Electric vehicles: Still in need of economic support

One of the less publicised stories of recent days was last week’s decision by the UK Department for Transport (DfT) to cut the subsidies granted to buyers of electric vehicles (EVs). From 9 November, the grants for new plug-in hybrids will be scrapped, while discounts on all-electric cars will be cut from £4,500 to £3,500. Coming in the same week as the IPCC issued a report suggesting that we have until 2030 to limit the rise in global temperatures to 1.5^oC, beyond which irreparable damage will be done to the global environment, the timing of the decision looks truly abysmal – not to mention amateurish. It certainly does not make good economic sense.

According to the DfT, the grant for plug-in vehicles was designed to help establish a market for them and having succeeded in this aim it is time to focus support on zero-emission models such as pure electric and hydrogen fuel cell cars. I would suggest that this is wrong – and industry specialists were horrified by the decision. The market is far from established in the UK (and indeed in most other European countries bar Norway): Sales of plug-in hybrid vehicles accounted for just 1.2% of total sales last year – not exactly an established market. According to Mike Hawes, chief executive of the SMMT motor manufacturers body, “prematurely removing up-front purchase grants can have a devastating impact on demand.”

All the evidence suggests that carbon emissions measured over the full lifecycle of EVs are far lower than for vehicles powered by fossil fuels. This report by the International Council on Clean Transportation calculates that even after we factor in the costs of emissions generated during the production of the vehicle battery, which are pretty high, “a typical electric car today produces just half of the greenhouse gas emissions of an average European passenger car.”

It thus makes sense from an environmental perspective to encourage the switch to electric vehicles of one kind or another. But one of the biggest deterrents to buyers is that the purchase price of electric vehicles is higher than their conventional counterparts. However, the running costs of an EV are generally lower, so consumers have to figure out how many miles (or km) they must drive in order that the lower operating costs offset the higher purchase price. In order to do this, I calculated the costs of running a Ford Focus in the US using a petrol-driven version and the electric equivalent. It currently costs around USD10 to travel 100 miles in a 30 MPG Ford Focus (assuming petrol prices at USD3 per gallon) but with US electricity costs currently averaging around 12 cents per kWh, it costs just USD3.72 to cover 100 miles in a Ford Focus Electric. Given these inputs, we can calculate the breakeven mileage based upon a range of prices for the conventional car and the markup for the electric vehicle.

According to my calculations, if the petrol vehicle costs USD15k and the EV is sold at a 10% premium, the breakeven mileage is  around 24,000 (38,000 km) which is just less than two years of driving by the average US motorist (13,474 per year). But if the EV premium rises to 20%, the breakeven mileage increases to almost 48,000 (3.5 years of driving). As the EV premium rises, so does the breakeven mileage. Similarly if the conventional vehicle is more expensive in the first place this also drives up the breakeven point. We can plot the various breakeven points in chart 1.

But what happens when a subsidy is introduced? As you might expect, it lowers the initial purchase price and as a result the mileage at which the EV becomes an economic proposition (chart 2). For a conventional vehicle costing USD15k, a USD 4k subsidy always makes it worthwhile to choose an electric equivalent for any markup below 30%. Even a 35% markup implies that the breakeven point will be achieved after 18 months of driving for the average motorist. Clearly, the more costly are EVs, the higher are the breakeven points but they are considerably lower than in the no-subsidy case (chart 2).

Obviously these are only illustrative examples – they are based on US figures and will differ according to local petrol prices and electricity costs. Nor do they include factors such as repair and other maintenance costs. But the point is made: Subsidies do significantly enhance the attractiveness of EVs over the fossil fuel equivalent and it strikes me as a remarkably short-sighted policy to begin phasing out the subsidies already, particularly when battery-powered hybrids still account for such a small market share. Over time, we would hope that the costs of EVs will decline relative to their fossil fuel equivalent, which will make them more economically attractive. But the DfT appears to be relying on the moral argument for buying EVs, rather than the economics. Of course, it would not be the first time that the UK government has launched a policy that flies in the face of the economic evidence. I think there is one that begins with a “B” …

Blink and think

In Jeremy Corbyn’s words this afternoon, this really is beginning to feel like Groundhog Day. The UK and EU27 continue to seek a resolution to the Irish border problem but are unable to find one because the British government is hemmed in by the contradictory positions of the hardline Brexiteers; remain-supporting MPs and the DUP. It is an unholy mess, and hopes that a border agreement would be thrashed out in time for this week’s Brussels summit appear to be receding. Having initially expected that both sides would agree the final outline of the Irish border agreement in October, the best that can be hoped for is that the EU will this week give a green light to hold a summit in November. European Council President Tusk has already said that if a plausible Irish border strategy cannot be agreed this week, the chances of scheduling a November summit are remote.

Increasingly, I do wonder how close to the fire politicians’ feet have to be held before they realise that playing with matches is dangerous. Theresa May’s statement to the House of Commons this afternoon was billed as an update of the state of play, but was in reality yet another blizzard of obfuscation. The prime minister’s statement reiterated that any backstop arrangement with the EU regarding the Irish border can only be temporary. But to the extent that a backstop represents the default position to which both sides revert in the event that the preferred solutions do not materialise, it can only work if it is a permanent arrangement. Nor does she concede in public that the EU simply will not accept a temporary solution. I am reminded of the line from the film The Battle of Britain, delivered by Sir Ralph Richardson who played the British Ambassador to Switzerland: “We're on our own. We've been playing for time. And it's running out!”

Not only did the PM argue for a temporary arrangement, contrary to the EU’s wishes, but she refused to be drawn on how temporary it would prove to be. A year? Two years? Longer? Quite clearly, this was Theresa May trying to square the demands of the DUP, who want to prevent Northern Ireland from being carved out from the UK, against the Brexiteers who want to break free from the EU customs union. And it is an impossible circle to square.

I had hoped that rationality would start to kick in by now, but as I noted a couple of weeks ago (here) it is entirely possible that all sides have adopted such entrenched positions that they are unable to back down and that irrational outcomes are increasingly baked in. But it is not about the UK versus the EU: The real problems lie closer to home, with the domestic positions of the respective UK parties showing no signs of moving. Perhaps even more worrying is that ideological rather than rational politics holds sway across many countries. The very fact that the sky has not (yet) fallen in suggests that those contemplating radical solutions might be tempted to pursue them in the belief that the downsides are limited. One day someone is going to make a big miscalculation, and if we continue down our present path it might just be Brexit that demonstrates where the limits of populism lie.

But there is an additional issue that politicians have to bear in mind. Although the government repeatedly tells us that it is intent on delivering the will of the people in accordance with the mandate given by the referendum, the winds may have shifted against them. Polling evidence suggests that those believing the UK made the wrong decision to leave the EU now hold a lead of at least five percentage points over those who believe it was the right decision (chart). If the government does get it wrong by triggering a hard Brexit, with all the attendant adverse economic consequences, the electorate will hold them to account. Arlene Foster, the DUP leader, memorably said yesterday in the context of Brexit that “This is a battle of who blinks first, and we’ve cut off our eyelids.” I rather suspect that an unforgiving electorate will want to cut off more than politicians’ eyelids.

Italy's budget issues: A problem of the EU's own making

Italy’s populist government has upset the European Commission with the release of its budget plans for the next three years, and the IMF has now got in on the act by warning that they risk upsetting markets. The whole furore is based on the fact that the current budget plans are higher than those outlined by the previous government. But by continuing to criticise the Italian government’s plans in public, the EC risks the very thing it is concerned about by driving bond yields higher, thereby raising debt servicing costs and exacerbating the debt problem. Whilst the EC’s criticisms of the Italian budget targets may have some validity, the fact is that EMU fiscal procedures are not fit for purpose – and perhaps never were.

To put it into perspective, the previous government targeted a deficit ratio of 1.6% of GDP which the EC deemed acceptable in order to help keep Italy’s high debt-to-GDP ratio in check. But the new government, a coalition between M5S and the League, pushed for a much higher deficit in order to fund some of its more populist schemes. Finance Minister Giovanni Tria, who is not a member of either party, initially tried to hold to the previous government’s plans but appears to have lost the domestic political battle. In late September, the budget plan envisaged a deficit-to-GDP ratio of 2.4% of GDP for the next three years but following concerns that this was too high, and despite claims by the Deputy Prime Minister that “we will not backtrack by a millimetre”, the government is now targeting deficit ratios of 2.4%, 2.2% and 2% in 2019, 2020 and 2021 respectively. 

Strictly speaking this is not an excessive deficit, which is broadly defined as 3% of GDP, and is the benchmark against which the Italian government judges its plans. But the EC’s fiscal rules are a lot more complex than they were prior to the financial crisis and it is the devil in the detail that has resulted in Rome and Brussels having very different opinions regarding the budget plans. In 2011, the EC introduced a series of reforms known as the “six pack”, one of which is designed to limit the growth rate of government spending to no more than the medium-term potential GDP growth rate. In addition, governments are now subject to Medium-Term Budgetary Objectives (MTOs), which in Italy’s case requires it to reduce the structural budget deficit to zero.

Of course the reason that the EC is so concerned about the Italian fiscal position is that it has very high debt levels (131.8% of GDP in 2017 versus a Maastricht Treaty reference value of 60%). But Italy has never even come close to meeting this threshold and was allowed into the single currency area despite a debt ratio that was way out of line with the entry requirements. Indeed, in November 2003 I wrote the following:

It is now far too late to impose on Italy the kind of fiscal austerity required to get the debt ratio down. The damage was done twenty years ago.

Italy’s problem now is that the EC’s concerns have spooked the markets and forced 10-year bond yields to their highest since early 2014 which will further raise budgetary pressures. Technically, the EC’s fiscal rules allow it to levy fines on Italy for failing to comply with its MTOs, which would be to add insult to injury. But this would be inadvisable. For one thing, Italy’s proposed 2.4% deficit ratio next year is below that of France (2.8%). Moreover, Italy is a net contributor to the EU budget to the tune of around 0.2% of GDP. And it is also the world’s third largest bond market. 

Unlike Greece, Italy will not be so easy to push around. The EC can huff and puff as much as it wishes but there are limits as to how much leverage it can exert if the Italian government is not prepared to cooperate. Perhaps more importantly, the very fact the EC is still talking about austerity after a decade of hard economic slog suggests there is a lot wrong with the rules. In any case, a couple of tenths on the deficit ratio does not mean much when the debt ratio is above 130%. By making an issue of it the EC risks exacerbating the problem, prompting a market reassessment of the whole euro zone bond sector, especially in view of the imminent end to ECB purchases. And as a final thought, two-thirds of Italy’s €2.3 trillion of outstanding debt is held by domestic residents (the ECB holds around 15%). Somehow, I can’t see the prospect of higher returns on these holdings being a great problem for yield-starved domestic investors.

Auction stations

A few days ago I heard someone describe the Brexit process in terms of the dollar auction problem and was immediately struck by how accurately it described the current state of affairs. The dollar auction problem was formulated by the late economist Martin Shubik, as a non-zero sum sequential game to illustrate how a series of rational choices can still lead to irrational outcomes.

In the original thought experiment, an auctioneer sells a dollar bill with two participants engaged in the bidding process. The caveat is that the person making the second highest bid must pay a penalty equivalent to the amount that they bid – unlike a real auction where there is no penalty for a failed bid. Suppose that bids increase in increments of 5 cents. If the first participant bids 5 cents for the dollar bill, a discount of 95% relative to the face value, the second person has an incentive to raise the bid to 10 cents because they still obtain the banknote at a 90% discount. Player One rebids because they can still make a significant notional gain and so it goes on. By the time Player One bids 95 cents, Player Two has to raise their bid to the face value of the dollar bill. They clearly make no profit but at least they avoid the 90 cents penalty from their failed bid. But Player One is facing a 95 cents penalty so it is in their interests to raise their bid to 105 on the basis that if they win, they will only lose 5 cents versus 95 cents if they do not bid. But Player Two has an incentive to bid again and the bidding round continues. In theory, it could continue forever so long as both players remain committed to winning.

Shubik designed this game to demonstrate how people can become obsessed with the idea of avoiding losing, even though the cost of winning can be so great as to leave them worse off – in effect, they lose whatever happens. This strikes me as a brilliant exposition of the underlying problems facing the two sides in the Brexit debate. We can think of the EU27 as the auctioneer determining the nature of the UK’s relationship with the EU, whilst the Leavers and Remainers bid against each other to ensure that their plan is accepted. Just as the bidding actions in the dollar auction game are determined by the action of the previous bidder, so the Leavers and Remainers have reacted to the plans made by the other side over the past two years.

We are now at the stage where Theresa May’s Chequers Plan represents the one dollar bid. It will not make the UK any better off but it will minimise the damage to the UK if accepted. But so committed are the Brexiteers to not losing the right to “take back control” that they are prepared to vote down any such plan. In their eyes, the economic losses are offset by the right (in the words of Dominic Raab) to take back control of “our borders, our money and our laws.”

Over the coming days and weeks, we will see whether the prime minister is willing to amend her plan in order to satisfy  the auctioneer’s requirement that a solution be found to the Irish border problem. Latest leaked reports suggest the government is prepared to back down on its opposition to new checks on goods moving between the British mainland and Northern Ireland. In exchange, May’s team would ask the EU to permit the whole of the UK including Northern Ireland to stay in the bloc’s customs regime (as I suggested here). At that point the Brexiteers may respond with another crazy bid, arguing that remaining in the customs union is to ignore the “will of the people” (it isn’t!)

The dollar auction game teaches us three lessons about escalation strategies: 

1. Perhaps the most obvious lesson is not to enter in the first place. But if you do, make sure you cut your losses early (too late for that I fear). 
2. It is possible to game the auction via cooperation. In the dollar auction,  the best outcome is derived if one person bids 5 cents and the second player refrains from bidding on the understanding that they will receive an equal share of the profits, in which case both end up better off. Again, it might be possible to achieve a smooth Brexit if all sides are prepared to compromise. 
3. The auctioneer is the only winner, especially as the stakes are raised.

Unfortunately, the dollar auction game can go on forever but the Brexit auction game can now only run for less than six months. Time, perhaps, to look again at option (2)
.

Left or right?

Party conferences are usually best avoided apart from those with a genuine interest in the minutiae of party politics. This does not prevent the UK media from dissecting the speeches of senior figures for clues as to what policies are likely to be presented (or more likely ignored) by the time the next general election comes round. But this year is different. The world’s media paid attention to last week’s Labour Party conference, and will focus on next week’s Tory conference for the same reason: They want to understand what the UK political establishment plans to do about Brexit.

Dealing first with the Conservatives, because that is the easiest part, we pretty much know that Theresa May will sound hawkish to reassure the party faithful that her government has no intention of backing down in the face of intimidation from Brussels. Expect a show of bravado with the underlying theme of “no surrender”, partly because that is what the party wants to hear but also because May is under pressure to save her political skin following repeated attempts by Boris Johnson to convince the electorate that he is the man to deliver Brexit (yawn!).

But Labour’s conference was a genuinely fascinating affair as it struggled to deal with the Brexit question. It is well known that leader Jeremy Corbyn is a Eurosceptic but a large majority of party members are opposed to Brexit. To complicate matters further, a large proportion of voters in Labour’s strongholds outside London were in favour of Brexit. Consequently, the party has struggled to come up with a coherent policy over the past couple of years. Last weekend, there was apparently much heated discussion as senior party officials wrestled with a compromise wording for the conference Brexit motion. Eventually, Labour agreed to keep a second referendum on the table but there was disagreement as to whether this included an option to remain in the EU. The shadow chancellor, John McDonnell, who is regarded by many as the keeper of the socialist flame, insisted that a referendum would only be called on the terms of any deal agreed with Brussels. But Keir Starmer, shadow Brexit secretary, won a standing ovation from the conference when he declared in an off-script speech that “no one is ruling out Remain.” So that’s all clear. Or not!

Irrespective of what is actually on the ballot paper, Labour appears to be committed to a referendum on something. There again, Tony Blair promised a referendum on euro membership that never happened. Indeed, it made it into Labour’s 1997 election manifesto. This has heightened the widespread belief that what Labour really wants is to get its hands on the levers of power – quite rightly, as that is what politicians are supposed to want. But at what price? Corbyn has spent 35 years in parliament protesting against the status quo. So whilst we know what he is against, voters do not know what he stands for.

John McDonnell’s speech to the conference this week revealed a radical economic platform. There is a general belief within the Labour hierarchy that the Conservatives’ social policy plans are so unpopular that Labour can afford to be upfront about its economic plans (they are probably right about the former but I am less sure of the latter). McDonnell outlined a compulsory share ownership scheme under which 10% of the equity in the UK’s large companies would be gradually handed over to workers. In addition, he announced plans to give workers one-third of the seats on company boards, and offered fresh details of proposals to nationalise utilities in the water industry. It is an agenda designed to frighten corporate Britain and the dilemma for many voters is whether this radical agenda is a price worth paying for reversing Brexit. For sure, the worst of all possible economic outcomes would be Labour’s economic plans AND Brexit, and the polls suggest that neither Labour nor the Conservatives are able to command a lead. Voters appear to be turned off by Tory infighting over Brexit and their inability to deliver what they promised, but equally they do not trust Labour in key areas of policy.

The international press also took a sceptical view. The respected Neue Zürcher Zeitung spoke for many by suggesting that Labour is putting a desire for power ahead of the national interest. Corbyn’s inability to articulate what he wants from a second referendum suggests it is a prospect to be dangled in front of the electorate in order to realise his true objective of taking Britain in a new direction. Le Monde also questioned whether the chaos of Brexit could indeed bring Labour to power.

Perhaps more than anything, the events of the past two years reveal the extent to which the policy failures of successive governments have been laid bare. Brexit was in part the result of the failure of governments to listen to the electorate on a wide range of issues, against a backdrop of extreme austerity. This has created a policy vacuum in which policies advocated by extreme free-marketeers and old-style socialists compete with each other in a way we have not seen for 40 years. It sometimes feels that taking back control really means taking the UK back to the 1970s. But much as I enjoyed that decade - it defined the music I grew up with for one thing - I would much rather look forward than backwards.

EU may see it differently

Although the British government was given a bloody nose following last week’s Salzburg summit, events of the past few weeks act as a reminder that Brexit is one of the few issues on which the EU27 is able to present a united front, since almost all the leaders of the larger nations are facing mounting domestic difficulties. 

Nowhere is this more evident than in Germany where Angela Merkel is facing what looks to be a significant fracturing of the political consensus. In summer 2017, the CDU/CSU coalition was running at 39% in the opinion polls with the SPD polling 25% and the AfD 8%. Latest polls put the CDU/CSU at 28%, the SPD at 17% and the AfD at 16%. In the 20 years that the Emnid weekly poll has been running, the share of the CDU/CSU and SPD, which together represent the main German political factions, has never previously fallen below 50%. That the AfD and SPD are running neck-and-neck in the polls is an indication of how things have changed. The fact that the AfD has maintained its polling status even after the riots in Chemnitz is another illustration of that fact.

The ousting this week of a long-term Merkel ally as head of the conservative bloc's parliamentary group is an indication that her domestic opponents have been emboldened by apparent signs of political weakness. With Merkel already one year through her four-year term, and unlikely to stand as Chancellor at the next election, the beginning of the end of her time on the stage is apparently unfolding before us. 

Not that Emmanuel Macron has much to be satisfied with. According to latest polling data, only 28% of French voters are satisfied with his performance – down from 35% in July and compared with 60% in summer 2017. This puts him on a par with Francois Hollande’s polling ratings after a similar period in office, and way behind Nicolas Sarkozy. Macron’s problems are: (a) he does not enjoy as much support as his landslide election win suggested – many voters simply chose him because he was not the right wing Marine Le Pen; (b) he has been unable to deliver on his promise of a domestic political revolution, and (c) promises to cut taxes remain so far unfulfilled (see this BBC article for a closer look at Macron’s woes).

As I have noted previously (here), Italian politics has been in flux since the spring election as the League and Five Star parties continue to share an uneasy alliance. Current negotiations regarding the 2019 budget have been dragging on for weeks, with the technocratic finance minister Giovanni Tria under pressure to increase the budget deficit to accommodate the expensive election promises of the populist coalition government. There are concerns that a deficit in excess of 3% of GDP would be a problem for the European Commission, provoking a row over fiscal policy that would result in another general election next year. Whether or not this materialises is not the point: It is yet another distraction that Italian voters – and indeed the EU as a whole – can do without.

Factor in the ongoing problems between Brussels and the governments in Budapest and Warsaw, and the news that the Sweden’s  centre-left prime minister has been forced out by the centre-right bloc after an inconclusive election earlier this month, and the scale of the political problems facing EU leaders becomes evident.

Thus, when the British newspapers obsess about Brexit as if it were the only game in town, you can be sure that they have it all wrong. The trials and tribulations faced by Angela Merkel over recent months highlight the extent to which the old order is crumbling. When even the German Chancellor faces mounting domestic problems as a result of the EU migration crisis, it is pretty evident that something is wrong. The likes of Italy and Spain feel that they have been left alone to cope with the waves of migrants arriving on the EU’s doorstep whilst countries such as Austria, which are located on the main land route towards Germany, are concerned that migrants should exit their territory as quickly as possible.

Indeed, immigration is the fault line running through European politics. It was one of the key issues in the Brexit campaign – this was, after all the topic which most exercised UKIP under Nigel Farage – and played an important role in Dutch, French and Italian elections over the past 18 months. There is clearly no easy fix. Aside from any irrational prejudices that people may have, the economic issue is what effect will large migration numbers have on public finances, wages and per capita incomes. The UK evidence does not suggest that there has been any significant adverse impact on the economy. Indeed, much of the empirical work conducted over the last decade suggests that immigration has had no significant negative impact on the job prospects of UK natives. The evidence of its impact on productivity is less clear cut but due to the fact that the skill levels of those entering the UK are generally high – notably those coming from the EU – the empirical studies conclude that a 1 percentage point in the migrant share of the working age population raises productivity by anything between 0.4% and 2%.

But this cuts no ice with electorates which believes this all to be fake news. The fact that populists continue to squeeze the political centre is a concern for those politicians looking for traditional European solutions, involving compromise and rationality, to these 21^st century problems. Too many European politicians are fighting their own battles against populists to care too much about what the UK wants. If British politicians want to engage constructively with the EU27, it might help to recognise that the UK is not unique in any way – apart, that is, from being stupid enough to open a Pandora’s Box, in the form of a referendum, that will not easily be closed.

Just a little respect

The late great Aretha Franklin demanded, and indeed commanded, respect. After a difficult 24 hours during which the EU27 decisively rejected Theresa May’s Chequers plan at the Salzburg summit, the prime minister was only able to demand it. It was not her finest hour! The EU’s rejection should have come as less of a surprise than the British press made out. It was less an “ambush” (as even the normally sober FT described it) and more a failure of the British government to correctly interpret the EU’s stance during the summer months.

Perhaps some EU politicians and officials did give the impression there were things in the Chequers plan that they liked which lulled the British government into a false sense of security. But even at the start of this month there were clear signs that the Irish border problem was not going well. Moreover, as I noted in July (here) the UK was always running a risk by asking for restrictions on the freedom of movement whilst calling for an association agreement which, to all intents and purposes, was a request to remain in the single market (at least for goods). Chequers was a cherry-picking plan par excellence and the UK government knew it. 

The way ahead has now become a lot less certain. European Council President Tusk announced that the “moment of truth” in Brexit talks would come at the EU summit on 18 October, by which time the EU expects to see a credible proposal for the Irish border issue. Recall that the October deadline was supposed to be the point at which the EU and UK would agree on the terms of the post-March 2019 arrangements, which would in turn be put to EU governments and the EU Parliament for ratification. That is now off the agenda. The hope is that an emergency summit in November will be the point at which these details can be thrashed out. But as Tusk noted, only if there is progress next month will the EU even agree to a November summit. Thus, October has become a critical deadline but for the wrong reasons – and failure to make progress here would substantially raise the risk of a disorderly Brexit next March. 

Domestic politics remains a major sticking point. Theresa May will next week have to face the Conservative Party’s annual conference without any support from Brussels and in the knowledge that domestic opposition to her Chequers plan is mounting. It is in this context that we should assess her extraordinary speech this afternoon in which she called for the EU to show more “respect.” The suggestion that “the EU is still only offering us two options” is actually the situation which UK voters faced in June 2016, and the choices are stay or go.

In the PM’s view, “the first option would involve the UK staying in the European Economic Area and a customs union with the EU … [but] that would make a mockery of the referendum we had two years ago.” She’s not often right but she’s wrong again!  Unless we all missed something, the decision to leave the single market and customs union was never on the ballot paper. Indeed, we were promised by many prominent leave supporters that exiting the single market was not an option. This interpretation of the vote is used by Brexiteers to justify their subsequent actions. However, it is –  to be blunt – a lie; fake news of epic proportions. And what is worrying is that this lie is being peddled by the PM. But whilst at first glance the PM appears not to understand the dynamics of the Brexit negotiations, which says a lot about her or those advising her, there is another interpretation. It is an appeal to the hardliners in her party ahead of next week’s conference. Simply put, this was Theresa May pleading for her job! 

The PM’s problem is that having set so much store by Chequers, it is difficult for her to abandon it. The Brexiteers have long opposed the Chequers plan because in their view it does not put sufficient clear water between the UK and the current EU arrangements. This highlights the British government’s dilemma: It cannot put together a plan that simultaneously satisfies both the EU and Leave supporters, and efforts to find a compromise have merely angered both sides. Recent suggestions by prominent Brexiteers that any deal agreed could be unpicked by a future government  or that the UK will not pay its financial obligations if there is no deal have done nothing to bolster the UK’s credibility in Brussels.

It is increasingly obvious that the simplest solution to many of the problems will be to postpone departure from the Customs Union – a policy which never made any economic sense. It will help to reconcile the objectives of reducing trade frictions whilst limiting the free movement of labour and is the only sensible solution to the Irish border problem. As it currently stands, the EU’s solution to the Irish border problem only  involves making provisions for Northern Ireland and not for the UK as a whole, which is (rightly) unacceptable to the UK government as it implies an internal UK customs border. But the UK’s backstop proposal envisages remaining in the Customs Union beyond 2020 (assuming a transition agreement is signed first).

Proposing to remain in the Customs Union would anger the Brexiteers. The question is whether the PM has the backbone to take them on. Only the Brexit ultras support leaving the Customs Union and my guess is that if she were to make this proposal to parliament, she would have the numbers to carry it through. At issue is whether she is prepared to demonstrate the leadership qualities required of a prime minister to make choices in the national, rather than the party, interest. I am not hopeful! 

As for Theresa May’s own position, speculation will mount that she is unlikely to survive too much longer, particularly since Boris Johnson is effectively mounting a leadership challenge via his weekly column in the Daily Telegraph. Consequently, the rhetoric at the party conference next week will sound as hawkish as ever with no talk of compromise. But make no mistake, that will come later – it has to! In any case, it is not clear that a change of leader resolves anything. May remains in post only because nobody else really wants the poisoned chalice. There is thus a good chance that she will remain in office until March but thereafter anything is possible.

But Johnson would be the worst possible candidate to try and negotiate with the EU following Emmanuel Macron’s comments earlier this year that “Nigel Farage and Mr Johnson are responsible for this crime [Brexit]: they sailed the ship into battle and jumped overboard at the moment of crisis.” In the words of one UK official quoted this morning in the FT “Now it’s getting real.”