Five to midnight

The game of chicken continues … 

It is eight years since I responded to a query from the FT asking whether we should worry that the UK might leave the EU in the years ahead. My response was that we ought to worry very much about “Brixit” (as we were then calling it) “as it is a critical issue, the consequences of which need to be thought through very carefully.” I concluded with a phrase that I have continued to use ever since that “the EU is far from perfect, but life on the outside may be even harder.” Eight years on and Brexit proponents have still not thought through the consequences and there is no recognition from them that life on the outside will be harder.

We are now 25 days from year-end; the point at which the UK’s trading arrangements with the EU will change irrevocably and there is still no trade deal in place. I am in no position to say whether the latest impasse in trade talks is the fault of the British government or, as it claims, is the result of unreasonable demands by the French. On the basis of past performance, in which the British government has adopted a highly confrontational approach to negotiations and whose politicians are not known for being straight on Brexit matters, we would be wise not to take the British view at face value. That said, EU governments have no interest in making life easy for the UK – something that has been obvious since the very start. The likes of John Redwood MP who said in 2016 that “the UK holds all the cards” have always had a deluded view of how difficult negotiations would be.

For all that I maintain the British government is largely at fault for the shambolic state into which negotiations have sunk, we should not overlook the EU’s desire to show that it can also play hardball. It wants to demonstrate that the 27 member states will determine the conditions of access to the EU domestic market. After all, one of the essential truths of trade negotiations is that might is right. It is also possible to imagine that the EU wants to cut the UK down to size by forcing a no-deal Brexit at the end of December so that it is forced to come back to the negotiating table in January in a far weaker position. I did point out in 2019 that Boris Johnson was the last person to whom the EU wants to offer any concessions given that he is perceived to be one of the figureheads of the Brexit movement. If ever there was a way to demonstrate to him that it is not possible to have one’s cake and eat it, a hard Brexit would be an ideal lesson.

But if the UK does leave without a trade deal at the end of December, this is unlikely to be a permanent state of affairs. In late-2018 when attempting to quantify the costs of a no-deal Brexit, I looked at a scenario in which the economic effects were so nasty that the UK capitulates almost immediately – in effect, a one-period no-deal Brexit. The initial shock in this instance would be quite traumatic and over a two-year horizon output would remain more than 1% below baseline levels before starting to recover more rapidly after three years (chart below). However, back then we were looking for the trade deal to be more comprehensive than the one the government is currently pursuing. Given that the deal currently in negotiation provides relatively little protection for many sectors of the economy, we do have to wonder whether the outcome of a skinny Brexit deal will be significantly better than a default to WTO trading arrangements.

… and the blame game intensifies 

It comes as no surprise that as the clock ticks down and the “easiest trade deal in human history” remains elusive, so both sides of the Brexit divide are blaming each other for the position in which we now find ourselves. Peter Mandelson recently wrote in The Guardian that as a Remainer he played his part in the disaster that subsequently unfolded by trying “to reverse the referendum decision rather than achieve the least damaging form of Brexit.” Mandelson can speak for himself but he does not speak for most Remainers who argued repeatedly that the government should accept the least damaging form of Brexit rather than fight old battles. Indeed that is the position I have adopted on these blog pages over the past four years.

But Mandelson’s admission has allowed Brexit supporters to disingenuously claim that it was the Remainers fault all along – a view which is now trending heavily on social media. However, let us remind ourselves of what has happened since mid-2016. Was it the Remainers who took a non-binding referendum and treated the narrow victory as a mandate to impose a winner-take-all outcome? By not trying to unify the country before triggering Article 50 and not setting out a vision of what it wanted from the process, the government has failed to provide leadership all the way along. As I have long pointed out, Theresa May made a huge mistake by prioritising the unity of her party over that of the country and it is this which has led directly to many of the issues we face today.

First of all, her government proposed eliminating any parliamentary oversight of the Brexit process. It required the intervention of Gina Miller and colleagues to prevent the biggest power grab in modern history. This provoked a lot of sound and fury from the Daily Mail and set the tone for what followed. But to have allowed the government to implement its Henry VIII clause unchallenged would have been profoundly undemocratic. The subsequent parliamentary debates were to a large extent unedifying but given the narrowness of the referendum result, it is only right that they took place. MPs work on behalf of the public and the voices of the 48% needed to be heard, even if many did not like what they had to say.

However, the biggest problem was the decision to leave the single market which led directly to the current wrangling over the form of trade agreement. Not only was this not on the ballot paper in 2016 but voters were explicitly promised by the likes of Daniel Hannan that “absolutely nobody is suggesting that we give up our position” in the single market. May then compounded her errors by holding an election which eliminated her parliamentary majority, rather than focusing on the Brexit task at hand. There was no doubt she should have held the election before triggering Article 50. Much of the discontent thus flows from the mistakes made in the nine months after the referendum. Sure, Remainers were angry but they felt that their voices were not being heard as Leavers pressed on without showing any willingness to compromise. The “you lost, get over it” mantra was no way to address the many legitimate issues being raised.

Boris Johnson has added to the difficulties. It was his government that decided not to extend the Brexit transition process in H1 2020 despite the fact that the corona pandemic would have given him adequate cover to do so. Having drawn that red line, it was his promotion of the Internal Market Bill, which by the government’s own admission breaks international law, which complicated dealings with the rest of the EU. And the fact that he operates a government with a parliamentary majority of 80 means he has not faced any domestic opposition on Brexit related matters over the last 12 months. The fact we are where we are comes down to a litany of government errors, compounded by a lack of political judgement and leadership.

Undoubtedly there will be people who read this and say “but it’s not about economics, it’s about the right to self-determination.” More than 40 years ago the people of Iran decided that they wanted to exercise self-determination by ridding themselves of a regime that made the country a vassal of the US. They ended up with a theocracy which then proceeded to repress and impoverish the people. The UK is not Iran but the principle of “be careful what you wish for” still applies. There is still time for the UK to avoid the worst case Brexit outcome but it requires a degree of leadership that has been sadly lacking for a long time. I, for one, have no idea how this ends. But if it goes wrong, we know where the blame lies.