A destabilisation of N. Ireland and all the Troubles that could create.
All in all, it's hard to find a silver lining for the UK in all those clouds. Just what are those wonderful new freedoms the UK will be able to enjoy outside of the EU other than the ability to cut much more disadvantageous trade deals and making the UK a great little low corporate tax country for billionaires to play in? And as has been pointed out elsewhere
, the EU sets only minimum standards on the environment and employment and social rights, so the new freedom is only to do more right-wing things, not more left-wing things:- it is clear what Liam Fox can gain, not clear what anybody on the Left would gain that could not also be done within the EU.
This is also the core fallacy of Andrew Marr's An Optimist's Guide to Brexit. It extols all the wonderful new opportunities that Brexit will create, blithely ignoring that these are either already being done by other nations within the EU, or virtually exclusively for those on the far right of the political spectrum. In fact the EU rarely if ever prevented the UK doing centrist or progressive things. Even EU restrictions on state aid to companies in difficulty were largely led by the UK.
And how will immigration be reduced if (say) India and China demand increased visas for their nationals in return for trade deals and if other developing countries demand the same? The UK will lose many skilled and hard working EU immigrants who payed their taxes and added relatively little demand onto the NHS. Their departure will be a net lost to UK GDP and a potential gain for the EU. Many larger businesses now have operations in many countries and any custom barriers will disrupt their internal supply chains and just-in-time production processes. Will they not seek to relocate at least part of their operations to where they have their largest markets?
Much has been made of the fact that the Brexit vote has not led to an immediate slump in the UK economy despite the fact that economists like Krugman argued that there was no reason for an immediate slump: the real impact of Brexit would be long term and incremental and wouldn't really become obvious until Brexit has actually happened. The problem for the UK is that many of those trends will also be very difficult to reverse: Looser monetary policy, currency devaluation and reductions in corporate tax rates are largely short term and one time boosters of the economy; not a strategy for long-term sustainable growth.
So all-in-all this doomsday scenario would predict a long term and sustained slump in the UK economy relative to the EU and rest of the world; intensified unemployment, inequality, and austerity; an overwhelming of public services like housing and the NHS; increased regional and class tensions and political instability in the Union; and the final departure of the UK as a major player on the world stage. The UK elite will "Take Back Control" and preside over a much smaller entity, and as usual the poor, elderly and infirm will suffer most.
Brexit may go down in history as one of the worst self inflicted wounds ever suffered by a once great nation: The final decline and fall of an empire. Ironically the EU may have delayed that fate: Few now seem to want to remember what a dysfunctional place the UK was prior to EU entry and for some time afterwards. It used to be called The sick man of Europe in the 1970's. Indeed it injected some of those class tensions into the EU body politic which adopted many UK inspired neo-conservative and neo-liberal political and economic policies such as participation in the Iraq war, the over rapid expansion into ex-Soviet states, and the aversion to fiscal stimulus of depressed economies. But ultimately the EU proved too big and cumbersome for that project to succeed in its entirety.
For the EU, the departure of the UK may eventually prove to be a blessing in disguise, although there is no guarantee that the EU will take full advantage of the opportunities that now arise. However,
ultimately, the EU can be a success even if it only prevents its constituent nations making war on each other. Economic and social progress is a bonus which we can't take for granted, but at least now have a greater opportunity to work towards.
Let's hope Brexit fails to fan the embers of a nascent nationalism and xenophobia in Europe and that the cooperative spirit of the EU founders will prevail. If this doomsday scenario for Brexit is even half way correct, the UK will act as a sombre reminder of what happens when nations stop cooperating with one another and when some seek to turn the interests of one nation against the others.