Since the EU and the UK agreed a fudge that allowed the Brexit negotiations proceed to the second stage in December, there was a growing sense, at least in my mind, that the UK would be forced and probably willing to compromise in order to achieve the softest form of Brexit possible.
In other words, pragmatism would win out in order to avoid potentially serious and totally unnecessary damage to the UK economy.
However, this view was heavily cognisant of the very volatile and unstable political climate in the UK, and those political realities have struck with some vengeance in recent days. This more relaxed view, which had certainly influenced financial markets and others, has been cast into serious doubt again over the past couple of weeks.
The pro-Brexit zealots in the Tory party are not happy with the direction in which the whole process is moving and are starting to flex their muscles in a menacing manner. It is rumoured that moves are afoot to remove Theresa May as Tory leader and Prime Minister and replace her with a strong advocate of Brexit, whoever that might be.
It is far from clear if there is anybody on the Brexit side with the ability to lead the country. However, if this were to materialise, the odds on a hard and destructive Brexit would increase significantly.
In any event, Theresa May’s hands are tied at the moment and whatever approach she takes will not be the right one for what is a very divided party. Anything is still possible.
This week the EU laid out its negotiating stance for the second stage of the negotiations. It did not pull any punches. The EU perspective is that the UK will become a ‘third country’ as of March 30, 2019, and then enter into a transition period. The transition period should be well defined and should not last beyond December 31, 2020.
During this transition phase, the UK will continue to participate in the Customs Union and the Single European Market, with the four freedoms of movement of goods, services, people and capital applying.
However, all existing EU regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures will apply, including the competence of the European Union Court of Justice. During the transition, the UK will no longer be represented in EU institutions, agencies, bodies and offices.
In other words, the UK will have to accept the rules of the game but will have no input to or influence over those rules. The EU is not of a mind to allow the UK cherry-pick the good bits and disregard the bad bits.
This EU stance is tough, but is very predictable. The EU now holds most of the power in the negotiations and will clearly be very unwilling to make any compromises that would undermine the structures and foundations of the EU.
Earlier this week, UK government economic analysis was leaked from somewhere showing that under all Brexit scenarios the UK would be left worse off. Financial services, manufacturing, and retailing are regarded as the sectors that would be most adversely affected, but there would be others.
Geographically, Northern Ireland, the north-east of England and the West Midlands are seen to be most vulnerable. Three scenarios were considered. Firstly a ‘no deal’ scenario, whereby the UK would leave the EU without a trade deal and World Trade Organisation tariffs would apply. Under this scenario, it is estimated that economic growth would be reduced by a substantial 8% over the next 15 years, compared to current forecasts.
The second scenario would involve a free-trade deal with the EU, which is estimated to knock 5% off growth over the next 15 years. In the third scenario, which is basically a ‘soft Brexit’, where the UK would have access to the EU single market through membership of the European Economic Area just like Norway does, it is envisaged that this scenario would knock 2% off growth.
Incidentally, in the modelling of all three scenarios, it is assumed that a trade deal with the US would be agreed.
The pro-Brexit heads have not responded well to this leak and have even had the temerity to cast doubt on the ability of economists to forecast.
Whatever one’s view about economists and economic forecasting, it does not require a huge leap of faith to surmise that giving up free access to a massive market would result in considerable economic damage. Eventually new trade deals would be done with the US and others, but in the meanwhile it is very hard to see the UK not losing global economic and political clout.
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