Today’s news that two of the “big beasts” in Theresa May’s
cabinet have quit is all of a piece with the actions of prominent Brexit
supporting politicians who, when the going gets tough, also get going –
generally in the other direction. Both resigned when it became clear that the
rest of the cabinet would not support their version of Brexit, which amounted
to nothing more than “let’s just leave and sort out the problems later” despite
the chill winds of reality which make it clear that a hard Brexit is an economic
non-starter.
Johnson’s resignation letter is a clear illustration of his
inability to see the reality of Brexit. It should, he says “be about opportunity and hope … That dream
is dying, suffocated by needless self-doubt.” If the UK were the EU’s
economic equal, able to wring concessions by applying its clout, he might have
a point. But that has never been the case: The UK was always going to be
disadvantaged during the exit process. The ultras only ever see Brexit in one
dimension and have totally failed to grasp that the rest of the world may not
see the process in quite the same way.
Regular readers will know I have no truck with the positions
of Boris Johnson or David Davis on Brexit. But I am both encouraged and
depressed at their departure. Encouraged, because I believe the chances have
risen that the government will be able to unify around a plan that delivers a
softer Brexit than might otherwise have been the case. But the depressing
aspect of it all is that it has taken supposedly intelligent people two years to
arrive at a position that many of us realised was inevitable five years ago. That
said, the Brexiteers are right about one thing: The idea of accepting the plan outlined by the prime minister at last weekend’s Cabinet away-day represents a significant crossing of Theresa May’s red lines which puts the UK
in a very awkward position.
Indeed, these red lines which have been set out over the
last 22 months have all but been rubbed out. The plan – further details of
which are due to be published later this week – calls for a “common rulebook for all goods including
agri-food”; adherence to common standards in a whole range of areas and an
ongoing role for the European Court of Justice “as the interpreter of EU rules.” In short, the UK is proposing
associate membership of the sort enjoyed by Norway. Johnson might be overdoing
it when he says “In that respect we are
truly heading for the status of a colony – and many will struggle to see the
economic or political advantages of that arrangement.” But he has a point
in that a policy requiring the UK to remain a rule taker with no say over the
drafting of legislation, and which will probably require continued
contributions into the EU budget, puts it in a far worse position than it
enjoys today.
Furthermore, we have so far only heard from the British
side. The EU’s negotiators in Brussels might well view the plan as representing
another attempt at cherry-picking by the Brits. For example, the document talks
about a trade partnership with the EU whilst simultaneously calling for an end
to free movement of labour thus “giving the UK back control over how many
people enter the country.” As an aside, it is worth noting that on latest
data through September 2017, the decline in net immigration has come about
purely because of a decline in migrants from the EU. Net immigration from
non-EU countries – the element that the UK already controls – hit record levels
over the preceding 12 months.
Nonetheless, the departure of Davis and Johnson raises
the chances that the government will be able to coalesce around a plan for a
soft Brexit without having to worry about Davis’ view. Johnson will be more of
a problem but since he never cared much about collective cabinet responsibility
in the first place, he will simply continue to take a position that is at odds
with the government.
Naturally, the press is now full of “crisis talk” and
speculation of a leadership challenge. But the rebels do not really have the
numbers to mount a challenge. The (inaptly named) European Research Group,
which is the bastion of pro-Brexit support within the Conservative Party, has
at most 80 members of which only a maximum of around 50 are believed likely to
support a change of leader. With the Conservatives comprising 316 MPs, the
arithmetic is currently in May’s favour so market talk of a “government crisis“
looks overdone. Johnson may be a charismatic politician with a high degree of
public support, but his parliamentary colleagues simply do not trust him. He is
not in a position to challenge for the leadership of the Tory party, and as one
who has flouted the rule of collective cabinet responsibility over the past two
years, many people will be very happy to see the back of him. But as Donald
Tusk put it in a Tweet today, ”politicians
come and go but the problems they have created for people remain. I can only
regret that the idea of Brexit has not left with Davis and Johnson.”
This week promises to be an important one for Brexit
legislation with parliament voting on amendments to the EU Withdrawal Bill
following its return from the House of Lords (see below). With time running out
ahead of the EU summit on 28-29 June, the government is further behind on its
legislative agenda than is needed at this stage of the proceedings. As ever,
the issue remains the split within government regarding the nature of the deal
which the UK is seeking with the EU.
Davis and the Irish border
The big story last week was the apparent threat by Brexit
Secretary David Davis to resign on the basis that the backstop plan for the
Irish border issue contained no end date. As a consequence he perceived a real
threat that the UK would be tied to the EU customs union indefinitely. It is
not the first time that Davis has threatened to withdraw his services. It is
exactly 10 years since Davis resigned as an MP over the issue of the erosion of civil liberties following a parliamentary vote
which saw the detention period for terrorist suspects extended from 28 to 42
days. In Davis’ words, this represented "the slow strangulation of fundamental freedoms by this government.”
The irony is, of course, that the current government has tried to keep
parliament out of the Brexit process and it was only thanks to the intervention
of the courts that it was given any form of jurisdiction.
According to the New Statesman,
this marked Davis’ fifth resignation threat. Given the lack of progress in
Brexit negotiations so far, many people are wondering whether the chief
negotiator might be part of the problem, and it speaks volumes for the weakness
of Theresa May’s position that she has not called his bluff. In the end, the
prime minister acceded to the threat by publishing a document outlining the
backstop plan in which the temporary customs arrangement with the EU “should be time limited” and run to the
end of 2021.
There are a number of issues with this suggestion. On the
one hand, a backstop is designed to be put in place on the assumption that the
first best solution does not work out. By definition, it cannot be temporary.
Second, it incorporates a date that the EU has not agreed to and runs a year
beyond the end of the planned transition agreement (which the EU has still not
yet signed off).
In response to the UK’s proposal, the EU yesterday released
an infographic (here)
outlining how it sees the solution to the border problem. This plan envisages
an open border between Ireland and Northern Ireland with the north retaining
access to the single market for goods. In the Commission’s view, “the EU backstop proposal to apply unless and
until another solution is found.” The key difference with the British plan
is that it allows no prospect for the UK to remain within the customs union
primarily because, in the Commission’s view, the UK’s plan leaves too much “uncertainty on the scope of EU trade policy
applicable to the UK.”
Whilst the UK government is way too ambitious and its plans
do smack of cherry-picking, the Commission’s response has been criticised by
some trade experts as being overly provocative (see this Twitter thread from David Henig).
For example, the slide pack released by the Commission requests “Full application of EU VAT and
excise rules on goods in Northern Ireland” which no UK government is likely
to grant. Given that the EU sees no alternative to its plan and holds all of
the aces ahead of the summit this puts the UK in a very awkward position.
Either it will have to cross yet more of its red lines in order to get a trade
agreement or we run the risk of moving ever closer to the cliff edge, as the
chance of a deal by October would look very remote.
Seeking domestic compromise
As it happens, the likelihood that the UK will leave the EU
without a deal has been significantly reduced by the concessions offered to MPs
who planned to vote against the government on the second reading of the
Withdrawal Bill. In order to stave off defeat, the prime minister promised rebels
that she would put down a new amendment, expected to give MPs new powers over
the final stages of Brexit. The proposals are designed such that in the event
of parliament rejecting the final Brexit deal, ministers would have seven days
to set out a fresh approach. In the case of talks with the EU breaking down,
they would have until 30 November to try to strike a new deal. Rebel MPs also previously
demanded that if there was still no deal by 15 February 2019, the government
would have had to hand over stewardship of the process to the House of Commons
to set its Brexit strategy (though this has not been adopted). In effect, the plan envisaged two years ago that
the government (not parliament) would handle the Brexit negotiations has been
scuppered. And rightly so.
But the Brexit department issued a statement suggesting “we have not, and will not, agree to the
House of Commons binding the government’s hands in the negotiations.” So we
are clearly not yet home and dry. Moreover, there is a worrying sense of
authoritarianism in that comment because parliament is the people’s
representative body: Cutting it out of the loop makes the negotiating process a
partisan party-related matter. Theresa May finds herself increasingly under
pressure. On the one hand, she has to balance her domestic problems but on the
other she has to deal with an EU27 that shows no sign of accepting the UK’s
Irish border solutions.
Of course, all sides at present are still playing poker and
there will be a considerable amount of give and take along the way. At home,
the Brexit camp is beginning to realise that the realities of delivering Brexit
on the terms suggested two years ago are not what was envisaged. And as obstinate as Theresa
May’s government has proven to be in the Brexit negotiations with the EU27,
both sides know that the alternative is a UK government that is much more
hard-line – think of Boris Johnson or Michael Gove as PM – which would be even
more unpalatable for the EU27. We may be in a desperate situation today but it
could be an awful lot worse – believe it or not.
The third round of Brexit
negotiations, which started this week, has not gone well. Michel Barnier has
called on the UK to start "negotiating seriously” as the mood across the
continent hardens against the British government's policy of constructive
ambiguity. There are, of course, two sides to this story. One is the domestic
shenanigans which increasingly dominate the UK debate as the government slowly
gets to grips with the enormity of the task at hand (shamefully slowly, many
would say). The view from continental Europe is far less strident, almost
bordering on indifference. Brexit is seen as a problem for Britain to sort out
and come to terms with.
The domestic narrative is viewed
from two sides. The Remainers have little confidence in politicians to deliver
a deal, with chief negotiator David Davis known for his breezy confidence
rather than his ability to knuckle down and deliver. Meanwhile, Leavers such as
international trade secretary, Liam Fox, have hit back by suggesting that the
EU’s position on the exit bill amounts to blackmail. Whilst I share the Remainers’
lack of confidence in the UK government’s position, the EU's approach should
not be accepted uncritically as the application of fair-minded logic.
When
Barnier talks about serious negotiations he really means the UK should fall into
line with the EU's payment demands and only then might it be willing to talk
about a trade deal. In doing so, the EU is behaving in the time-honoured
fashion of a big economic block using its position to try and intimidate a
smaller one, as the Greek government found to its cost, and as the UK will
discover further when (or if) Fox is allowed to complete the many trade deals
he claims are possible. But as I have noted before, the UK cannot realistically
commit to paying a sum, the magnitude of which will likely only be revealed in
2018, without getting something concrete in return. None of this should come as
a surprise, of course: We all knew that the EU would play hardball and that the UK is negotiating
from a position of weakness.
There are ways out of this
impasse. One possible solution floated earlier this week was that the UK pays a
sum of around €10bn per year into the EU budget for the next three years in
return for a transitional arrangement. This effectively means continuing to
accept EU laws (freedom of movement and ECJ oversight) in return for single
market access whilst losing voting rights. Indeed this is similar to the idea I floated in March except for the fact that the annual cost is too high, as it is broadly what the
UK pays now in net terms. The government would have to be desperate to maintain
the status quo without any voting rights. Yet according to today's Sunday Times, “Theresa May is set to approve a politically
explosive Brexit bill of up to £50bn after the Conservative Party conference in
October in an effort to kickstart trade talks with the European Union. Under
plans being drawn up in Whitehall, Britain would pay between £7bn and £17bn a
year to Brussels for three years after Brexit before ending sizeable direct
payments into EU coffers in time for the 2022 general election.” So much
for saving £350m per week (£18.2bn per year) to spend on the NHS.
Meanwhile, the public appear to
be getting a little restless. There is concern that negotiations are not
proceeding as rapidly as anticipated and that the UK will be forced to accept a
deal on terms which they were promised would not happen. Indeed, the DailyTelegraph recently carried an article by the European Parliament's chief Brexit
negotiator, Guy Verhofstadt, who responded to claims that the EU was being inflexible in its negotiating
tactics by pointing out that the EU had actually been very flexible in offering
membership on terms which suited Britain. "An opt-out from the euro, but banker to the Eurozone. An opt-out from
Schengen, but access to the security databases linked to it. A blanket opt-out
from Justice and Home Affairs, with the possibility to opt back into the most
effective crime-fighting measures. The list goes on." All true, of
course, and exactly what I pointed out in the wake of the referendum. What was
notable was that the Telegraph offered Verhofstadt such a platform in the first
place. This was after all the newspaper which in August 2016 blamed the
economic problems facing the UK on "the pessimism of the previous government, the Labour Party, Barack
Obama, global institutions, sections of the media and, of course, the Bank [of
England]". The gung-ho confidence of the Brexiteers which
characterised parts of the media a year ago has dissipated.
For that, much of the blame should
be directed at those prominent campaigners who argued that the EU would be
begging to do a deal and "they need us more than we need them".
Moreover, those naive campaigners who suggested that "absolutely nobody is talking about threatening our place in the single market" clearly miscalculated the EU's position. Unfortunately, this problem has been
exacerbated by the UK government's own decision to leave the single market and
customs union (even if the letter to
Donald Tusk triggering Article 50 did not explicitly suggest the latter).
In a way, this goes to the heart
of the domestic Brexit contradiction. The electorate apparently voted to regain
sovereignty, which for many meant controlling borders (i.e. immigration). But
many of the leading campaigners are free marketeers who simply want to trade
more freely. The fact that they are fantasists with an old-fashioned liberal
view of the world (some call themselves Whigs) is where the trouble starts.
They have the influence and political clout but no practical idea of how to
achieve what they want. More importantly they have totally failed to understand
the EU and what it stands for. For many Brits EU membership is a transactional
arrangement, but for the original six members there is a much deeper political
commitment. The hero of many free-traders is Adam Smith, who pointed out the
benefits of comparative advantage – specialising in what you are good at. But
that only works if the trading arrangements under which we operate allow
everyone to benefit. The ideological thrust at the heart of the free-traders’
campaign is not consistent with the realities of modern day trading
arrangements in which the UK is not a major exporter of goods and relies
heavily on a services industry which sells to the rest of the EU. Faced with
the evidence, maybe even a rationalist like Smith would be forced to agree that
the free-trade case for Brexit is weak.
As a final thought, it is worth
pointing out that Brexit is not the issue in other EU countries that it is in
Britain. The EU has moved on, with France dealing with its own issues and
Germany preparing for an election. Ultimately, Brexit boils down to a domestic
debate about what role Britain wants to play on the world stage. It can either
choose to be outward looking and deal with rising economic powers as an equal,
or it can leave the EU and suffer the increasing economic irrelevance that goes
with it. Boris Johnson is about to be proved wrong: you can't have your cake
and eat it.
I noted three days ago how pro-Brexit campaigners appear to be
distancing themselves from the whole idea. Since then, more evidence has come
to light suggesting that British businesses are not being listened to by
government. This matters. Many people might see businesses as insatiable users
of human resources, chewing people up and spitting them out at a whim. But they
are the providers of jobs and income for the vast majority of us. If businesses
are not going to get a Brexit which works for them, in whose name are we doing
this? A Brexit which does not work for business will not work for the UK
economy.
Only last week, the CBI called for the UK to remain within
the single market and customs union until such times as the shape of the final
deal was clear. But British government officials torpedoed that option because,
according to observers present, Brexit Secretary David Davis fears a political
backlash if the UK is seen to be backtracking on its commitment to leave. He is
concerned that politicians would be judged harshly if it opts for what can best
be described as the Hotel California option – having checked out it, it can
never leave. In my view this is to misread the domestic political runes. And it
would not be the first time this year that the Conservatives have done so. Indeed,
Davis is said to have been instrumental in persuading Theresa May to call the
spring election, so I am not sure I would necessarily trust his political
judgement. Moreover, surveys suggest that the electorate is not in favour of a hard Brexit.
The election was a warning shot across the bows of a party which
campaigned on the basis of “no deal is better than a bad deal” and was punished
at the ballot box. And if “taking back control” was so important to the
electorate, why did UKIP – the party which pushed so hard for it – take such an
electoral hammering?
This morning’s story from The Observer warning that the UK cannot expect any help from German business in securing a
favourable Brexit deal is further evidence of the delusions under which too
many UK politicians are operating. Senior representatives of German industry
bodies have repeated what I (and many others) have said all along, namely that
the main objective for the EU is to maintain the integrity of the single
market. A few months back I had a meeting with a group of senior German
politicians, some of whom told me very firmly that Germany would not go out of
its way to help the UK if it meant sacrificing relationships with other EU
members. I am sure they have said the same things to their British
counterparts, but too many British politicians appear to have selective hearing
(or should that be understanding) when it comes to Brexit issues.
It is this attitude which brought to mind the Bagehot column in The Economist a couple of weeks ago.
The article criticised the government for dealing with the needs of business in
an amateur way and highlighted that the only realist is Chancellor Philip
Hammond, who “is a grown-up in a
political playpen that is stuffed with children. The chief claimant to the
throne, Boris Johnson, is the most childish of all. Bumptious and bungling, he
wants to grab the shiniest prize for himself for no other reason than that it
is shiny. Other claimants also have problems with maturity. David Davis, the
Brexit secretary, is a vainglorious contrarian who … habitually underestimates
the damage a bad Brexit might cause ... On the other side, Mr Corbyn is an
extreme case of arrested development. He is a man-child leading an army of
disgruntled youths, a professional protester who has reached his late 60s
without ever having to make adult decisions about allocating limited resources,
let alone creating them in the first place.”
As it happens, I am pretty sure that the government will be
forced to cave in on its Brexit negotiating position. Despite the position
espoused by Davis earlier this week, The
Observer reports that the government is warming to the idea of a transition
deal. Perhaps they are waiting for the EU27 to offer some form of olive branch
which will allow them to change course. Perhaps the EU27 is prepared to face
down the UK in order for it to change of its own free will. But in an economy
where real incomes are falling thanks to the rise in inflation triggered by a
fall in the pound, and where consumer sentiment has fallen sharply back to
immediate post-referendum lows, I suspect the electorate is in no mood to pay
the economic price for the government’s shenanigans. Politicians need to get real –
and fast – because in effect they have a year to finalise the arrangements
before the EU’s deadline of autumn 2018.
The sound you hear is the clock ticking …
It is increasingly evident that Theresa May’s July comment that
“Brexit means Brexit” was simply a device to buy some time over the summer in
order to allow some heat to go out of the fractious debate. Today’s return of parliament
following the summer recess marks the point at which the government has to get down to some hard thinking about how it wants to implement any sort
of plan.
Today’s domestic highlight was the speech by Brexit minister
David Davis outlining the government’s position on Brexit. I use the word “position”
because plan is too grandiose a word to describe what we know so far. The key
message from Davis was that it is “very improbable” that the UK will remain a
member of the EU single market. This comes a day after the US and Japanese
governments warned PM May, in China for the G20 summit, of the consequences of
Brexit for trade and investment. The US indicated that securing a trade deal
would not be a priority for the US, which is seeking to conclude negotiations
with the far larger EU, whilst the Japanese government issued a 15-page report
outlining the problems which Brexit could cause for Japanese firms. It pointed out that “a number of
Japanese businesses, invited by the Government in some
cases, have invested
actively to the
UK, which was seen to be a
gateway to Europe.” In other words, you invited us
in and took the money we brought but you have changed the rules of the game.
The thrust of the document was a plea for business conditions to remain broadly
as they are now, otherwise “this could force
Japanese companies to reconsider their business activities.”
It is, of course, still very early days, but the events of
the weekend highlight what many us pointed out all along: first, that changing
the economic rules will have consequences for UK jobs and, second, that the rest of the world was not necessarily
going to jump at the chance to negotiate a special deal with the UK. If you can
do a trade deal with a market of 500 million people, it is likely to yield far
bigger benefits than negotiating one with 65 million. All this throws Davis’s comments into
stark relief and highlights the rock and hard place dilemma facing the
government. In order to make a success of not taking part in the single market,
the UK has to secure trading relationships with non-EU nations – a process
which has not got off to a good start. If it proves difficult to build these
relationships, the government will find that it is in its best interests to
maintain closer ties with those EU countries which it just spurned than many
people might find desirable.
A curious element of PM May’s speeches in China was that she
ruled out the adoption of a points-based system to manage immigration flows,
despite the fact that this was a key element of the Leave camp’s plan, and left
her open to the charge of backsliding (though she never advocated it, so that
charge seems rather spurious). She argued that they are not an effective means
of controlling migrant inflows. I am less sure about that – as a means of controlling
absolute inflows they have their uses. But they do have other shortcomings, as
even the Australian government admits. For one thing, many of those coming in
on such schemes often tend to be under-employed which drives them down the
value chain to compete for unskilled jobs, and for another they allow government
to dictate labour supply rather than the needs of employers.
But by torpedoing one of the key planks of a policy
advocated by Boris Johnson and Nigel Farage, PM May is sending a signal that some
of the simple ideas put forward by the Leavers will not be implemented. Maybe
this is clever politicking designed to restrict the Brexiteer’s options in a
bid to expose some of the fallacies inherent in the case for leaving the EU. It
will certainly make life harder for David Davis as he puts together his plan to
take the UK to the next level. However, much that we have heard so far tells us
only what the government is opposed to, not what it is in favour of. Brexit may
indeed mean Brexit. But it may also end up being a slogan designed to hold the Conservative
party together in much the same way as David Cameron’s pledge to hold a
referendum in the first place.
