EU Dashes UK Fantasy of Talking About “Future Relationship,” Meaning Trade, Soon

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It may seem mean-spirited to criticize the UK’s shambolic performance in the Brexit negotiations when British citizens have so much at stake. But we’ve had UK leaders yet again offering citizens and business leaders false hope, and having the press barons amplify their fantasies as if they had a good chance of becoming reality. Moreover, the outcome was entirely predictable, as shown by the fact that this humble blog predicted it.

Readers may recall that the UK wanted to talk about what it calls “the future relationship,” meaning the outlines, and perhaps even the details, of its trade and services deal with the EU in parallel with the negotiation of the other issues now on the table: the so-called exit bill, movement of people, and the Irish border.

We stressed that this demand amounted to renegotiating the shape of the table, as in the basic parameters of negotiations. This sort of thing is simply not done in negotiations that are already underway. And there were other reasons to expect this push to be rejected:

Under EU treaties, the UK cannot negotiate new trade deals until it is out of the EU. The EU has already made a concession (without demanding anything in return, as in a “free concession” which is generous) by being willing to enter into preliminary talks before the UK exit

The UK is acting as if it does not understand that the EU’s chief negotiator, Michel Barnier, is operating under parameters that were approved by all 27 EU members. He does not have the latitude to go outside that without going back and getting their approval

EU leaders made clear what the order of negotiations would be. Whether the UK likes it or not, the EU has all the leverage since the alternative is a disorderly Brexit, which is far more damaging to the UK than the EU

The EU made an additional free concession to the UK in moving the Irish border issue forward into the first set of issues to be considered

The UK has done nothing to earn the good will of EU leaders or negotiators since the talks have started. UK official have not only continued their pattern of being hostile, often based on claims that show ignorance or deliberate misrepresentation, but have also ignored clear and consistent messages from EU leaders and continue to be shockingly unprepared for negotiations

The EU made clear it was unreceptive to the UK’s push at the September round of negotiations, which virtually ground to a halt. Various EU leaders, either in their own name or via leaks, made clear afterwards that the EU was very unlikely to decide, as the UK had hoped, that the EU would decide in October that enough progress had been made on important Brexit issues so as to start talking about “the future relationship”.

Put it more simply: virtually nothing has been settled. How could the Brits fantasize that the EU would roll over? So what if Theresa May gave a speech in Florence outlining a 50,000 foot idea of what a transition deal might look like? That doesn’t mean the EU is prepared to entertain it now. And that’s before you get to the fact, as European officials point out, UK leadership is so divided over Brexit that they don’t appear able to enter into any commitments. Or to hoist a label applied first to the US:

The Russians expressed their total disgust and outrage at this attack and openly began saying that the Americans were “недоговороспособны”. What the word means is literally “not-agreement-capable” or unable to make and then abide by an agreement. What that word means is literally “not-agreement-capable” or unable to make and then abide by an agreement. While polite, this expression is also extremely strong as it implies not so much a deliberate deception as the lack of the very ability to make a deal and abide by it.

Now unlike the US, UK leaders might overcome their internal dissent and be able to negotiate in a reasonable manner. But that isn’t where they are now.

The situation is so stark that it’s not hard to read between the lines of a report in the Financial Times, Germany rejects May’s Brexit transition hopes. Some key observations:

The EU’s chief negotiator, Michel Barnier, made a good faith effort to get a waiver for the UK. But predictably, EU officials were not moved:

The uncompromising positions in Berlin and Paris emerged on Friday as ambassadors from the remaining 27 EU members held their first debate on the union’s approach to transition talks, including the option of approving exploratory negotiations at an October summit.

Michel Barnier, the EU’s chief negotiator, outlined the potential benefits of opening talks on a transition deal at the meeting. He argued that they could create space to resolve the big outstanding issues on a Brexit bill, as well as recognise Britain’s recent more accommodative stance.

But this option was firmly rejected by a group of countries led by Germany and France, which took a stricter view on the sequence of negotiations, according to several diplomats briefed on the meeting.

The article tries to depict Germany as the heavy, but the opposition to the UK’s stance is broad based. As a rough and ready rule, when Germany and France agree on anything, the rest of the EU generally follows precisely because the two countries typically have very different interests and priorities. Here, we have not just France and Germany in a united stance, but Germany supposedly leading a block of other countries too. It is hardly a secret that most if not all of the Eastern European countries (whose entry the UK ironically promoted aggressively, to weaken the position of Germany and France) are particularly hard line about having the UK settle its so-called exit tab first. And recall further that the exit arrangements require unanimous approval of all 27 remaining members.

The EU is expecting the worst. It was obvious from early on that the EU, in its cold fury over the Brexit vote, did the equivalent psychologically of marking to market, as in accepting that they’d take large economic losses. For instance:

The stalemate comes as Germany’s biggest business lobby has warned members to prepare for a “very hard Brexit” because Britain lacks a clear strategy.

So they can approach the negotiations from the perspective of “This is a given, how do we make the best of this bad situation?” And on most issues, what is best for them is not at all good for the UK.

On top of it, the UK is making own goals like this:

The UK’s two main negotiators are battling each other for staff and resources days before the fifth round of Brexit talks begin next week. According to an internal email seen by the Financial Times, Olly Robbins, who left his job as head of the Department for Exiting the EU last month to set up a rival “Europe Unit” in Downing Street, is openly trying to poach his former colleagues from David Davis, the Brexit secretary.

The Foreign Office has been hollowed out thanks to Thatcherite budget-slashing. But even at its higher manning levels of decades ago, Brexit would have been an overwhelming task. And now we have infighting making the far-too-few professionals dedicated to this initiative even less effective.

Worse, way too many people in the UK, and most important, its political leaders and its press barons, think that there is economic upside that will just fall in their laps if Glorious Brexit rolls forward, and they are doing nothing even remotely approaching the level of war-level industrial planning and operational preparation to keep Brexit from being chaotic and extremely damaging. So the Brits are regularly miffed and confused when the EU does what they should expect: look out for its own interest. Here is yet more confirmation of how the UK is only waking up now to how serious its downside is:

If a delayed timetable were adopted at the summit in October it would be a serious blow to British business, which is warning ministers that an end-of-year deal on a transition period is essential to avoid a wave of companies decamping operations to the continent because of uncertainty

Despite all of this, the EU is not taking maximum advantage of the horrible position the UK has put itself in:

As a gesture to recognise progress, the EU is considering starting an internal “scoping” exercise on a transition deal, where the EU27 would prepare for talks with the UK at a later stage. While an advance of sorts, this falls well short of London’s hopes that talks would begin after the summit in October.

But in general, as our readers have pointed out, the EU has psychologically come to grips with Brexit, while the UK is still sleepwalking. And it needs to wake up, pronto. The worst-case scenario is now looking troublingly likely. The take below isn’t even so much a dire forecast as a linear extrapolation, since despite the appearance of two sides still talking, the stalemate as of last month was the functional equivalent of a breakdown:

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53 comments

  1. Anonymous2

    Thank you, Yves, for your usual insightful, sane analysis.

    For those new to the subject, welcome to the wacky world of British politics where most of the politicians lie most of the time, many of the people believe what they are told by them and a profoundly mendacious press, wave the Union flag, sing Rule Britannia, while Boris Johnson (who is busy doing Winston Churchill impressions) says ‘ let the lion roar’!

    Could anyone have made this stuff up?

    1. Eustache De Saint Pierre

      Laurel & Hardy perhaps, in another fine mess sort of way, but they were entertaining & known to be clowns – no prizes for guessing who would eventually bear the full brunt of this potential disaster & who many will blame for it.

        1. Eustache De Saint Pierre

          Perhaps a Pythonesque parallel could be seen in their film where a bunch of high table idiots set off on a fools quest & after various misadventures end up facing the same Europeans ( French in this case ) who wont give them their non-existent holy grail – perhaps the rabbit was named Boris.

  2. PlutoniumKun

    I think the UK press has a lot to answer for. Even leaving to one side the rabid Brexit obsessives in the Mail and Telegraph, there seems little interest in really spelling out the consequences to the public at large. It seems quite clear from opinion polling that if another vote was taken tomorrow Brexit would win comfortably. In many ways, the only hope for the UK is a panic of the sort that concentrates minds, but instead the UK looks like the frog sitting in a pan of slowly warming water.

    Col Smithers here reported a few days ago his conversations indicating that the New Year is the crunch date for businesses – if there is no progress, then there will be serious 2018 plans for exodus for a wide variety of businesses – subsequent news reports indicates that this is exactly the case. I don’t see any chance of significant movement before then – May simply doesn’t have her back covered to the extent that she can start making decisions.

    As an Irish person, I have to record that I’m pretty concerned about border issues. From what I can find out, the Irish government hasn’t done anything to organise border controls. To give an indication of what is needed, there are something like 400 roads crossing a border over 300 miles long (sometimes on very difficult terrain). There are something like 16,000 Irish police and the Irish army has around 15,000 soldiers, with some reserves. I don’t have any figures for the Customs service but its likely much smaller. In order to keep those roads opened, but controlled, there would have to be a massive recruitment, or an emergency level mobilisation to ensure the manpower to control the border (during the ‘Troubles’, approximately 20% of army and police were permanently on border control, with most ‘serious’ security done by the British Army). So far as I am aware, they haven’t even started planning for this.

    One thing I have noticed about Northern Irish politics is that there has been a very intense polarisation over the past year or so. All the middle ground political parties have been either destroyed or weakened to irrelevance. The DUP now have such a grip on Unionism that even the most moderate of middle class Unionists now reluctantly consider them to be their ‘leaders’. Its even more apparent on the nationalist side that there has been a very strong hardening of opinion. Many catholics in NI have been of the ‘well, I’d like a United Ireland, but the prospect of Unity is kind of scary, so lets just keep it aspirational’ side of things – i.e. so called ‘moderates’. But there has definitely been a growing consensus that living in a NI under a Conservative government that gives the DUP free reign is not sustainable. So the possibility of massive upheaval is very real – the question really is what form it could take. I honestly don’t know the answer to this, but its worrying – and more worrying that neither the London or Dublin governments really seem to have grasped the change in dynamics. There is a growing fear in the Irish mainstream political/business establishment that a future government with Sinn Fein as a minor partner (a very strong possibility) coinciding with Brexit could be highly destabilising – and this means they (i.e. the establishment and the media) will do everything in their power to prevent it happening, through fair means and foul.

    1. vlade

      My scenario (for Britain, no idea what will happen in NI):
      Q1 2018
      More and more companies, starting with banks will announce leaving schedules. A large number of people in good jobs (in South East, but elsewhere) get notices saying “your job is going to be here only for the next 12-18 months, we do not expect you to relocate”.

      Q2:
      Government will panic. BJ will announce that it’s all a play of the Remoaners, and the UK would be better off if the continent just sunk

      (an aside – I find it fascinating how BJ tries to play Churchill, who was one of the greatest British Europeans – for example, he was the first to call for, what he termed, “United States of Europe”, making plans and getting the UK war cabinet to approve UK and France merging into one country on the eve of the French capitulation, with a rather generous terms for French, given they were about to be overrun – including calling it FRANCO-British Union. De Gaulle supported this BTW, most of French cabinet didn’t, including Petain saying it’s better to be Nazi puppet than British dominion).

      May gets kicked out, but the hard brexiters (which at that time will likely idicate people with a large short-sterling position, or naive idealists) will cause a Tory civil war. Chaos ensues. Summer comes, and the UK finds out that the Europe went for a holiday, w/o it giving a toss what happens in the UK.

      Q3:
      UK will either announce immediate withdrawal from EU (short sterling positions won), or begs the EU to be given Norway option, or even maybe stay in the EU (depending on the public polls at the time). The companies will not stop the exodus though, although if the sterling dropped sufficiently by then, they may consider using it as a cheap-labour nearshoring destination.

      Q4 – Brexit is over, one way or another – because EU refused to play along (UK gave a Brexit, but the Europe didn’t come).

  3. paul

    I just think they are all in shock at the amount of work involved and have bravely decided to ignore it. They rose to escape responsibility, not assume it.

    Their reasons for involvement in politics are vanity and veniality, they’re like Territorial Army types who’ve just been airlifted to Afghanistan.

    “We never signed up for all this!”

    Getting into the already overcrowded old folks home next door is most likely to be at the front of their minds right now.

    These are the flag carriers of the those who wanted de-industrialisation,de-unionisation and consider the NHS to be a 60 year old mistake.

    They know it’s going to be disaster for others, but they just don’t fucking care.

  4. Jim McCarthy

    EU best strategy is to let UK muck around for another 6 to 12 months giving companies time to build up a head of steam on relocating to the Continent and then graciously granting the UK’s request for a two year extension to give the UK time to deal with the impact of Brexit.

  5. ratefink

    Thank you again Yves and commentariat, for the clear headed and near single-handed realistic appraisals of these difficult events. From the Greek immiseration, the US presidential race, through to Brexit and the unfolding disaster in Spain, I feel you keep me grounded and looking at precisely those things which I so much wish were otherwise. Thoughtful analysis and realistic reporting, which over and over again pull me away from my own biases, along with your willingness to stand up to so many pressures and oceans of misinformation make this site alone nearly worth the price of the web.

    1. marku52

      Totally agreed, This site is an invaluable source of information, from commenters on the ground as well.

    2. Yves Smith Post author

      Particularly on Brexit, the commentariat has been of enormous help. Even though we can see the broad outlines of how bad this is shaping up to be by reading the press for events, not spin, there is a lot of additional detail the readers have supplied either by knowing insiders, knowing technical details beyond our ken that are important, and by giving us details that have been reported in the less captured corners of the UK media that we’ve missed or just can’t keep on top of.

  6. Colonel Smithers

    Thank you to Yves and readers, especially PK.

    I will have updates next week and in a fortnight, including invitation details for two Brexit related events in the City that I am attending in late October.

    Must dash, so I will add next week.

  7. TroyMcClure

    Even the writers of “The Thick of It” wouldn’t dare write such a zany script as this.

    Far too on the nose.

    Could the UK become just a larger, colder Cayman Islands money laundering outpost in the coming years ?

    1. Anonymous2

      A new Cayman? Could be.

      More than one commentator has effectively said that the English have gone insane, need a slap to start bringing them back to reality (I am Scottish so am well placed to observe).

      What could happen? Worst case scenario could be major disruption to food supplies, airplane flights, British exports collapsing. All of these things need agreement with neighbours if they are to work properly. That would certainly amount to a good hard slap. Might they threaten war in retaliation? Who knows? When people have lost their sanity anything is possible.

      1. grumpy realist

        Have just discovered this site so haven’t read all the back comments on Brexit, but has anyone pointed out the following: One very big reason for Singapore’s usefulness to the world (and why it is such a magnet in the Far East) is that it’s one of the very few countries in the world (and about the only first-world country) which has a taxation treaty with Taiwan. Which means that if you, as a foreigner, want to invest in Taiwan, the most convenient way is to go in through a company out of Singapore.

        So all U.K. plans of recreating Singapore’s success off the coast of Europe are already leaving out one jolly big factor.

        1. Yves Smith Post author

          That isn’t even remotely an explanation for Singapore’s success. First, Singapore’s success is based on the fact that Lee Kwan Yew recognized when it became independent that it needed what amounted to an industrial strategy. He decided that the way Singapore could succeed was by making it the best emerging economy in which to do business. He focused on having a highly educated population and havinn clean government. Among other things, Singapore has very tough internal audit and pays its top bureaucrats on the same level as top private sector professionals (think partners at top law firms) so as to greatly reduce the incentives to cheat.

          Singapore also is one of the biggest ports in the world, so it has geography in its favor.

          And sorry to disabuse you, but the biggest employer in Singapore is not professional services, which is what you’d expect if your little story about taxes were true. Financial and insurance services employs only 5.7% of the population, if you look at Singapore’s own stats. Legal, accounting, and management services is another 3.3%.

          Moreover, did you notice that Singapore has a population of only 5.7 million while the UK has a population of 65 million? And did you miss that the EU already has Luxembourg as its little tax haven with very highly skilled professionals? And did you also miss that EU competition minister Verstager is going around dunning multinational doing business in the US for ginormous amounts for taxes they tried to evade due to clever tax schemes?

  8. George Phillies

    “EU leaders made clear what the order of negotiations would be.” It seemed to me that they proposed what the shape of the table should be, and assumed that the other side had to agree. Instead, we are in the current situation in which the UK differs, and is as inflexible as the EU. There may then well be a hard Brexit, the UK in that case would give the EU nothing, and perhaps the EU will note the Swedish claim that the UK is not a WTO member and must negotiate to get in to the WTO. In that case, the EU cannot complain to the WTO about what the UK is doing to the EU, because the UK is not a member. The situation could become unfortunate very quickly.

    While it is true that the EU Treaty says the UK is not as an EU member allowed to negotiate other trade agreements on its own, it is not obvious to me that the Europhiles in writing this rules actually thought about what this meant in terms of exit negotiations. However,the Germans are good at executing written rules. If the UK were instead negotiating with Japan matters in some ways would be simpler ‘There is a contract, but circumstances have changes.’

    1. Yves Smith Post author

      No, you miss several issues.

      First is that under the treaties that the UK entered into, it cannot negotiate trade deals as an independent country until it is out of the EU. The EU is completely within its legal rights not to consider any discussion of trade until Brexit is over. The EU is thus making an accommodation to the UK which it has no obligation to make in being willing to discuss anything at all re trade prior to the date the UK is out of the EU.

      Second is that the UK needs a deal. The EU does not. The timetable is also very much against the UK. That means the UK is in no position to make demands. Arguing over the shape of the table means there is even less time to discuss substance. The less time to discuss substance, the higher the odds that the UK crashes out of the EU with no deal.

      Third is the UK clearly knows that anything the EU does requires the consent of all 27 member states. The EU states agreed on the negotiating parameters at the end of May. The EU was clear about its intended order of battle. May was too busy with her stupid election ploy to even pay attention, much the less try to offer concessions to get them to do something different (like commit privately to a bare minimum exit tab as opposed to screeching that she’d pay nothing, which is na ga happen, as she’s had to concede). Then months after (in September!) they wake up and start making a stink. This is incompetent as well as bad faith.

      1. George Phillies

        And what is the penalty if the UK breaks the treaty? Hard Brexit in less than two years? That seems likely to happen anyhow.

        1. PlutoniumKun

          Its not a case of breaking the Treaty. The UK is voluntarily, using legal means, exiting an existing treaty. The problem comes with the UK’s weird assumption that everyone else will be happy to sign new treaties on more favourable terms.

          Hard Brexit seems baked in. The question is whether the UK will have good enough relations with its neighbours to mitigate the damage. The members states of the EU are under no legal or ethical obligation to look after the interest of non-EU citizens or other countries. The remaining EU states will solely look after their own interests, individually and collectively.

          1. optout

            “The members states of the EU are under no legal or ethical obligation to look after the interest of non-EU citizens or other countries.”

            and vice vera… that’s 3 mln+ who become expendable and need to find work in Poland/Bulgaria/France.

            1. vlade

              Way way fewer than 3m – if they want – as a majority of them qualify for whatever it is that would allow them (as a second class people, sure), stay in the UK after March 2019.

              The situation in this is actually worse for the UK (again), because majority of the UK citizens in EU are retirees avoiding the UK weather, health and social services. Sometimes rather free-loading on those (as they may not have ever registered for long-term residency in Spain for example).

              Who may well have to move back, even if they could in theory stay, but the crash in pound may make it untenable (that and the fact that while living in the UK their pension is adjusted annually, but not when getting the pension overseas IIRC).

            2. JTFaraday

              This is only a problem to the extent the EU limits its own power over itself. And even if it does, this is not a threat. A drop in the bucket and big shrug.

  9. Frenchguy

    Not sure if someone already posted that but this is an interesting piece:

    How I learnt to loathe England

    A Dutchman reflects on what he’s learnt by living in Britain for the last six years—it isn’t pretty

    https://www.prospectmagazine.co.uk/magazine/how-i-learnt-to-loathe-england

    His point in short, british culture is broken and, in particular, they need to fix their class system before being ever allowed back in the EU. One of the best excerpts:

    There is another, final, side to this class system à l’Anglaise. It seems to breed a perspective on the world that is zero-sum. Your class system is a form of ranking. For one to go up, another must go down. Perhaps this is why sports are such an obsession. There, too, only one can win. It was striking for this Dutchman to see an innocuous school dance be concluded with the designation of a winner. The result: all the other eight-year-olds went home slightly or clearly annoyed for not having won. Why not just let them dance? There seems to be in English culture—with its adversarial courtrooms, and its parliamentary front benches two swords’ length apart—an almost reflexive need to compete, to conclude a process by declaring a winner. The expectation that English children will learn to put a brave face on the hurt of losing doubtless deepens the scars.

    The English consequently struggle to understand the “one plus one is three” concept of co-operation so fundamental to the EU. The word “compromise” has an almost negative ring in English popular culture; the idea gets dismissed as “fudge,” rather than a worthwhile outcome that can help everyone save face.

    1. Eustache De Saint Pierre

      Yes the class system is & always has been a big problem of which accents play a part, which I perhaps mistakenly believe is not as much the case elsewhere.

      I do not recognise the school dance situation, but my daughter went to school in the eighties, but I suspect as Adam Curtis described, that this could possibly be as a result of New Labour attaching competitive targets to just about everything. A process that caused little good as many found ways to game it, especially in health care & policing. As usual it seems we are left with the negative results of a policy that badly failed in it’s attempt to improve.

    2. jochen

      I lived in the US for six years. And that observation is what I am saying about our American friends. Everything seems to be a competition.

      1. Tyronius

        This is even more true in America nowadays than ever before, and there’s a darker undercurrent of a decreasing level of compassion for ‘losers’. There is an attitude that people deserve their place on the economic ladder, that one’s self worth and social stays is ever more tied to their economic position.

        All this in an ever more toxic atmosphere of dramatically increasingly wealth and income inequality.

        Small wonder America leads the world in mass shooting events.

    3. RBHoughton

      I am greatly concerned by the abuse of the adversarial system. Its antecedents are impeccable – a means of discovering truth by verbal confrontation just as we do in debating societies but it got waylaid by the money and in the last few decades the adversarial system has become a thing in itself and not a means of reaching justice.

      Formerly lawyers were upstanding men concerned for their reputations but today they are economic actors accumulating wealth before honor. Their MO is the discovery process whereby the Prosecution must reveal its case to the Defense. Venal lawyers use this to know what they are up against and then shape their defense accordingly. The defendant’s statement is unnecessary indeed unwanted as the lawyer will create the Defense himself.

      Its not surprising that so many regulators strike plea bargains. Legal representatives are beyond trust.

  10. rtah100

    The whole management of Brexit looks shambolic in terms of all UK parties’ internal politics. It is hard to tell if the civil service itself is managing the detail and process any better. However, I am sceptical of Yves’s analysis of who is winning.

    1) Neither side in any negotiation should show any weakness or doubt. The leaks and opinion pieces are all noise.
    2) the City is not at risk, nobody wants it operationally. The Eurozone governments know that their national banks are non sovereign and yet the backstop of any GSIFI would be with them, not the ECB directly (except through open market operation fakery), exposing them to their own potential Greek tragedies. Relocating the rest of the economy is also not going to happen.
    3) the horse trading has barely begun. The 27 can change their minds in an instant and the Plan B is already being prepared, however it is being sold.

    What is baffling is the UK not making stronger hard Brexit preparations to show it means business and has minimised the costs. The only way to negotiate in zero sum situations is to need to settle less than the other guy.

    1. Anonymous2

      Hard Brexit preparations would require substantial infrastructure expenditure, training of e.g. food inspectors for which there is insufficient time, but I agree it is strange that there appears to be so little forward thinking going on.

    2. Yves Smith Post author

      With all due respect, you are wrong about the City. The ECB ultimately backstops Euro transactions and the Bank of England, ones with in the pound. Banks like Paribas trade dollars all over the world but get backstopped by the Fed by having a New York branch, which gives them access to Fedwire. So the Europeans have only upside from forcing more activities now in London to move to the Continent.

      The ECB and France have been trying to force more infrastructure to the Continent for years. Did you miss the suit over requiring Euro derivatives clearing to take place in Eurozone countries? The reason that lost was the ECJ ruled that the EU could not discriminate against an EU member. So there is no bar to the ECB implementing its desired rule upon Brexit.

      And accordingly, as of the morning after the Brexit date, financial institutions with London operations started investigating getting new licenses in the EU and started applying almost immediately. Some firms have already announced job moves from London, or did you miss that too?

      Now there is a certain amount of inertia, and certain activities where London was dominant before there was a Eurozone like FX trading are likely to stay there. But many of the activities that are vulnerable are ones done with highly paid people, so the economic damage will be disproportionate to the number of jobs moved. And do not forget that support professions, like lawyers, accountants, and IT people, will shift accordingly.

  11. Strategist

    A couple of points on Yves’ piece, within a general context of real admiration for the clarity and foresight consistently shown by NC. (“the outcome was entirely predictable, as shown by the fact that this humble blog predicted it” Too modest!)

    My first point is re Yves’s

    “These staffers may believe, correctly, that they are getting nowhere in their current setting and might actually be able to do some good for the UK on the other side of the table.”

    in the context of

    “Olly Robbins, who left his job as head of the Department for Exiting the EU last month to set up a rival “Europe Unit” in Downing Street, is openly trying to poach his former colleagues from David Davis, the Brexit secretary”

    This reads like an error: it is not about Brexit negotiators being poached to join the other side of the table in the sense of the European Commission’s side of the table; this is an internal British government thing, in which the Prime Minister’s office at 10 Downing Street is implementing a process of taking direct control over the Brexit process, and emasculating David Davis and his DExEU Brexit department.

    The open warfare in the British Tory Government cabinet is, I assume – though few report it in particularly clear terms – between those who still believe “no deal is better than a bad deal” and those who fully realise that “no deal” is a very messy place indeed. I personally think that Theresa May pulled what could reasonably have been thought to be a clever stroke back in 2016 by putting David Davis in charge of Brexit: he looked to be (by the standards of the Brexit loonies) a principled but open-minded guy, and only he could talk down his own side should it transpire that no acceptable Brexit deal was actually negotiable and Brexit needed to be cancelled. (In exactly the same way that “only Nixon could go to China”, or “only Ian Paisley could persuade the protestants to accept the Good Friday agreement”.) But one way or another it appears that they have decided Davis can’t or won’t do the job and so are taking direct control from 10 Downing Street.

    It seems to me Theresa May’s Florence speech was about accepting that “no deal is better than a bad deal” is not viable, conceding that the British have no cards and therefore that capitulation is the order of the day. The No10 Europe Unit will now organise the actual capitulation, not DExEU. “Brexit” will consist of Britain losing its presence and vote in the European institutions but continuing to pay a lot for access to the single market and accepting all the EU regulations and obligations with respect to trade, fishing, environment etc. The facesaver is “transitional arrangements”, currently supposedly time limited to 2 years as a compromise thrashed out in the Tory Cabinet to keep it together, but in reality something which will become open-ended until such point as Britain has a change of heart and applies to rejoin.

    My second point is re

    “The EU’s chief negotiator, Michel Barnier, made a good faith effort to get a waiver for the UK”

    in the context of the quoted

    “Michel Barnier, the EU’s chief negotiator, outlined the potential benefits of opening talks on a transition deal at the meeting… But this option was firmly rejected by a group of countries led by Germany and France, which took a stricter view on the sequence of negotiations.”

    This might be true, but in the bigger picture I am more sceptical. Barnier’s job is to administer the punishment beating that the UK has so foolishly asked for. I am sure that the Commission, France and Germany have all decided that it is in their short and long term interests to give Britain a very hard time indeed. With that big decision taken, all the rest is theatre. That is the lesson I take from Yanis Varoufakis’s incredibly good book “Adults in the Room: my battle with Europe’s deep establishment”. When you have got no cards you get a lesson in power politics.

    I wonder if it is more a case of Barnier saying, I have now won, let’s now sort out the terms of the capitulation, but the French and Germans saying, no let’s enjoy this delicious revenge for a little longer yet. (And maybe even ratchet up the punishment? Look out for a suddenly bigger exit “settling the accounts” demand?)

    The Brits have been so unbelievably stupid and obnoxious it is hard to sympathise with us, sure, I fully agree. But it would be a mistake to imagine the Commission, or Merkel, or Macron as good guys trying to do a deal in good faith. Part of it is about ensuring that nobody else dares to try leaving, and part of it is about removing a rival from the game. What is the downside? Sure, it will cost them some export revenues, but Germany has deep pockets. There are sound economic and geopolitical reasons for making an investment in crippling Britain. They have good reason to fear a buoyant Brexit Britain standing off shore like some pirate ship, undermining the European economic model of collecting taxes and running a decent welfare state.

    And Britain has been such a pain in the arse over the years to the continental view of what the EU can be that we should not underestimate how much giving us a beating as we lie prone due to our spectacular unforced error appeals to them as a purely pleasurable revenge.

    1. Yves Smith Post author

      I stand corrected re that part of the article re the poaching and will amend it. That was a big error. Apologies.

      My misreading was due to a bad case of confirmation bias, in that NC readers have said in comments (and in more detail privately) that the EU has been recruiting ex and current UK officials and staffers with experience in trade negotiations. The sources have been gobsmacked, particularly since in one case, a spectacularly qualified individual tried repeatedly to get hired by the UK and got no interest despite it being widely know that the UK is desperately understaffed, and was recruited by the EU.

      Re Barnier, I’ve been involved in negotiations a great deal. Barnier has been a highly respected EU negotiator for many years. I see his conduct as consistent with what you’d expect from a professional negotaitor.

      One thing that happens in negotiations is that the negotiator is or becomes as loyal to getting a deal done as he is to his principal. Indeed, if you don’t understand that dynamic as as principal it can really bite you.

      One of the reasons this dual function matters is that principals inevitably want too much even when they are in the power position. So a key role of the negotiator is to make them accept less than they want. The cliche in dealmaking is a good deal is one where both sides feel bruised.

      Barnier thus needs to preserve the best relationship he can with the UK side under the circumstances even with the Brits looking like they are doing their best to poison the well.

      That means making a solid case for demands they have that are reasonable. This UK demand isn’t nuts in substance even though they went about it all wrong (as in this is something they should have explored with the EU before triggering Article 50).

      Moreover, on a different level Barnier knows his principal would have to do a lot of wrangling on its side and take a lot of procedural steps to indulge the UK (as in they’d need to change his negotiating parameters formally). Given the very high bar for getting the EU to adopt the UK position, he has very little to lose by acting as a fair broker of the UK position. It demonstrates that he has made a good faith effort while knowing full well that the die is pretty much cast and the odds of a course change now are low.

      1. PlutoniumKun

        Thanks for clarifying that, I was puzzled by your first two paragraphs, I assumed there was something there I didn’t understand. It is hard to keep track of all the multiple sub-plots!

    2. Anonymous2

      I agree it could play out as you suggest, Strategist, but there still remains the possibility it goes the other way. I had a conversation with a former senior Tory a few days ago and he was clear there is still a power struggle going on in the party between the pragmatists and the Hard Brexiteers. The outcome of that struggle will be crucial.

      One key moment coming shortly IMO will be the decision point on the financial settlement. If the amount is capable of being portrayed as extortionate (and public opinion does not realise that in these sorts of situations, where potentially the UK could lose as much as £200bn. p.a., £10bn is small change), I fully expect someone in the Tory party to see if they can bring May down on the grounds that she is allowing the EU to bully her into paying over the odds. So IMO there is much to play for and it could go either way, depending on how the war inside the Tory party plays out.

      It is if course a nightmare for the EU to know whether May is going to be around to deliver on anything she promises. Someone on the inside I believe described it as trying to negotiate with a jelly.

      1. PlutoniumKun

        From an outside perspective, I simply don’t see how there can be any clear outcome to the struggle between Brexiteers and pragmatists. There doesn’t to me seem to be any common ground between them. A strong leader could simply declare one side a winner and relegate the losers to the back benches, but May simply doesn’t have that strength.

        In todays Observer, Andrew Rawnsley suggests the best outcome for the negotiations would be for Davis to oust May. He suggests he is the only one with sufficient Brexiteer bona fides and pragmatism to persuade the ideologues that compromise is necessary. In theory, he is correct, but I doubt Davis is smart and subtle enough to be able to do this, and I get the impression that the Brexiteers are now utterly hell bent on zero compromise and so can’t be stopped from dragging the whole country over the bring with them.

        1. Strategist

          Plutonium said

          I simply don’t see how there can be any clear outcome to the struggle between Brexiteers and pragmatists

          I think this is right. The Tory civil war cannot be resolved because the party is split down the middle and whichever side wins can only do so narrowly and neither side can form a Government alone. The hard brexiteers are mobilising against the “fake Brexit” of a soft Brexit with infinite transition period, and as the details of what this soft Brexit means become clear (being entirely subject to the EU without any say in the EU), its pointlessness will become apparent.
          But the pragmatists I believe have now understood what hard Brexit entails and will now neither ever accept it, nor concede control to the hard Brexiters to go ahead and do it.
          So surely proffering the voters a second referendum and the chance to revoke the Article 50 notification and abandon Brexit will become an attractive option as a way out of the stalemate.
          A nice outcome would be a commitment to seriously to address the problems of gross inequality that caused the original referendum vote for Brexit, following a second referendum decision to stay in. In these circumstances, the die-hard Brexiteers would soon shrink back to being an eccentric fringe with about 25% support, and a clear outcome to the struggle will have been found.

          1. PlutoniumKun

            I would agree with you, although from the outsiders perspective of the Tory Party, I think its not so much a 50:50 split, as more a party that has become at its grassroots overwhelmingly become pro Brexit, with a relatively small but powerful core at the top who are pragmatic. As the Tory party membership shrinks, it seems to have become dominated at grassroots level by fairly elderly deep English conservatives. The moderates are found only on the fringes (e.g. the Scottish Conservatives) and an increasingly shrinking core of pragmatic senior statemen/women.

            In these circumstances, I think the pragmatists can only win in the event of a really major economic blow that scares some sense into the Brexiteers. I suspect that it would be too late by the time that happens, and they’ll blame Europe for what happens anyway.

            As you suggest, the sensible face saving solution would be to put together as close as possible a deal with Europe and put it to a referendum, hoping that it would be reversed. I really don’t see though how that can happen unless there are very radical political changes over the next 12 months.

            On the issue of inequality, one of the interesting things thats been ignored I think is that the May and many of the Tory Party leadership have been making surprisingly left wing noises over the past 12 months – there were things in the Conservative manifesto for the last election that would have been unthinkable just a couple of years ago. Its all been overshadowed of course by Brexit but the leftward shift in the Overton Window has been very apparent in the UK. To some extent, this may actually feed the fanaticism of the right wing Brexiteers, some of them may very well think that a hard Brexit is the only hope for them to make their neo-feudal libertarian fantasies come true.

  12. maff

    It is important to remember, in the fog of this economic analysis, that Brexit was essentially a political decision. Most of the people I know who voted leave knew it would involve a cost and knew it was going to be difficult, but they wanted it anyway. Most revolutionary political changes involve a difficult transient to a new equilibrium. Whats rarely mentioned is that, as a net importer from Europe, the UK would benefit under a WTO regime, indeed it could set up a fund to completely reimburse the tariffs paid by all exporters and still come out ahead.

    Roll on a hard Brexit, its the only way to get a real Brexit.

    1. Yves Smith Post author

      With all due respect, I sincerely doubt anyone of the chipper Brexiters is at all prepared to take the dislocation that will happen if the UK experiences a disorderly Brexit. It’s like saying you are going to chop off a leg or an arm, when you’ve been misled to think that the damage will be more like a bone break, a few months in a sling or on crutches, maybe some rehab, and you will be back to normal.

      And frankly, your comments suggest you have no clue. There is no “default to the WTO,” as had widely been misreported in the UK press. The UK will have to negotiate a deal with the WTO and the WTO has made clear that it has a queue and the UK is not going to get to jump the line. That process takes years, and I don’t mean two or four. Some countries may allow the UK to trade on WTO terms, but they will do that only if it is advantageous to them, and they may (as in probably will) extend WTO terms on goods where it suits them.

      The UK is already running a trade deficit, or did you miss that? It’s going to get worse as major manufacturers like transportation parts makers shift production out of the UK. The City is going to take a big hit. And a cheap pound does not give you advantage if you don’t have goods people want to buy or where the informal barriers (the nuisance of a hard border v. trading within the EU) offsets the cost advantage. The US was unable to take advantage of a higher yen (in the 1980s) in Japan due to informal trade barriers. Tourism will benefit, but pray tell, what do you fantasize that the UK will be able to export more of when manufacturers with extended supply chains, starting with automakers, have already made clear they will make much less in the UK if it is not in the EU?

      The UK is going to suffer a large, permanent decline in living standards. It will also experience a brain drain. Maybe it can repurpose itself after all the dust settles as a cheap retirement spot like Ecuador.

      1. vlade

        what, with the horrendous weather, atrocious health care (which is only going yo get worse) and social care for elderly that is beyond breaking point before the uk dumps all the eu citizens on which it alrady relies quite a bit?

        Not to mention all those uk pensioners woh moved out of the uk to avoid all of the above having to move back (and all that implies)

        nah, cheap call centres for us it is, as most americans will likely respond better to the bbc accent than indian one

      2. charlesv

        “With all due respect, I sincerely doubt anyone of the chipper Brexiters is at all prepared to take the dislocation that will happen if the UK experiences a disorderly Brexit.” Having spoken to a number of brexit voting people I think the majority would still believe the price is worth paying. Sure, I think they also think they underestimate the dislocation but roll forward 5, 10 or 15 years and I think the same people will still say they were right to vote leave.

        Given the above, regrettable as it is, I believe this process is now irreversible politically. I am not sure this is fully accepted by the 27 or their electorates.

        I am also unclear what you actually expect any UK government to do now. We are going to given a punishment beating whatever we do – stay in, hard or soft brexit and however sensibly we approach the negotiations. The EU is about France and Germany, always have been and always will be – their interests and the desire for European integration trumps ours.

        They were quite willing to administer a very severe punishment beating when we were trying to be good europeans and stay in the ERM, they will do the same now. As I think you acknowledge they will do this even if it means they lose some exports, or have to pay more into the EU budget or damage a security relationship with a key ally. With friends like this……

        1. Yves Smith Post author

          I think you have this backwards. The other 27 countries have accepted that Brexit is on. In trading terms, they have recognized the losses and are trying to figure out how to benefit from what is on the whole a not positive situation. This isn’t even news to them. The UK is the one that is sleepwalking into it.

          You don’t seem to appreciate that the basic premise of Brexit from the UK perspective is false. The UK is not going to regain national sovereignity. The UK is a small open economy. It sells goods and services to other countries. That means complying with their laws regarding products and services. While it was in the EU, it could do a lot to influence those laws. Now it won’t be able to.

          Moreover, the proponents of Brexit flat out lied about immigration. There are more non-EU immigrants than EU immigrants. The press as well as readers have reported that EU migrants have already started leaving and are being replaced by non-EU immigrants.

          EU immigrants are essential to the functioning of the NHS, accounting for 10% of the doctors. They are not going to be so easy to replace. So the UK will have to give waivers for them or face further cuts in service levels.

          UKIP and the Tories supported Brexit to further Thatcherism. The EU regs they wanted to escape were the ones most Brits support: labor and environmental standards.

          The only way for the UK to really regain national sovereignity is to become a near autarky. That basically means retreating to a vastly lower standard of living. If you think British citizens are going to celebrate paying a lot more for critical goods like food and fuel, even worse infrastructure due to a collapse in tax revenues, and falling housing prices in many parts of the country (unless foreigners snap them up, which will mean even more expensive rentals as wages are falling in inflation-adjusted terms) you are smoking something very strong. And that isn’t a 10 year project, it’s at least a generation, and even then, with the full backing of the state, something to which the Tories are absolutely allergic. And even though Labour is more willing, I don’t see them as very skilled in what amounts to industrial strategy either.

          1. Anonymous2

            Charlesv

            It is worth remembering that when the UK joined the ERM it failed to consult the other EU members in advance which was a clear breach of procedure. So even when being ‘good Europeans’ the UK was being more than a little difficult. The Bundesbank would have insisted on a lower rate for the pound quite rightly. I believe it may have been Thatcher who demanded the higher rate which subsequently was indefensible. Was she seeking to sabotage the whole idea?

            1. CharlesV

              Don’t think that’s correct, have you got a link to some evidence of that? We shadowed it for some time before we joined but then joined properly.

              Think black Wednesday has some interesting parallels with where we are at today: weak and divided Conservative government with few friends in Europe. I am sure that then other EU member states would have welcomed the prospect of dealing with the more euro friendly labour opposition and will have shed few tears when the this happened.

              The thing is 20 years after welcoming pro-EU Tony Blair the UK is leaving the EU and, if we take at face value what our fellow EU member states say, this wasn’t what they wanted. So heaven knows where we’d be 20 years after Corbyn becomes pm, quite possibly somewhere where no one in Europe wants. I hope that this will give a few over the channel pause for thought.

          2. charlesV

            You don’t need to make the case to me as to why brexit is a bad idea, I didn’t vote for it and wish is wasn’t happening. Unfortunately my side lost.

            My experience during the campaign was that the average brexit supporter is smoking something very strong and my experience post the referendum is that they still are.

            My question still stands, given that a lot of people in the UK are smoking that strong stuff, what are you actually expecting the UK government to do now.

            I appreciate you analysis is we are essentially stuffed but I think it would be good to move the debate on from “the Brits are dumb, arrogant, don’t understand how a negotiation works, are making a massive mistake etc…” – let’s take that as a given – to what any UK government could do given their weak hand vis a vis the EU and assuming that politically we are definitely going to leave (which I think we are). What would an industrial strategy look like etc…

            I also think there is an interesting point as to what happens to the EU without us. The balance of the organisation will be different, will lead to greater integration more quickly? Presumably so. Will this be universally popular across Europe? I suspect not. What will be the political ramifications of this over the next generation? No idea.

            So it would be better if we could move on from the repeat examination of the imminent car crash, your analysis is clear and understood.

            1. PlutoniumKun

              I think that strategizing how a ‘good’ Brexit could work out is a somewhat pointless task. A key part of Yves argument – and I think she is correct in this – is that the UK has such a weak hand (and worse still, is oblivious to how weak its hand is) that whichever type of ‘Brexit’ occurs, of the soft or hard variety – it will be largely dictated by Europe, and later by the US and other large trading nations as they take advantage of the UK’s weakness to impose unfavourable bilateral treaties on the UK. Without knowing the form these agreements will take, its difficult to make any sensible predictions or analyses.

              The only medium term hope of the UK is that the EU, whether out of ethical concern, or that it is distracted by other more pressing issues, decides to give the UK a moderately favourable transitional deal. But even this will involve huge uncertainties. I don’t think you can even begin to discuss how the UK goes forward until everyone knows the shape the deals will take, and I’m not sure anyone knows this.

              The optimistic view you can take is that the Tories self destruct over this, and Corbyn is able to use the chaos and freedom to construct a fairer and more equitable (if somewhat poorer) Britain and put in place a proper long term industrial strategy. This I think is quite possibly his dream. But even a dying Tory establishment will do anything – and I really mean anything – to stop this happening.

              1. CharlesV

                So essentially, I think what you are saying is this ends badly whatever happens so therefore do whatever you can to get a lengthy transitional deal to push out the date when that happens? To me that seems pointless as it just delays the point of reckoning, best we get on and face the music and deal with it – sooner we do that the sooner some better long term decisions can be made.

                The long term planning is an interesting one. IMHO EU membership as well as poor political judgments by successive UK governments have played their part in us failing to do this. For instance, I find it odd that having access to EU nationals to staff the NHS is cited as a positive for EU membership. To me it’s a sign that our education system is failing to do what it should and/or the NHS is not able to innovate to improve its productivity. Hopefully both these things will change now that the comfort blanket of easy EU migration is taken away (I suspect it won’t and that we will simply increase the number of nurses we take from outside the EU, Asia in particular).

                I don’t think Corbyn will be more inclined to put in place any long term strategy than the tories. His focus appears to be focused on defeating them and their establishment, not on anything constructive.

                1. Yves Smith Post author

                  There are significant differences between bad and less bad. A disorderly Brexit may very well mean food shortages. Go read the post just launched on the way Customs will seize up in the event of a hard Brexit in March 2019. And that is hardly the only pressing problem given the utter lack of any preparation by the Government. It would take war-level effort starting as of triggering Article 50 to avert the worst downside effects. The napkin-doodle level efforts May’s officials are starting to talk up now aren’t in the same universe as what is required.

              2. vlade

                That’s not entirely true. Either side can force hard brexit (UK as well as EU). Anything else is on EU’s sufferance though.

                UK’s future of course, is almost entirely out of UK’s hands as you say. It’s funny. For centuries UK used to dictate to the countries, and some still think it can. They are in for a rude awakening.

                Re the Corbyn dream – it’s likely his dream. But it’s still NOT RoTW independent. Say industrial policy can be penalised heavily under WTO – much more so than under EU rules, which I don’t believe Corbyn undestrands. The problem of all current UK politicians is that they are way too much UK centric, and don’t understand the new role of the UK in the world – which is going to be much smaller, and much less important.

                Until they understand that they are not fully – often even at all – in charge of their own destiny anymore (which is no shame – very very few our, either as countries or individuals), it’s not going to get better.

  13. JTFaraday

    The neoliberals in Britain apparently think trade is primary whereas the EU is making citizenship primary, or more specifically, being a member of the collective, (or not). The interesting thing about positing that the Anglo-American leadership is “not agreement capable” is that trade, which is apparently all important, is supposed to be all about contracts and agreements. Economic liberals are supposed to be big on contracts, it’s the only legitimate form of governance.

    Citizenship or membership in the collective doesn’t necessarily revolve around, or devolve into depending on your perspective, such cut and dried agreements. Citizenship is messy because people are messy. Unless you really color outside the legal lines, putting into question your membership in the social and political collective, you still get your vote. Contractual relationships aren’t supposed to be messy. That’s why they’re so highly codified.

    Some Brits seem to think that they’re leaving the bureaucracy. But it could be they just jumped out of the frying pan and into the fire, even at a theoretical** level from 10000 feet. As for this:

    “Worse, way too many people in the UK, and most important, its political leaders and its press barons, think that there is economic upside that will just fall in their laps if Glorious Brexit rolls forward, and they are doing nothing even remotely approaching the level of war-level industrial planning and operational preparation to keep Brexit from being chaotic and extremely damaging.”

    This only makes sense if we consider that people have been living off legacy systems for a couple decades now, some of them predating on them in the most morally objectionable ways. They’re like the bureaucracy hating permanent students on academic faculties who all have their diverse little hobbies and are only unified in their belief in magic campus, which pops up 15 minutes before their personal arrival and disappears 15 minutes after they leave. This is what makes them a class, and as such it’s not an entirely capable one. So it’s no surprise they lost the war on campus with the boards and the administration, and lost the campus in the war.

    **Of course, Anglo-Americans are said not to think on a theoretical level, at least not in the ways French and Germans have. They speak in broad empty terms like “liberty” that no one could possibly object to, and then attempt to fill in the empty blanks with the deployment of power. They probably don’t even understand “the shape of the negotiating table.” And like, why is there even a table? Meetings bad. Unproductive.

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