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Pivot Point, Brexit Special

By January 9, 2019Blog

 In light of yesterday’s game changing defeat in Westminster of the UK Governments plans to budget for a No Deal Brexit, today we issue a Brexit Special and maintain our baseline assumption that a crash out is the least likely outcome. Yesterday’s successful rebellion on the UK Finance bill, the first since the mid 1970’s, is the first tangible evidence that a majority of MPs are prepared to take over the reins of Government to prevent the most harmful outcome, a crash out.

But this moment is just a pivot in a longer and harmful game, the outcome of which will redefine internal relationships within the United Kingdom and its external relationships with the outside world. Here we explain why;

The Post Withdrawal Reality Check

There is a blizzard of opinion, biased and otherwise and a great deal of misinformation about Brexit. In this paper I outline (a) how Westminster is likely to resolve its current state of political stalemate given its failure to coalesce around a common position on its relationship with the EU and (b) why, no matter what the outcome, (saving the UK remaining in the EU), the UK will inevitably face a diminution of sovereignty from trade deals including with the EU during which they will be skinned.

The post withdrawal period is not adequately discussed. It will take years to resolve and is the period into which the UK enters with a terribly weakened hand, a first world economy with no trading partners and a desperate need to find them.

This territory is largely unexplored in a media driven by political noise, rather than hard-nosed business and economics because of the focus on the Withdrawal Agreement and not the senior hurling that follows, where the real price of Brexit will be determined and extracted.  This is the period during which the UK enters into negotiations with the EU, and with the USA, Japan, and China and a host of other players, each determined to extract the maximum value from UK weakness. It is how the game is played.

What is likely to happen at Westminster?

To date it is clear that PM May’s deal with the EU will get soundly beaten in Parliament, there simply isn’t sufficient political support whether voted for once or twice as expected. But opposition to the deal is still quite fractured and incapable of coalescing, meanwhile the failed attempt in the Tory party to oust Theresa May has secured her leadership, thus closing that route. So here are the possible outcomes;

A.     May secures support closer to the exit deadline and perhaps with a second vote because the majority of MPs fearful of a crash out, move to her deal after securing some EU political promises as cover for their retreat and the UK exits in March. I don’t think this will happen.

 B.     May’s deal fails in parliament, opposition parties immediately table a vote of no confidence in the Government and a cross party group takes control of the negotiations changing UK red lines, the EU responds with a delay to 2020 to facilitate the new model and the UK exits next year. There is no general election because two thirds of MPs don’t vote for one. The defeat of the Government Tuesday January 8th, 2019 marks the first-time cross-party MPs have found a consensus to block a crash out, but this falls far short of developing and agreeing a new way forward.

C.     May’s deal fails, and MPs vote for a fresh referendum, the wording and execution of which occupies most of 2019, the EU extend Article 50 to facilitate. Whether or not the agreed wording will allow for the option to remain in the EU will be the sticking point. A fresh referendum opens a new vista, remaining in the EU but I don’t see this happening easily despite the polls.

D.     This is a derivative of B, May’s deal fails, the Government lose a no confidence motion, but Parliament cannot still agree to coalesce around a common position to engage with the EU and a General Election is triggered. The EU extends the Article 50 deadline to facilitate. After a General Election the new Government decides to go for a fresh referendum or changes the red lines to reopen negotiations with the EU.

 E.     May’s deal fails, Westminster simply cannot agree on any way forward neither a cross party agreement, an extension or a vote for a General Election and the UK crashes out on March 29th by accident rather than by design. This is looking more unlikely after the defeat on Jan 8th 2019.

Post Brexit what then for the UK?

This is largely unexplored territory because of the narrative spun that the UK regains sovereignty, the skies brighten and the old empire twinkles in the sunshine. Unhappily it is very far from the truth. Firstly, the UK cannot escape its geography, it is bound to Europe and thus is a member of the Eurosphere whether it likes it or not. This is just economic reality.

The Eurosphere is the region around Europe that is required from economic necessity to adopt European standards to do business from the outside with EU consumers inside and access its Single Market with or without tariffs. Let me give you a few examples;

  • A Hobbs Financial Practice Limited client who certifies new electronic equipment including small additions or attachments to existing products (e.g. house alarm panel) for adherence to EU sound radiation introduced me to the EU technical manual. It runs into over 800 pages without adherence to which the product cannot be sold within the EU.
  • On Jan 1st, 2018 the EU adopted 1.5 million paragraphs of financial services law known as MiFiD II, changing everything from dark pools in stock markets to the consumer advisory point and brings a new level of transparency and disclosure to EU consumers. Any UK financial services firm that wants to trade with EU consumers must adhere to MiFiD II and, post Brexit, to the rules of the UK Financial Conduct Authority as well. This means staff having to comply with two regulators, two sets of rules, doubling up lawyers and compliance staff and passing on the cost to customers.
  • Last year the EU introduced GDPR a new charter of consumer rights on Data Privacy that is fantastic for consumers but puts very onerous compliance on data processors and has some pretty scary fines. Any British firm processing EU consumer data must comply with GDPR regardless of its location.

What hasn’t been explained is that there is no escaping the EU, not if you are within the Eurosphere which extends East towards Asia, South into the Middle East and North Africa and West into the UK. It is that simple.

Trade Agreements are not Cricket

The UK whatever the shape of Brexit, will emerge as a third country, outside the club but economically bound to the EU’s regulatory rules and standards. The idea that the UK as a modest sized economy, suffering from subnormal economic growth for at least a decade after Brexit and desperate to do trade deals, will be afforded a fast track to better or equitable trade deals, is a fantasy. Negotiators for the other side will leverage on UK weakness and its desperation to free itself from being a rule taker within the Eurosphere, an impossible task in itself without sailing the island mid-way between Asia and the USA.

The notion that trade with dispersed Commonwealth countries will bridge trade lost with the EU is a self-deception. The Single Market is the richest and most densely concentrated economic region in the world, the commonwealth is a club. Moreover, the EU is the world master at projecting soft power as distinct from US hard power. New members are required to adopt over eighty thousand pages of EU law, changing countries from the grass roots up in preparation to join the EU. It is what makes leaving the EU so difficult and costly.

What Third Country status means

In its trade with the EU as a non-member, UK firms will be subject to EU courts in resolving disputes whether with trade partners or regulators, not British Courts. This is just a statement of fact. As a third country the UK will always face a united EU front on any matter that effects a member, the Backstop is merely the beginning. In the trade negotiations to come the UK will find 27-member states backing France and Spain on fishing or on Gibraltar and backing any member on any matter that might otherwise diminish the EU.

No amount of ballyhoo, such as adopting Churchillian defiance and aggression in fresh negotiations, will lead to better outcomes. It won’t. Nothing will change. The EU as a Single Market will exercise its raw economic power as it is mandated to do by members, putting the UK in a constant state of negotiation with it, a lopsided relationship that ignores British exceptionalism.

This is already evident to anyone caring to look, the EU boxed in the UK to its model of exiting, kicking trade negotiations out beyond the Withdrawal Agreement, where the real action starts and resisting UK efforts to negotiate British exceptionalism; outside the club but with most of the benefits of being in it. The UK Red Lines were a fantasy for domestic consumption, a reality well known to British civil servants and ought to have been clear to politicians, had they been prepared to lift the scales from their eyes. 

This rather sobering summary overarches any fantasy you care to choose, the WTO rules favoured by the hard Brexiteers or Canada++. It is not logical to argue that the UK must extract itself from the deepest and largest free trade zone in the world in order to negotiate better deals elsewhere, but this is the argument made. Neither is it logical to argue that negotiating trade agreements somehow bolsters sovereignty when its very essence is to cede control, reduce or eliminate barriers and diminish protectionism.

Goods and Services are bound at the hip

As pointed out here before, one cannot separate goods from services, they are inherently intertwined, but this has been attempted at national level. Take the example provided of a car rolling off a Japanese production line in Britain, most of its parts will have been sourced from the EU and beyond with countries like Japan with whom the EU has trade agreements and pass through complex, just-in-time chains where services will have supplied insurance to underwrite transport and credit risks, FX to deal with currency and accountancy and compliance services to keep records in order. The UK services industry will only be able to defeat the impact of tariffs and barriers after Brexit by locating branches in the EU. Let me be clear, local regulators like the Central Bank of Ireland will insist on authentic new enterprises, not boilerplate operations. This poses dramatic change and costs for UK service companies especially in heavily regulated areas like finance.

The reality is that the UK will fight at its weight level in trade negotiations. It is not a heavyweight and will be treated accordingly. It is how the world works and why small countries like Ireland see the EU less as an issue of losing sovereignty but gaining projection through pooling it with other members, benefiting from the strength of the many.

It is hard not to escape the vision of a divided UK stumbling into complex trade negotiations still fighting internally about what kind of relationship it wants with the outside world. Unlike the EU which has been crystal clear from the outset, the UK has been at war against itself, unleashing forces, including English nationalism, that threatens the cohesion of the union itself.

Quite how the UK can get the genie back into the bottle I think is not a question that will be answered for many years but one outcome is clear, the UK in the future will be nothing like the UK of the past in or out of the EU, it is embarked on the biggest project in self harm of any first world country and risks its society and economy for a generation. The only question that remains is how much harm it is prepared to inflict on itself.

Eddie Hobbs,

9th January 2019

Unit W9A1, Ladytown Business Park,

Newhall, Naas, Co. Kildare, W91 T211.

Tel: +353 45 409364

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