The Fundamental Flaw in Muddied Brexit Thinking

Yet another set of articles in today’s Financial Times confirms what we’ve observed about the UK’s stance towards Brexit from the outset: an astonishing capacity for denial. For Americans who’ve observed the Clinton bubble and the heroic post-election attempts to keep it pumped up, the Brits are managing to do them one better.

One of the sightings is on how foreign banks in the UK will make “transition arrangements” if there’s no clear post-Brexit deal likely to be in place by the presumed Brexit date of March 2019. As we noted last week, Japanese banking leaders had a tea and cookies chat with British regulators and told them they’d start moving operation out in six months if they didn’t get reassurances. That puts them behind pretty much all other foreign banks, who started getting licenses and looking into foreign office space locations pretty much as soon as they’d recovered from the immediate Brexit vote shock. Late last week, Lloyds of London was the first prominent City institution to set a schedule for relocating part of its operations to the Continent as a Brexit hedge.

As we’ve stressed, the surprising thing is that anyone is acting as if this a a surprise. The EU treaty rules are very clear: the UK can’t negotiate any trade or services with the EU or bilateral deals with individual EU members as long as it is still a member of the EU. EU leaders, with a single voice, have said they are not going to be nice to the UK in the Brexit process. And more generally, as we have also stressed, Europeans are far more procedural and literal-minded about contracts and treaties than Anglo-Americans are.

So the only way Britain will get to negotiate any new deal before the drop-dead date of March 2019 is if it completes its exit negotiations a meaningful amount of time before then. How likely do you think that is? Look at some of the impediments. From the Financial Times:

But the first priority of Michel Barnier, chief EU negotiator, is to sort out the terms of the divorce. This means Britain must offer assurances on issues such as the rights of EU expats and paying an exit bill of up to €60bn before a deal on a “soft landing” is possible.

Senior EU diplomats admit the timetable also reflects a cold calculation of interests: delaying agreement on a transition would spur companies to move some of their business to the EU to cope with the danger of a hard exit.

Again, we’ve stressed that Continental countries see Brexit as an opportunity to take a bite out of the City’s business and they look determined to do so. Recall that the EU plans to launch the procedures to require Euroclearing take place in EU-ex-UK countries immediately on the heels of the UK pulling the Article 50 trigger.

Remarkably, another Financial Times article last week showed that the City thinks it has a magical wand to get a deal that is nowhere in the offing, that of negotiating a “transition deal” before a Brexit, an idea that the EU has rejected each and every time a British leader has mooted any such idea. And the next fantasy is that the EU would be sporting and give the UK an “equivalence” deal:

And ECB chief Mario Draghi sees no financial stability impediment to playing hardball. Again from the pink paper:

Equivalence is in principle extremely attractive. EU business is, after all, only a subset — say 20 per cent — of most investment banks’ activities, and zero for domestic institutions such as building societies. The beauty is that it would not require the UK to replicate the EU rule book in its entirety — and certainly not for domestic business.

When Michel Barnier, now the EU’s lead negotiator on Brexit, cut an equivalence deal with the US over derivatives a few years ago, he stressed the principle that when two countries’ rules were “comparable and consistent” with each other’s objectives, it was “reasonable to expect [each] to rely on those rules and recognise the activities regulated under them as compliant”. Few could argue that Britain’s rules were not equivalent to European ones — they are currently identical. And with both sides following the same G20-led process of financial regulation, their objectives are carbon copies, too.

The comparisons here are disingenuous. The US and EU are comparable in size as economies. With the EU to move Euroclearing out of the UK, any institution that wants to deal with customers in Euro will have to have operations and licenses on the Continent (or in Dublin) or deal through correspondent banks, which is unattractive for reasons of cost and speed. This is no different than for banks who want to deal in dollars. They have to have a US operation, which is almost always a New York branch, so as to have direct access to dollar clearing facilities.

The UK banks can whinge all they want about how they will initiate a race to the bottom to get a competitive leg up. They won’t be able to deal in Euros or directly with concerns that have Euro banking accounts unless they have operations licensed to do so, in the EU-ex-the-UK.

And that’s before we get to the fact that the banks themselves aren’t so hot on the transition rules idea:

So why are the banks not keener on equivalence? The biggest issue is the lack of certainty. There is no agreed definition of what is equivalent when it comes to assessing different jurisdictions. There has been talk in Brussels of tightening the rules to make it tougher for non-EU jurisdictions to gain access. And, in principle, equivalence can be withdrawn at 30 days’ notice, leaving everyone in the lurch. Of course, it is worth noting that withdrawal would cut both ways, and would affect EU banks branching into London. Past experience also suggests that shared interests militate to keep these deals intact once they are going. An equivalence deal on futures between the US and foreign exchanges has lasted for more than two decades.

Back to the story from today. ECB chief Mario Draghi does not see any reason to cut the UK slack:

Speaking at an EU summit in Brussels last week, Mario Draghi, European Central Bank president, repeated his assessment that Britain would “first and foremost” bear the economic pain of Brexit, according to diplomats.

Despite warnings from the Bank of England and UK ministers, Mr Draghi has been relaxed in private meetings with eurozone officials about the financial stability risks of Brexit, arguing financial services is a mobile industry able to bridge regulatory uncertainty.

Another Financial Times today is the functional equivalent of a press release from hedge fund lobbyists titled Hedge fund lobby groups outline Brexit wishlist. I’m at a loss to understand why anyone would mistake Angela Merkel for Santa Claus.

How is it, now nearly six months after the Brexit vote, that UK leaders (including a disconcerting number of business executives) and EU authorities are still taking past each other? A fundamental reason seems to be that many in Britain believe the Brexit PR, that leaving the EU means they will regain national sovereignity and the EU must deal with them as a prospective equal.

Putting aside the substantial difference in size between the two economies, the fatal flaw of this logic is that the UK cannot be meaningfully sovereign due to its degree of economic integration into the EU. They’ve run up against Dani Rodrik’s trilemma, which he first wrote about in 2007:

Sometimes simple and bold ideas help us see more clearly a complex reality that requires nuanced approaches. I have an “impossibility theorem” for the global economy that is like that. It says that democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full.

Here is what the theorem looks like in a picture:

To see why this makes sense, note that deep economic integration requires that we eliminate all transaction costs traders and financiers face in their cross-border dealings. Nation-states are a fundamental source of such transaction costs. They generate sovereign risk, create regulatory discontinuities at the border, prevent global regulation and supervision of financial intermediaries, and render a global lender of last resort a hopeless dream. The malfunctioning of the global financial system is intimately linked with these specific transaction costs…..

So I maintain that any reform of the international economic system must face up to this trilemma. If we want more globalization, we must either give up some democracy or some national sovereignty. Pretending that we can have all three simultaneously leaves us in an unstable no-man’s land.

In other words, if the UK wants to have more national sovereignity, it must become more economically self-sufficient, as in more of an autarky. Yet making that sort of change would require a national economic policy, meaning having the government identify sectors where the UK has or could develop competitive advantage and do more to promote their growth. The failure to do planning (and better yet, some preliminary execution) means the UK, despite the phenomenal arrogance and ignorance of its officials, is approaching these negotiations as a beggar: it wants and needs to preserve substantial elements of the status quo, such as access to the single market and passporting rights for UK financial institutions, or face meaningful shifts of activities out of its economy (and please don’t try the dubious statistic that the EU will face bigger trade losses than the UK. What matters isn’t the absolute dollar, or in this case, pound and Euro hit, it’s the cost of the losses relative to the size of the economy. Measured properly, UK citizens will suffer considerably more than their EU counterparts).

And that’s before you get to the fact that this sort of industrial policy is anathema to Thatcherites and neoliberals.

As they say in Maine, you can’t get there from here. While greater national sovereignty is an estimable goal, the UK has gone down a path for decades that means it will take a long time to get the economic independence that would allow it to have more political autonomy. And despite all their bluster, UK leaders aren’t taking that objective seriously either.

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  1. PlutoniumKun

    I have one personal pet theory (based admittedly on little evidence) as to why so many UK businesses seem so very slow to grasp the potential consequences of Brexit on their own businesses.

    Presumably, most organisations of any size will have set up internal working groups to report to senior management on the immediate consequences of Brexit. Most of these working groups will be made up of relatively senior management and technical staff. But these working groups will, in effect, be reporting on their own futures. If they report back that ‘if we stay focused on a UK base and don’t either relocate to another EU country or immediately downsize in preparation the company is in great danger’, then they are in effect inviting the CEO to threaten them personally with redundancy or relocation. Its one thing to recommend that floor level operations have to be shifted, its quite another to recommend that a head office needs to move, and move fast. That’s personal for the people making the recommendation.

    I suspect therefore that there is a lot of groupthink going on, both within companies and between companies in the same sector, which basically goes ‘it looks bad, but we’ll muddle through somehow, and hey, it may even turn out for the best‘. Put simply, nobody wants to put their head on the chopping board to point out what should be obvious, which is that the impact on some sectors will be nothing less than catastrophic once the process starts in earnest.

    Again, its anecdotal, but the British I know who are most upset by Brexit, and taking the most urgent changes to protect their own futures, are in either academia (heavily dependent on foreign students and EU funding project) or in those professions most likely to be directly impacted by a removal of EU wide recognition. The most immediate short term impact will be on architects and related professions who may find their qualifications are simply not recognised anymore outside the UK unless there are urgent transitional arrangements set up. Small contractors in construction related businesses are already getting hit hard as they are being excluded from non-UK contracts because of the potential legal issues. I think the awareness will cascade out from sectors like that into ‘mainstream’ financial and non-financial business.

    1. dw

      this actually makes sense. probably the same issue shows up in the government too, as finding that the economy shrinks, means fewer jobs for them too

    2. Bold'un

      The sensible thing for the UK financial industry is to offer up Euroclearing voluntarily and then try to specify where it should happen: Calais, ideally, so that some key personnel can commute via the chunnel, especially during the setup phase…

      1. PlutoniumKun

        They could use all those soon-to-be-empty cheap wine emporiums in Calais which will likely have to close.

  2. fajensen

    My Pet Theory is that Brexit – whatever that exactly means – will be walked back entirely. Or at least mutate into something that means “status quo”.

    Key signal to the world is Theresa May putting that clown Boris Johnson in charge of the process, to make sure the whole thing is solidly messed up and of course to pin the failure solidly on Boris for his help in causing it.

    The current parliament will just drag out the separation process until the next parliament comes in and declare that: “Brexit!? Nothing to do with us, nah, that was that last lot!”

    Personally, I think the EU should grab the opportunity and kick Britain out because I blame mainly Britain for the total lack of any social dimension to the EU project, which the UK has fought against with every opportunity (Incidentally causing the problem of the bad employer being undercut by the very worst that drove many of the Brexit voters).

    1. PlutoniumKun

      I think that’s entirely possible, and I suspect its what the financial industry is hoping for. The problem is that May herself does seem to be engaging in quite a determined push for it. If she really hoped to drag it out for a few years I’m pretty sure she would be signalling it by now, and in particular would not have been so fixed on an early 2017 date for the A.50 declaration. She’s had more than one opportunity to fudge things (not least after the successful court challenge on Parliaments role) and she hasn’t taken them. I think internal Tory party politics will make a fudge almost impossible (remember that May has a very small Parliamentary majority). And as Yves points out, internal European politics means that once the A.50 is made, there is no incentive or mood in Europe to fudge matters in the UK’s favour. I believe that it has an unstoppable momentum now.

      1. Kat

        A lot depends on whether an invocation of Article 50 is irreversible or not, and legal scholars seem to be split over the matter. Obviously, if invoking Article 50 is reversible, then the British government will always be able to declare that it’s gotten a bad deal before the two years are up and withdraw the notification.

        If you wonder why this may be possible even though Article 50 TEU does not provide for withdrawing from the process once started, keep in mind that the Vienna Convention on the Law of Treaties states in Article 68 that “[a] notification or instrument provided for in article 65 or 67 may be revoked at any time before it takes effect.” (Articles 65 and 67 are about, inter alia, the procedure of withdrawing from a treaty.) A lot would depend on whether the CJEU would see Article 50 TEU as displacing Article 68 VCLT or providing an implementation for it.

        There are also other arguments both for and against the irreversibility of an Article 50 invocation and a lot of debate over the details surrounding these arguments. So, one should definitely not rely on it being reversible. However, one also shouldn’t assume that it cannot be reversed, even though this is being stipulated by many people.

        1. begob

          Interesting to see what the supreme court has to say on this issue in January. Both sides steered clear, but can the judges continue to ignore the pachyderm in the parlour?

            1. begob

              And now there’s a fresh political crisis in Northern Ireland that will impact the Good Friday Agreement. As one of the supreme court judges said: “Another shake of the kaleidoscope”. Can’t see the UK’s political parties surviving in current form.

        2. PlutoniumKun

          It may be true legally, but it would seem to me to be political suicide for any Tory politician to advocate withdrawing it, at least not without another referendum. The only way I could see that happen is if the process drags on over an election and a new government decides it has a mandate to do it.

          1. Kat

            At the moment, yes, but we’ll have to see where the public mood is in two years time. Consider also that the answer to this question would greatly affect both the UK’s and the EU-27’s negotiation strategies, regardless of whether the British government would actually exercise the option of withdrawing its notification.

            1. PlutoniumKun

              I would have thought that if the answer is ‘yes’, then there would be an even greater incentive for the EU to play hardball. Deliberately creating a crisis that could lead to a new UK government withdrawing the A.50 would be seen as a reasonable strategy.

        3. a different chris

          This is horrifying. How venal and stupid are our Masters of the Universe?

          OK, a really big issue Yves correctly harps upon is how long negotiations will take and that they “can’t start until county X exits.” But if Article 50 is irreversible, then any sane person would think the contract would allow them to start negotiation immediately upon declaring it.

          I understood it was non-negotiable before leaving and therefore just assumed it was reversible. You know, the other side of the “sane” coin. That would allow other parties to put the Fear Of God into you and maybe throw in a carrot (not that Britain deserves a carrot, please tell me that I can stop worrying about you guys actually thinking that I don’t think the whole thing is a mess and both sides are a-holes just because I, sigh, “support” Brexit) and then you can gracefully back out.

          But not irreversible and no chance of any negotiations pre-Exit, that’s just sick and abusive. Which is pretty much the whole EU project. I can’t countenance it just because a-holes like the British are the ones getting the abuse.

          Britain has to leave and break this ugly creature. Spawning a number of ugly creatures, of course, including and probably most of all itself, but then sanity can maybe divide and conquer.

          1. Kat

            But not irreversible and no chance of any negotiations pre-Exit, that’s just sick and abusive.

            You are misunderstanding something fundamental here. First, there is the notification under Article 50. This notification kicks off the actual exit negotiations between the UK and the EU-27. These can last up to two years (or longer, if both sides agree to extend them). Then the actual exit happens.

            What the EU-27 don’t want is negotiations before notification, because that would allow the UK to drag out the process indefinitely. There will definitely be negotiations between the notification and before the exit happens.

            What the UK cannot do is agree to new treaties with third parties before the exit happens. There is a ongoing debate over whether they can negotiate trade treaties (with the goal of signing and ratifying them after the exit) during the two year period. In practice, the bigger problem is that such treaties take much longer than two years to negotiate and the UK no longer has much institutional expertise in negotiating trade treaties, so it’s going to be a mess either way.

            There are ways to work around this: for example, the UK could join the EEA for an intermediate period (which AFAIK doesn’t preclude negotiating your own trade agreements).

            The biggest problem that the UK has is that the government did not really prepare for the eventuality of the referendum actually resulting in the Leave vote winning. And by not really preparing, I mean, not preparing at all. Notwithstanding treaty negotiations, there is an absolutely massive body of domestic law that needs to be rewritten and basically not enough time to do that. The whole exit process could now potentially take decades, even if the EU were to go easy on the UK.

            1. George Phillies

              “What the UK cannot do is agree to new treaties with third parties before the exit happens.”

              While the May government seems agreeable to talking to the EU, exactly how does the EU intent to enforce this, in ways that are not very expensive for them? For that matter, given that most EU actions require unanimity, what is the likelihood that the UK will make generous arrangements with, say, Malta and Greece, such that any EU action is vetoed.

              1. Kat

                I was describing the legal situation, not how this might play out politically. That said, the UK is a nation of laws and I’m skeptical that they’d just flat-out ignore the treaties.

                Second, relatively few EU actions actually require unanimity anymore (a necessary byproduct of EU enlargement, as unanimity between 28 member states is difficult). Most require a simple majority in the European Parliament and/or a qualified majority in the Council of the European Union.

                Third, countries cannot unilaterally conclude agreements with member states where the agreement falls into the exclusive or shared competence of the EU; this covers most trade agreements, would prevent Malta or Greece from being a party to one, and is also why the UK is currently barred from concluding any trade agreements unilaterally. This is precisely so that powerful third parties cannot use divide-and-conquer approaches when negotiating with the EU.

                Fourth, neither Malta nor Greece nor anybody else within the EU-27 seems to be particularly interested in giving the UK any advantage. The UK is not liked very much by the rest of the EU, frankly. Despite getting more privileges and opt-outs than any other member state, they kept complaining and asking for more, while simultaneously using the EU as a scapegoat. So, there are plenty of member states who aren’t exactly sorry to see the UK go and are unlikely to lift a finger to help them.

            2. Jim A.

              The article 50 process is SUPPOSED to be punishing. The idea from the get go was that anybody who wanted to leave would be forced to negotiate with a two year ticking timebomb. The idea was that this would be daunting enough to dissuade anybody from invoking it.

        4. Yves Smith Post author

          Huh? With all due respect, this is yet more hopium. This must be the thinking of UK “legal scholars” trying to create wriggle room that isn’t there. The treaty language is crystal clear: Invoke Article 50 and you get to work out an exit deal, but you are out regardless in 24 months.

          1. Kat

            No, this is not “hopium”. This is an actual – though contentious – debate among European legal scholars. To be clear, it’s not something that the British government is saying or even appears to have any interest in and legal scholars often engage in debates over things that in the end have very little effect in practice. But it’s a very real legal dispute about important points of international law.

            Even if the language of Article 50 TEU is crystal clear (I’ll leave the teleological arguments and the discussion of legislative history aside), the question of the applicability of Article 68 VCLT remains. You can find arguments both against and in favor of irrevocability. As you can see, there are some fairly complex and nuanced points that are being made, which should indicate that the question doesn’t have an obvious answer.

      2. m-ga

        I’ve also been surprised by May’s verbal support for Brexit. It’s difficult to know whether to take her at her word.

        A50 has already been delayed at least twice. Once by Cameron (who delayed by resigning), and again by Theresa May (to March 2017, although IIRC there was first a shorter delay to A50 immediately upon May taking office).

        It’s possible to interpret the court case over A50 as a sign that Theresa May is actually serious about triggering A50. Against that, if the government wins the court case it’s not incumbent on May to actually trigger A50. She would have established that she has the power to do so without recourse to parliament. Gaining such a prerogative power would be useful to her anyway (could support her authoritarian tendencies in other areas), so she might have viewed the court case as a win-win. If she wins the court case, she becomes more powerful. If she loses, she can shift some of the blame to UK judges for the Brexit mess.

        So, it remains very difficult to read Theresa May. One prediction I’d make is that there will be consumer pricing hell in the UK after Christmas. There are two reasons this might happen. Firstly, the insurance policies (currency hedges) of UK multinational retailers must have expired, meaning that they’re eating the cost of a lower pound if they don’t raise prices. Secondly, the post-Christmas sales is a perfect time for an overall UK price rise. The bad publicity of the price increase is offset, from a PR perspective, by the headline price cuts of the sales period. It’s hard for the UK media to hammer you if you’re feeding them continual stories of white goods, luxury goods and so on at 75% discount, with fights in the aisles to get at the bargains. If the stories are spectacular, and retailers act in concert, it could cover up a price rise of 10% or so in January.

        Once consumer prices actually start to rise, I’d expect a rapid move to the 20% or so increase that the drop in sterling necessitates. This would be a realisation of the “Project Fear” that’s been so maligned by Brexiters. The inevitable public backlash could then create political space for not triggering A50 in March.

        2017 should be interesting in the UK. About the only thing for sure is that the post-referendum climate, in which it’s clear that everything will have to change, but it seems that nothing has changed, will not continue for very much longer.

  3. Jean Inconnu

    Interesting article Yves. However, it all hinges on the belief whether the EU in its current form will still be around in a few years. If the whole shebang goes down, which given the current crises all over the place is by no means unlikely, the Brits have made the best move ever by being the first to leave the sinking ship.

    I personally do not feel sure enough to bet either way.

  4. Richard

    What the hell’s the matter with those people?

    On day 1, the day of the referendum, Cameron should have taken THE VERY NEXT LANE TO BRUSSELS and invoked/ article 50. When he didn’t do that, I KNEW he was looking for an excuse to prevaricate. The remainers fell right in line.

    They are looking for a way to negate the referendum. Their real problem now (I think) is that more people want to leave now than wanted to at the time of the referendum..THEY SHOULD JUST LEAVE.



    JUST LEAVE, for God’s sake. Walk away. NOW!!!!!!

  5. vlade

    Last week I had a dinner with my Kiwi mate. We talked about Brexit, and he mentioned that there is actually a precedent – sort of. That is, in 1970 – ironically spurred by UK entering EU, it had to kill the “special priviledgeds” that many a Commonwealth country had for accessign UK’s market.

    This basically killed NZ farming overnight. It took NZ a generation (into mid 90s) to recover. It didn’t help that the world was going through a number of economic crises at the time (hmm..).

    True, right now NZ farming is probably the most efficient in the world (I believe it has the least subsidies and must export), but it a generation and a lot of misery to get there.

    1. ChrisPacific

      And that was nothing like an upheaval on the scale that Brexit will be. It was the disappearance of protected access to our (admittedly largest) export market, but it didn’t require the kind of wholesale rebuilding of trade and political agreements from scratch that Brexit will. Not to mention the fact that they will have to exit first before even beginning the work. There was also a clear recognition from both the NZ government and voters that there was an urgent need for a national strategy to make agricultural exports more competitive/attractive and also diversify into other markets, a realization that doesn’t seem to have come to UK leaders.

      The whole process is likely to resemble leaping out of a plane and then trying to assemble your parachute on the way down.

  6. Anonymous2

    If the UK government has any sense and is a free agent it will take advantage of Fillon’s proposal to reform the EU and defer any possible implementation of Article 50 until after the French Presidential elections. Assuming Fillon is elected they can then await the outcome of discussions on reforming the EU in the hope that the outcome will enable them to say the the concerns that lay behind the Leave vote have been addressed, so let’s move on.

    This may be too sensible for the current irrational state of UK politics. Plus, I worry that Rupert Murdoch has his boot on Teresa May’s throat and will not relent until he achieves his goals, which may be a combination of, first, a power grab; and, second, the disintegration of the UK as revenge for the time snooty English undergraduates at Oxford turned their noses up at him for being a colonial back in the early 1950s.

    Revenge, after all, is a dish best served cold.

  7. realist_brexiteer

    That Brexit will cause all sorts of damage across the board? Undoubtedly. You can’t read the articles on here and conclude otherwise.

    Do most Brexit voters know? Probably not, but even if they do, their attitude is “better we all suffer than us continue to suffer in order that the elites keep on getting their cheap lattés and Apple gizmos every 6 months. Though I’m loathe to use economic game theory here, I think one game outcome is pertinent – “better we all suffer than continue living the status quo for yet another 30 years with you top 20% or top 50% pulling even further ahead whilst we gain 0.01% of the winnings”.

    The hope is that this ultimately forces some sort of industrial policy back onto the agenda to facilitate better self-sufficiency (which is coming, like it or not, for various reasons outlined on NC in the past) and maybe ultimately even a MMT agenda once that is achieved.

    Of course that hope may be total pie-in-the-sky – the elites traditionally navigated uncertainty better. But the 52% just snapped. Referenda do not often produce good policy guidance and ultimately if dislocation leads to social unrest (remember the poll tax began the end of Maggie) then some good may come of it all.

    Of course if Italy can’t pull off another exercise in can-kicking-down-the-road then the UK vote may come to be seen as prescient.

    1. Jabawocky

      An interesting view, but what your brexit vision lacks is any mechanism by which the elites are deprived of their lattes and gizmos. Mainly, it will be the lower and middle classes who suffer, surely? The elites will be quietly offshoring.

      1. Yalt

        The latté crowd won’t be offshoring. That’s a different group.

        I think maybe the two of you have a different cutoff for “elite.” Brexiteer refers to “you top 20% or top 50%.” To a former coal miner or manufacturing worker, anyone with a job in the City probably counts as elite and he may well enjoy some schadenfreude as those jobs disappear. A Lloyd’s broker or bank middle-manager whose job and lattés may now be at risk doesn’t think of herself that way–her elite owns the capital she’s helping to manage and they’re the ones that can quietly offshore.

  8. George Phillies

    You can have two of the three democracy, sovereignty, and global integration prosperity.

    The British may choose the first two, even though it is expensive.

    The current huffing and puffing is all the preliminary negotiation phase. Both sides have legal mass destruction schemes that would cause vast damage to both sides. Both sides could renege on various treaty obligations (Carter, China) and close their markets to the other. Both sides could insist that their foreigners leave. Both sides could indeed try to outstupid the other. The UK has aircraft and diplomats, and could start negotiating elsewhere or with individual EU or other governments now,notwithstanding treaty obligations to the contrary.

    With some luck, good sense will prevail. With less luck, matters will be unfortunate.

    1. rd

      Once the Norman kings lost their Normandy estates almost a thousand years ago, the UK (in its various forms) has been a sovereign entity that made it a point of not really being part of Europe, other than some royalty inter-marrying and periodic mutual aid treaties that resulted periodically them fighting the Spanish, French, or Germans. The Common Market and then the EU was an attempt for Britain and mainland Europe to be largely one for the first time since the Romans ran everything. That is what the voters rejected, so with that vote it was clear to me that Britain was going back to its semi-isolationist structure of the previous 1,700 years.

      Mainland Europe has a number of significant economic issues. Why in the world would the EU structure a deal favorable to Britain on financial passports and Euro-clearing as part of Brexit? This is an opportunity to move quite a few wealthy people into mainland (or Dublin) financial capitals with all of the additional work for nannies, tutors, restaurants, etc. that would come with that. The EU would be doing a disservice to their own citizenry to allow good paying jobs to remain in a country that just rejected them.

  9. susan the other

    It all sounds opportunistic to me. Boris’s briar patch. What a good chance for all the crony UK corporations to offshore themselves, thereby avoiding the coming political changes in the UK – those industrial policies which they hate bec. they are good neolib internationalists, not good nationalists. And Oh gosh, we didn’t realize it would hurt good ol’ Britain. It’s fun to watch those guys pretend to be incompetent. And as modern irony goes this is just another double-cross because the Left/Socialists/Nationalists are going to be left holding the empty bag, because, gee, nobody knew how bad it would be for ordinary citizens.

  10. SA

    The politicians may think they can drag this out indefinitely, either to pre-negotiate a deal or to hold a second referendum, but events are already passing them by. The banks are already leaving, and once May invokes Article 50 in a few months, foreign-owned manufacturing and services will pick up stakes–they have no choice because of jurisdictional issues for contracts among other things. And Scotland will be headed for an exit. Up til now, Brexit has been a slow-motion train wreck, but that will soon change.

  11. Albert

    Well, since all these businesses are leaving then surely the UK could do without, as a starting negotiating position, 1 million EU nationals living in the UK…

  12. Bob Bollen

    A lot of these comments may be correct, but they ignore one fact.

    May cleverly delayed her commitment to trigger Article 50 (which might still slip) to after the French presidential election, for which there is a significant possibility that the French might elect Marie le Pen. Le Pen has promised her own Frexit vote aimed at those who’ve been hit by globalisation and scared by media stories exxagerating the impact of immigration.

    So all the tough words we’re hearing right now are aimed at deterring the French electors from voting for le Pen.

    (incidentally, the Tory party is still silently struggling to agree what it wants out of Brexit – so the extra time helps find a compromise).

    As the French Presidential election approaches, or if le Pen wins, we may find a softening of the EU position on free movement of people – which may allow May to throw sops to her own voters who’ve also been hit by globalisation and scared by media stories of immigration – and satisfy more of the elite in her party.

    Of course, none of this is a certainty – but it may have been thought a gamble worth taking.

    1. Yves Smith Post author

      The French are not electing Le Pen.

      Francios Fillion is plenty right wing and the establishment and socialists will vote for him over Le Pen. The overlap between their policy positions is large and he doesn’t have her racist baggage.

  13. Scott

    The EU banking system & its combined currency taking away sovereignty without any other banking but the neoliberal bullshit that means those that buy Sachs pretend world give them money out of any treasury in the world because they sold bad debt in bad faith and purport to own everything anyway can get as vindictive as it wants, which will do something for somebody.
    Won’t it come to mind that Greece was screwed and France is smarter than they look for a little while but the Germans will go on with it all as long as they get the money to buy what they need to dominate, and will change fast when it means they get to dominate.
    They will wave Marx and make a new rule of the Industrial Service Bank while the UK tries to sell to the US which is going to build a ferry highway for trucks from Ireland to Iceland to Nova Scotia which is getting warmer.
    The UK could lead the way with some conviction, or could have demanded a smart banking system but now is all hand wringing like there was not a good reason to say to hell with the Euro if it’s financial system was going to dictate all into riches for Sach alumni, an no one else anyway.

  14. RBHoughton

    Actually Yves, Britain has been here before. During our wars against democracy we tried to stop European trade and Europe responded with the so-called Continental System whereby they denied British trade access to European ports.

    We combatted that with a successful smuggling operation that received high level governmental support, indeed the ministry taxed smuggling at 1.5% ad valorem as our merchant ships were escorted by the Royal Navy to prevent interference.

    Our factories packed their wares in smaller boxes, our artists faked the Customs papers of every country and the signatures of their trade ministers and we shot any Customs officers impeding our trade. We occupied strategic islands – Stralsund, Heligoland and a few sand islands in the rivers – and used them to warehouse our goods.

    Today, faced with the same restraint we would use the Channel Islands and Northern Ireland to warehouse our exports with preference for the latter. A commentator on the NC site has already referred to the 2015 book “Waiting for the Sheriff” which revealed the Irish Government to be institutionally corrupt in its executive, legislative and judicial functions. There should be no difficulty in maintaining British trade through Dublin.

    Its true the Euro clearing business appears likely to be lost but we will greatly increase trade in goods that Europe proscribes and there appears nothing they could do about it.

    1. Yves Smith Post author

      With all due respect. what are you smoking? Do you understand at all about how shipping works today? Banks make payments against letters of credit. You can’t do your little bootleg fantasy on any scale, particularly since the main buyers of many British exports (particularly in the transport industry) buy intermediate goods (parts) and most assuredly do not want to get their final products barred from sale. There are tons of rules regarding inspections, for starters.

      1. Cry Shop

        Yves, one very minor quibble, but Forfaiting has replaced letters of credit for most consumer goods, particularly those sold through large consumer chains such as electronics and fashion, or large dealership networks ala automotive (Also, in my days as a commodity trader, I’d rather have Exxon’s contract to buy on open credit than any bank’s LC, the former was far more bankable as Exxon was a lot more flexible than any LC. Ship a few days late, with a phone call notice beforehand, and Exxon would pay, but not an bank holding an expired LC.) However, the end result, particularly the 3rd party inspection services remain the same as if an l/c is involved.

        For many goods, particularly foodstuff and consumer goods, the inspection is even more severe for government regulatory reasons than by request of the retailer group. USB chargers sold in Germany seldom blow up, but do cost considerably more for example than those sold in China. Only goods that are sold outside entire established legal distribution and retails networks (ie: illicit drugs, sex slaves, counterfeit goods, ) through non-standard shipping practice in small volumes can beat this system,

      2. andy blatchford

        Ignoring the obviously ludicrous comment you were responding to Yves as a freight forwarder I can tell you letters of credit are rarely used in International trade nowadays (mostly gone the way of bills of exchange), still get a few and those are mostly from countries with capital controls or places that still like to use them (Pakistan & India are good examples, Middle East now & again).

        Very few companies even know how to deal with them and I have gone myself to help them out. I was recommended to one so went and visited them and talked them through how to as their bank wasn’t very helpful.
        I sat there explaining to their finance director what to do (yes really). Funnily enough found a little bank scam where their bank had told them to ‘confirm’ every LC which as you probably know is just doing a credit check on the issuing bank, out of the 5 LC’S only 1 I considered necessary (a small Saudi bank I had never heard of) the shippers own bank had confirmed an LC issued by their branch in Dubai (okay the charge was only 200 GBP so not exactly on the scale that is usually reported here).

    2. Cry Shop

      Europe under Napoleon was a fragmented Empire held to gether by a non-French aristocracy/oligarchy in each nation who felt it was easy enough to pretend to be compliant to Napoleon, while pretty much doing as they wanted. France simply could not provide the man-power to run it’s own government of occupation in every nation. Today, with modern transparency, smuggling on the scale necessary to run the British Economy even with the complicit support of some member EU nations just isn’t possible. If it were otherwise, more people would be dying from opium bales falling from overstuffed warehouse windows, and not so much from using bad batches.

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