End of the Brexit holiday

It has been another funny old week in Brexit Britain as parliament reconvened after the summer. We were treated this week to the views of former BoE Governor Mervyn King who criticised the government’s “incompetent” preparations for Brexit. In an interview to be broadcast next week, he argued that that the government had weakened its negotiating position by “a whole lack of preparation” for a no-deal Brexit and said it “beggared belief” that the world’s sixth-biggest economy should be talking of stockpiling food and medicines.

It is hard to argue with that view. Yet at the end of 2016 King suggested that whilst leaving the EU would not be “a bed of roses – no one should pretend that – but equally it is not the end of the world and there are some real opportunities that arise from the fact of Brexit we might take … There are many opportunities and I think we should look at it in a much more self-confident way than either side is approaching it at present. Being out of what is a pretty unsuccessful European Union – particularly in the economic sense – gives us opportunities as well as obviously great political difficulties.” Maybe King retains his belief that leaving the EU is a good idea and his differences with the government are more about tactics than strategy, but he is the latest in a long line of Brexit supporters whose expectations are not being met.

But I have always struggled to see what the economic opportunities are. In an environment where trade flows are negatively related to distance – as is the case in standard trade gravity models – the UK will require a more-than-proportional increase in non-EU trade to make up for any losses with EU countries in the event of leaving the single market, as King has advocated. It is not as if King has a great track record over the years of being on the right side of the economic argument. In 1981 he was one of the signatories to a letter to The Times arguing that “present politics will deepen the depression” – just before the economy started to recover. More damningly, he was Governor of the BoE when the UK suffered its first bank run since 1866 having failed to deal with the circumstances that led to the failure of Northern Rock and was slow to appreciate its significance. So forgive me for not being a knocked out fan of Mervyn King’s forecasts.

But there is no denying that he is right about the sheer incompetence of the government’s planning so far. Yesterday we were treated to the Treasury’s secret no-deal Brexit contingency plans unwittingly being made public after a photographer snapped an official holding a letter detailing an outline of Project Yellowhammer. The briefing documents state: “The Civil Contingencies Secretariat held a two-day workshop last week to review departments’ plans, assumptions, interdependencies and next steps.” The paper reveals it is an aim of the Treasury to build a “communications architecture” that can “help maintain confidence in the event of contingency plans being triggered.” It added this is “particularly important for financial services” and seems to include a reference to “aviation and rail access to the EU.” Whilst the government is quite right to be considering the possibility of no-deal before March, this all seems a little alarmist.

Indeed, the more we think about it, the less likely is a no-deal. It is not in the EU’s interests to allow the Brexit process to collapse, particularly if Michel Barnier has ambitions to be European Commission president, as has been speculated in the press. Moreover, as recent IMF research has indicated their calculations show “EU output losses of 0.2 to 0.5 percent in the “FTA” and “hard Brexit” scenario, respectively” (see chart). Perhaps this explains why Barnier’s opposition to elements of the Chequers Plan has reportedly softened in recent days, and why Germany is rumoured to be asking for less detail from the UK at this stage, in order to get beyond the March deadline and set up a transition period during which the hard negotiations will take place.

But the UK government has even more to fear. Whether or not people are changing their views on Brexit, the electorate appears to be showing rising distrust regarding the government’s negotiating approach. Boris Johnson’s newspaper article earlier this week suggesting that “The scandal of Brexit is not that we’ve failed but that we have not tried” was met with widespread derision (if only he had had a position of influence in government for the last two years!).  The British government cannot be seen to be delivering a no-deal Brexit for it would damage its credibility beyond repair. So despite all the horse trading which is likely over the next few months, and the associated adverse headlines, it is likely that the EU will bend a little in order to make way for the UK to bend a lot. And in my next post, I will look at ways in which this could be done.