Perfidious Albion

As the eighth round of post-January talks between the UK and EU gets underway this week, the newspapers are today abuzz with rumours that the British government is about to renege on the Northern Ireland protocol, signed alongside the EU Withdrawal Agreement only last year. Specifically, the FT reports that it plans to “‘eliminate the legal force of parts of the withdrawal agreement’ in areas including state aid and Northern Ireland customs.” Such a move would constitute a breach of international law and jeopardize any attempt to ensure a trade deal can be reached between the two sides before year-end. This would dramatically raise the risk of a no-deal Brexit on 31 December. Politically it is a big deal: It threatens to become a major economic issue.

Up to now I have taken the view that despite all the bluster, the UK will eventually sign a trade deal – however suboptimal compared to current arrangements – simply to allow Boris Johnson to say that the deal he promised has been achieved. However, the suggestion the government is prepared to renege on previous commitments implies that the risks to this view have taken a quantum leap higher. Recall that during the election campaign 10 months ago, Johnson promised that the deal was oven-ready. It turns out that it was merely half-baked.

What might the motivation be for taking such a stance? It could simply be a negotiating tactic: a mad dog strategy to convince the EU that the UK is crazy enough to do anything in order to force more concessions. Indeed I have learned to be wary of stories which the government plants in the press – even sources as reputable as the FT – because it has a habit of leaking stories to suit its own purposes. Or it could be that the UK really wants to avoid a hard border between Northern Ireland and the mainland, which as it currently stands would run through the Irish Sea (recall Johnson’s mid-August quote that “There will be no border down the Irish Sea – over my dead body”). The problem with this, of course, is that the alternative would be to impose a hard border between the Irish Republic and the North. Interestingly, although both the UK and EU are committed to upholding the 1998 Good Friday Agreement, the Agreement itself says very little about a physical border: The only place in which it alludes to infrastructure at the border is in the section on security (there should be a "removal of security installations").

Only this weekend Johnson sounded relaxed about the prospect of no-deal suggesting that it would be a “good outcome for the UK.” I hardly need repeat my long standing view that nothing could be further from the truth. All the economic evidence suggests otherwise (here and here for example). Nor does the electorate appear to buy into the idea with survey evidence continuing to show a lack of enthusiasm for Brexit, let alone the no-deal version that the government is edging towards (chart). This may in part be due to an erosion of trust in the government following a series of high profile missteps in the course of this year with latest polling data showing a sharp fall in the government’s approval rating.

However, this episode raises two major issues. On the domestic front, it is unclear in whose name a no-deal Brexit is being conducted. The Johnson government might believe that its whopping election victory last December gave it the green light to pursue the form of Brexit which its more hardline proponents have always advocated, involving independence at any price from the EU. That is a very risky calculation. The fact that many voters held their nose when voting for Johnson since the alternative was to vote for Jeremy Corbyn suggests that support for the government’s position may be less deep-rooted than supposed. Moreover, with the UK suffering the biggest contraction in Q2 GDP of all the world’s industrialised economies, it is evident that the economy faces significant economic headwinds. There may be some elements in government that believe they can hide the consequences of a hard Brexit behind the smokescreen of a Covid-induced recession but it would be a major political gamble to assume that the electorate will not see through the ruse.

The second issue is the international dimension of the government’s threat. Issuing threats to your main trading partner during the course of tense negotiations when they hold all the economic aces borders on lunacy. Michel Barnier has already expressed irritation that the UK has wasted time over the summer. In his words: “Too often this week it felt as if we were going backwards more than forwards … I simply do not understand why we are wasting valuable time.” The problem remains the same as ever: The UK simply does not understand (or refuses to do so) the EU’s position on the conditions for access to the single market. This is not to say the EU is blameless. The fact that it treats the UK differently to Canada in terms of access to the EU market is a genuine source of UK irritation. Nonetheless, with positions hardening in a number of EU capitals, the risk of miscalculation is mounting. If the EU simply refuses to budge – and it would have every right to do so, given that the UK is prepared to tear up agreements to which is a signatory – the prospect of a no-deal Brexit becomes more real.

In addition, as I have pointed out before, the tectonic plates of globalisation are shifting. The UK is not alone in wanting to follow a policy of economic nationalism and it does not have the clout on its own to secure the trade deals it wants with the partners of its choice. And even if it were, the latest threatened actions by the Johnson government do not paint it as a reliable partner in international agreements, which will raise the risk premium baked into sterling denominated assets.

What to make of it all? I am inclined to see the UK’s latest threat as an increasingly desperate negotiating ploy by a government which (a) does not have the experience to conduct complex trade negotiations and (b) is finding it far harder to deliver on its promises than it believed. You do not have to be a great poker player to realise that the UK has a weak hand and is bluffing. The EU knows it, but I am not sure that the UK knows that the EU knows. Whatever one’s views on Brexit, this is not the way to conduct trade negotiations and even if the UK does get some of what it wants, the Johnson government’s dwindling reserves of goodwill are almost exhausted. It does not pay to make enemies of your friends for in the words of country singer Merle Haggard, “Someday you're goin' to need your friends again.”