May to Plead With Merkel as Brexit Deadlocks Domestically Too; New Data Shows UK Lacks Foreign Reserves, Meaning Even More Vulnerable to Brexit

Theresa May is attempting to keep the sinking ship HMS Brexit afloat. She is running to Brussels to implore Angela Merkel to give the UK a break and endorse the UK position in a pending EU decision this week, that of having Brexit discussions start addressing trade, or more generally, the “future relationship” with Europe.

The emergency session looks and is desperate. The odds of Merkel (and Macron, and the majority of nations that back the German-French position) relenting are close to nil. The most May is likely to get is lip service from Merkel that endorses the plan of the EU lead negotiator Michel Barnier, which is to allow a bit of preliminary planning to take place as the next decision date for possibly approving allowing trade discussions to proceed moves back to December.

Merkel is a famously cautious politician. She has been completely consistent: her priority is preserving the rest of the EU. The UK is not going to get any special treatment. Any deal it gets must fit in the parameters of the arrangements it has with other neighbors that have close economic relations with the EU. She has the full backing of German business. She has no reason to relent.

By contrast, the UK has been irresponsible, unrealistic, and high handed since the date of the Brexit vote. The underlying assumption of the Brexiteers, that the EU needed the UK and would bend to its wishes, has proven to be false. Yes, countries that were expected to be “soft” on trade with the UK, such as Denmark and some Eastern European countries, may indeed be lobbying for the trade talks to proceed. Even if true, that’s not going to make any difference as far as the state of play is concerned. How could anyone have missed that they’d been deadlocked for not just one session, but two, and that the EU response was widely anticipated?

Even the Financial Times’ comment section, which usually has a decent representation of Brexit stalwarts, had close to universal derision for May’s late effort to get the negotiations back on track. A couple of the more measured remarks:


The UK is again mistaken about how the EU works. The Telegraph or Daily Mail are not a good guide, Merkel does not control the EU. And no, the Nordic countries and the Netherlands are in agreement with the rest of the EU, if the UK wants Brexit it is up to the UK to come up with what it wants and how to ensure problems are solved. The UK will have to accept that it will have to pay and give a lot to make it work. There will be no cake nor any eating of cake for the UK.

Nigel Farage wrecked the UK

As much as I love the UK I am sorry I have to say the EU does not really need a deal with the UK.  The UK has been written off a long time ago. It is next to impossible to find anything about the UK or Brexit in the continental news.

It is also a bit bizarre that the UK, who has also helped build up the EU wants to leave but still retain all the benefits. 

I think the UK can go whistle., nobody cares the EU will do better without the UK and its old empire fanatics.

The reason for the contempt is that even casual viewers who get an overdose of UK press baron Brexit boosterism can see May’s Hail Mary pass is an effort to shift blame to the EU when the UK bears responsibility for the mess it is in. As we and many others have pointed out, the Tory party is so badly divided that even if it were to make commitments, they aren’t credible since who knows how long May will be in charge (my current bet is longer than anyone thinks, precisely because the Tories are unable to get behind either Hammond or Johnson).

And May’s sudden trip could also be motivated by the stalling of her Great Repeal bill. The need to rewrite a huge swathe of domestic legislation is yet another element of the enormous complexity of unwinding the relationship with the EU that was greatly underestimated. Recall that last week, the Government postponed debate of the bill, mired down by the prospect of dealing with 300 proposed amendments, of which a bare minimum of a dozen already are reported to have enough support to pass. As Clive pointed out:

The UK government’s approach was actually quite sensible — indeed, about the only practical option available in view of the otherwise huge amount of legislation which would instead be needed and the immovable constraint of limited parliamentary time….

This should have all worked just fine. But no-one, rightly, trusted the government. Here, as so often, there is a cost of a low-trust society. I can’t help but chuckle to myself that a government which has done so much to create such a problem is now finding itself dealing with a particularly nasty dose of its consequences. Banana Monarchy is just the phrase (that phrase is definitely a keeper — see yesterday’s comments in the latest Brexit post).

But the government simply cannot manage the Brexit parliamentary logistics without the Great Repeal Bill. It will — as threatened to happen — just get mired in parliamentary tactics by both Conservative and opposition MPs. And be at risk of crazypants vested interest motions getting through just because the votes can’t possibly be based on a good understanding of the matters in question. The committee stages could be a warzone.

So the UK government can’t go forward and it can’t go back. It’s only option at the moment is to convince MPs cross-party that it will not be a bad actor (and I don’t mean Robert Vaughan here).

And David added:

But it’s not just the dozen or so amendments where the government might be defeated that are the problem, it’s the endemic guerrilla warfare and constant knife-edge votes that would effectively scupper the whole thing. May finds herself in the same situation politically (though much worse objectively) as Jim Callaghan did in 1978, when he told the Labour Whips Office that a given vote “absolutely had” to be won, to which the reply was that he “absolutely had” to find some more MPs.

And if that wasn’t bad enough, paul pointed out that “thorny issues for the devolved parliaments” = “Looks like Westminster will have to reorganise the UK at the same time as it sinks out of the eu.”

There is an opportunity in the Great Repeal Bill Train Wreck, if someone had the good sense to act on it. May’s Florence speech was an admission that the Government recognizes that the UK needs at least two years to get its Brexit house in order (at its current snail’s pace, it needs more like 20, but at least recognizing it needs more time is a step in the right direction) and at a minimum it needs to keep paying EU dues.

However, a big impediment to any sort of Brexit standstill is the hard Brexit faction. But the Great Repeal Bill Train Wreck offers a perfect excuse. It’s not that the UK is being outmatched by the EU. Heavens no. It’s that the UK is a democracy and democratic processes take time. The UK can’t let its democratic processes be held hostage to arbitrary Article 50 deadlines, now can it? It certainly isn’t consistent with getting more national sovereignity, now is it?

In other words, there’s a messaging strategy somewhere in there of depicting the hard Brexiters as anti-democratic, insistent upon running roughshod over Parliament. It’s a way of creating a rationale for deferring Brexit without touching the “second referendum” third rail. Not that I think this will happen, mind you, but it is the first mechanism I’ve seen that could possibly slowing down the Brexit train. However, it still would require the UK to go grovel to the EU and ask for a “time out”. The hard Brexit backers still have enough backers in the tabloids to make that a tall order.

And it doesn’t hurt that a major dose of Brexit reality hit today in the form of an update on UK official statistics that shows the UK has a staggering £490 billion less in foreign exchange reserves than previously thought. That means it has nada in the way of net foreign assets. To put it bluntly, that makes it vulnerable to a Thailand-style currency crisis…..and the UK is already at risk in big way by virtue of its large trade deficit. Does the UK have an IMF program in its future?

Excerpts from Ambrose Evans-Prichard’s story at the Telegraph:

A massive write-down in the UK balance of payments data shows that Britain’s stock of wealth – the net international investment position – has collapsed from a surplus of £469bn to a net deficit of £22bn. This transforms the outlook for sterling and the gilts markets.

“Half a trillion pounds has gone missing. This is equivalent to 25pc of GDP,” said Mark Capleton, UK rates strategist at Bank of America.

Making matters worse, foreign ­direct investment (FDI) by companies is plummeting. It fell from a £120bn surplus in the first half 2016 to a £25bn deficit over the same period of this year.

The apparent resilience of FDI flows shortly after Brexit was an illusion: the spending that took place in late 2016 had already been committed earlier….It implies that the UK’s underlying position going into the referendum was much weaker than anybody realised. The concern is that the external forces supporting sterling and gilts are all in doubt as major central banks tighten policy and drain global liquidity…

Company profits are lower than imagined. What was thought to be ownership of foreign debt securities by UK corporates have turned out to be loans to over-leveraged UK citizens.

Evans-Pritchard points out that the impact on the pound has been blunted by punters buying the currency on the expectation of a interest rate increase. The ECB’s continued QE has also propped up the currency:

David Owen, from Jefferies, says the ECB is covering most of the UK current account deficit, a bizarre situation that is greatly under-estimated by the market. ECB data show that eurozone net purchases of UK “debt securities” were running at an annual rate of £68.7bn in the second quarter.

We have also pointed out that contrary to conventional assumptions, a cheaper pound won’t necessarily produce inflation, since the last time it fell sharply, domestic businesses instead cut wages to preserve margins. But the net decline in living standards was probably the same.

Evans-Pritchard argues that the grim news for the UK increases the odds of destabilizing blowback to the EU in the event of a collapse of the pound. But the falloff in foreign direct investment undermines hopes that the UK could use an initial currency shock to gain advantage in exports. Frankly, I don’t see this as very realistic. Direct factory labor costs are a relatively small portion of the total cost of manufactured goods, only about 13% in the case of cars. Informal trade barriers (if nothing else customs) will make the UK too much trouble for many multinationals to deal with. Eastern Europe offer cheap labor and (whether true or not) those countries are also often seen as having higher-caliber blue collar labor than the UK.

The reality is that if Brexit proceeds on schedule, meaning as of March 2019, it will be a hard Brexit at best and more likely a disorderly Brexit.

Thus it isn’t clear what a trade deal even means when the UK on track to allow smuggling on a mass scale, save that it will make buying UK goods even less attractive. No advanced economy is going to be keen to take goods from a country when they won’t have any assurance as to what its content is (as in what elements are local versus which originated in other countries and are being re-exported). From Bloomberg:

Smuggling along the Irish border may be a microcosm of the challenges facing Britain and the European Union following Brexit. Theresa May’s government has made clear it won’t introduce strict border controls when the U.K. leaves the bloc. That will inevitably create a “gangsters’ paradise,” according to Simon Sneddon, a senior lecturer in law at Northampton University…

And at other entry points too, such as the port of Dover, the government last week signaled it’s prepared to rely mostly on self-assessment for customs controls, even in the event of crashing out of the EU without a deal.

Smuggling is a great business model for moving commodities or commodity-like goods. But it’s another kettle of fish entirely for multinationals that make higher-valued added goods, or where product quality is imperative, like pharmaceuticals. Does the UK want to make its country safe for Harry Lime?

As PlutoniumKun put it:

The UK of course is perfectly entitled to take a lax view of securing its borders for customs. The problem for them is that by definition, a border involves two parties, and the second party may not agree to this. When you add in the vastly greater complexity of supply chains these days (for example, parts for cars crossing borders several times for processing before getting to the final assembly plant), that approach is just not sustainable.

Before any disaster capitalists start rubbing their hands, the victors in Shock Doctrine scenarios are multinationals and foreign vultures. Domestic winners are few and far between. British businessmen who backed Brexit beware. You are likely to become the lunch of bigger predators.

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  1. vlade

    Correction “from the date of the Brexit vote” should read “since ever”.

    As for the rest, well, it’s likely a great fun to watch from the sidelines, especially with a lot of the participants in this tragicomedy being entirely unaware of it. A ray of hope is springing fromt he latest polls, which indicate that the public is finally starting to catch up on the gov’t messing up (and that’s to put it extremely politely) the negotiations, as well as buyers remorse – 47 would vote to remain vs. 42 to leave, IIRC first clear (i.e. the difference larger than the margin of error) poll since the referendum.

    1. Purplepencils

      Difficult to understate how badly things are going. A friend’s house mate is part of the ‘negotiating team’ and relations between the EU side and UK side are frigid.

      I marvel daily at how we seem to hit a new low weekly, if not daily.

  2. paul

    There is an opportunity in the Great Repeal Bill Train Wreck

    I was thinking that yesterday.
    An uncharacteristic demonstration of honesty, backed up by the unpublished impact reports, could give them an exit.
    Withdraw from the A50 process,ask the department for brexit to come up with a plan over the next five years and just let it wither.
    All for the greater good on this important matter, why should we railroaded by EU rules,etc,etc….

    The collective sigh of relief would be audible from across the channel.

    They have been shameless in reneging on their promises plenty of times before.
    The ultras can evaporate in a new party if they want, the traditional tories and their voters won’t go anywhere else and May’s dead in the water,anyway.

    Wishful thinking,I know.

  3. vlade

    A comment to PK’s lax border’s comment.

    If you take a lax approach to border checks, chances are that sooner or later you start getting the human cargo, as that’s pretty damn valuable kg for kg.

    So you may not get many Polish plumbers, but you’ll get loads (pun intended) of African/Asian illegals. Find it hard to understand how that’d be “solving the immigration”.

    1. PlutoniumKun

      Its more than just human traffic. If the UK take the view that they will not bother controlling their borders, and then not accept rulings by the ECJ, then they will have to accept that normal standards such as food safety rules will not need to apply for products going to the UK. The UK will find itself with a thriving import trade in unlabelled animal meat, contaminated fruit and veg and hazardous waste.

      Of course, a border is a two way valve. Everything coming in the other direction will have to be checked to ensure it complies with EU regulations and standards.

      That any sane rational person thinks that the UK only has to ignore setting up customs checks to ensure it will be a thriving free market economy is baffling. Although perhaps the answer is that a significant section of the UK establishment is no longer sane and rational.

      1. vlade

        I wasn’t going there – lax borders kill exports, as I wrote even in the comment a year ago that Yves takes out now and then (basically, that if you drop all the standards, others won’t like it much). Imports – well, I wrote some time ago that I don’t expect food criris per se, as we’ll get plenty of chlorinated chickens US can’t sell anywhere else.

        The human traffic point was that ignoring all the goods and free market mumbo jumbo, it will also create a massive hole for illegal immigrants to come through – and criminals and terrorists from all over the world..

        1. ejf

          The entertainment industry could be making quite a few bucks on this already. Think of stories alone: the chlorinated chicken from the US, handled with a few guns from Irish Boston smuggled directly to the Irish border.

    2. gallam

      I’m pretty sure that the UK intends to police its borders fairly aggressively post Brexit. This might well exclude the Irish border in the event of non-cooperation by the EU. That way the EU will be responsible for policing a border that the British Army were completely incapable of controlling. Maybe the EU could contact Trump with a view to employing his wall builders. Perhaps they have some other plan.

      The Irish border is a major problem for the EU in the event of a breakdown. That is the reason for its inclusion as an issue in stage 1 of the discussions.

      1. Yves Smith Post author

        Intend and what they can actually do in the event of a hard or disorderly Brexit are in two different universes. The White Papers on trade that we shredded the week before last were an absolutely appalling display of unseriousness and ignorance. The borders will be at best a sieve, at worst a sluice, based on where the Government is now.

        1. gallam

          Thanks for the reply – your Brexit coverage is reminding me of the good old days of the financial crisis and the mortgage fiasco. Keep it up!

          Anyway, I just came across this story on the BBC from a few months ago that was referenced by Bloomberg:

          Note the tension within the EU (Eire’s interests are diametrically opposed to those of the French farmers),

  4. Matt

    No fan of Brexit but the AEP piece is nonsense. It’s taken a load of methodological chances and blown them all out of proportion, which I think you can tell from the utter lack of reaction in the price of sterling and gilts today. See Shaun Richards blog for a more measured response.

    1. Yves Smith Post author

      AEP likes to be melodramatic and he also has a bearish bias. However, his calls in the runup to the crisis were markedly better than most journalists, particularly on oil prices, which he called as a short-term bubble when many (notably Paul Krugman) insisted was due to fundamentals meaning prices over $120 would hold and even go higher. AEP pointed out that traders were betting on the pound to be supported by the BoE via higher interest rates. The change in net foreign assets would not change the BoE’s near-term posture. So I don’t see the info as affecting markets near term. But it does create a much greater potential for the bottom to drop out of sterling if/when sentiment changes.

  5. Carolyn

    There is an opportunity in the Great Repeal Bill Train Wreck, if someone had the good sense to act on it.

    It appears that Ken Clarke, MP, sees the opportunity with his (and a Labour Member’s) principle amendment to the Bill which seeks to incorporate into the Bill the provisions of the Florence speech. He makes good points as to why this would help – if it were supported – including signalling trust and ability to deliver to the EU; he also rubbishes the ‘no Ultra dealers’ as living in La-La land. Listen to his interview on this morning’s Radio 4 Today programme @ 2h 10mins in, and lasting for about two minutes

  6. Colonel Smithers

    Thank you to Yves and the community. Great stuff, as always.

    Readers may want to read and weep. Vlade and I wondered over lunch, last week, how short Sterling Legatum, and Odey and Shore Capital for that matter, are. Vlade suggested an investigation by Richard Smith.

    Legatum’s think tank employs several prominent “journalists” and politicians. There’s some overlap between these “employees” and the wacko jackos at the Henry Jackson Society. The overlap serves as a hedge for Legatum as (neo-)liberals like Sharon Bowles and Paddy Ashdown are remainers.

    Cristina Odone, better known for Lorenzo’s Oil, is one of Legatum’s more elegant / presentable shills. Calexit enthusiast Shanker Singham advises the British government, but is often on the airwaves espousing Calexit and having a go at Trump. The UK MSM loves it / him. They have fallen for the right on shyster in the same way as they fell for Weinstein and Blankfein.

    Steve Baker is a former Royal Air Force officer. Soon after his election in 2010, a colleague (also a Tory activist) and I went to the Commons to explain to him why pegging Sterling to the barbarous metal was not a good idea. This said, Baker’s views on bank capital, accounting and derivatives would find much favour on this blog. Soon after, I recounted the surreal episode to dad, also a former RAF officer. He thought it was typical of the officer class that had come in from the 1970s onwards, especially as institutional memory of WW2 and colonial campaigns had faded.

    1. Anonymous2

      Yes. Legatum also has links with other MPs such as Ian Duncan Smith, John Redwood, Peter Lilley. Small world.

      1. Colonel Smithers

        Thank you.

        One has to wonder about George Smith. Firstly, how did someone from his background become a (Scots) Guards officer and marry into the gentry. His in laws own over a thousand acres and a pub near where I live, employ migrant labour and get EU subsidies. He lives on the(ir) estate. Go figure.

        Lilley lives in Goering’s former residence near Dieppe. Fellow Tory outer Nigel Lawson lives in the south west of France. Their bolt holes have been ready for years.

    2. paul

      The Cobden Group wants to go for the jugular of the state?
      Why don’t they go down the democratic route for such an important and noble cause?
      Why don’t these deadbeats get a proper job?

    3. Petter

      Tusen takk Colonel.
      May I ask what the aristocracy’s position on Brexit is? I read somewhere a few weeks or months ago that the aristocracy still owns about a third of land in the UK (it might be more, I just can’t be bothered Googling). The best known I suppose is the Duke of Westminister who owns Mayfair and Chelsea, or close to those neighborhoods. Anyway, if I understand it correctly, the aristocracy owns the land in perpetuity and whatever is built on their land is leased, so they are not responsible for the vagaries of the market for those above ground structures. They collect a rent.
      I would assume that this land owning aristocracy, who have owned the land for hundreds of years, are perfectly willing to see a Brexit. So, worst case, the rents go down for a few decades. Probably happened before, in the hundreds of years they’ve owned the land.

  7. Frenchguy

    Not much news in this latest BBG story but some funny/sad bits:

    [A]ccording to a person familiar with the U.K. government’s position.

    Without a clear sign that negotiations will progress to trade and transition arrangements by December at this week’s summit of European leaders, the entire Brexit process will be in danger of collapse — and senior British ministers are losing faith in the EU’s willingness to strike a deal, the person said.

    Hum, they are the one supposed to panick about a collapse of talks so what are they proposing ?

    The assessment comes as the prime minister heads to Brussels for dinner with EU chiefs ahead of a critical summit starting Thursday, and is calling EU leaders individually in last-minute diplomatic efforts.

    That’s what they call doing a Tsipras in Brussels. Thank god he has stopped trying that a long time ago.

    German Chancellor Angela Merkel and French President Emmanuel Macron are the two key obstacles to allowing talks to move on to trade, according to the first official.

    Kudos to the official for correctly identifying the two most important EU leaders.

    The chancellor is also more preoccupied with forming a new coalition government at home.

    You think ?

    Business leaders and the Bank of England say a transition plan must be outlined by the end of the year or it will start to lose its value as companies give up waiting and begin to move operations out of the U.K. to cities such as Frankfurt, Paris or Dublin.

    I can feel the shivers going down Merkel/Macron’s spines.

    Euroskeptics in May’s Conservative Party want her to “call time” on the negotiations and walk away without a deal. She needs the EU now to create the atmosphere and the space for her to make any further concessions, because her political position at home is so precarious, the person said.

    So now the UK wants the EU to interfere in its internal politics ?… Anyway, what a sight.

    1. Colonel Smithers

      Thank you.

      Over the week-end, the ludicrous HRC got free passes, half volleys and admiring glances from the BBC’s Andrew Marr, Channel 4’s Matt Frei and CNN’s Fareed Zakaria when suggesting that Putin had promoted Brexit to weaken the EU and use it as practice for Trump’s campaign.

      The interventions from Obama and Kerry were not mentioned.

      1. Frenchguy

        Ludicrous is the right word. And if Putin did it, I’d have to thank him. De Gaulle always had this right:

        “[Britain] will join the [EU] only when it will have foregone its imperial dream and its special relations with the Americans. Or to put it another way, when it will have converted to Europe.”

        When you read the Telegraph, it’s clear those imperial dreams are still very much alive…

  8. Purplepencils

    It seems it’s actually 300 and not 100 amendments.

    I’ve been disappointed but not surprised to note that quite a few partners at City firms have started blaming the EU for their intransigence. It seems like one way of dealing with the chaos. But of course, friends in various firms have recorded a good number of Eton-Oxbridge types across the City who are staunch and enthusiastic Brexiters…

      1. vlade

        That is the beauty of the Brexit argument. If it goes well, it’s due to the great british *insert your favourite here* taking over those *insert favourite here*. If it goes the other way, it’s due to those *insert favourite here* *insert favourite outgroup here*.

      2. Purplepencils

        Yeap. No defence of course, but it’s a tragically human response. Or perhaps I should say we are often susceptible to such arguments…

    1. ChrisPacific

      I am not particularly close to any of this, but this has always struck me as a worrying point.

      If Brexit ends up being the train wreck that it currently promises to be, the government will be desperate to shift blame elsewhere. The EU would seem like the most likely target, and I think that given the way the debate has been framed in the UK to date and the role of the tabloids, making the EU the scapegoat would be pretty easy, even if it happens to be manifestly false and unsupported by facts.

      As the referendum revealed, there is already a great deal of simmering anger in the UK. Take a population of struggling angry people, apply a shock that makes their lives suddenly and drastically worse, and give them an external party to lay all the blame on. What happens? I can think of a number of possible answers to that question that are supported by historical precedents, and the worst case scenarios are quite bad.

      Hopefully this is just me being paranoid and those more familiar with the situation can reassure us.

      1. purplepencils

        I see it as yet another point of division — no doubt there are many who are very upset with the Tories right now for mucking this up*, but there are also quite a number of brexiters (including the relatively newly converted) who are blaming or will blame the EU for this. In a way it is more than an allocation of blame. Personally, I think that more so than the actual Brexit vote itself, which can be attributed to a myriad of factors, the reception to the negotiations expose the crass entitlement, delusion, and nostalgia for empire that many of us from so-called third world countries (and former colonies) have witnessed firsthand when dealing with certain types of Brits.

        1. Anonymous2

          Interesting. Thank you. I find the hatred some English people have for their fellow Europeans quite disturbing.

      2. Shane

        I quite agree this has the potential to be much, much worse than people are generally contemplating right now, but I think there’s another factor that’s being overlooked: the probability of another global financial crisis within the next 2-3 years, exacerbating the devastation if it were to coincide with a potential March 2019 forced hard Brexit. Even executives at big banks have made comments regarding this likelihood, and at least over here in the colonies, structural problems with our economy were not fixed following the last crisis. IIRC, credit default swaps abound now on subprime auto loans, and the TBTF banks are bigger than ever. There’s no way our current bubble bursting doesn’t severely impact the UK (“special relationship” and all that). So, if these events were to amplify each other, the potential devastation to the British people is remarkable. Yet, while the potential to foment the ensuing anger and direct it outward to the Continent and brown immigrants and inward to all the old social bogeymen is high, there is also an opportunity here as well. Corbyn did everything he could and needed to in the last election to position Labour(/Momentum) to not just take control but establish a new regime when they do. If the floor falls out from under the British economy, it is possible that could be the tipping point in bringing Corbyn to power.

      3. Mark P.

        Chris Pacific wrote: … the worst case scenarios are quite bad. Hopefully this is just me being paranoid and those more familiar with the situation can reassure us.

        You’re not being paranoid and should not be reassured.

        Yves has consistently pointed out that the EU possesses all the advantage over the UK in this confrontation/negotiation and will likely press those advantages with the same foresight, flexibility and humanity it showed with Greece.

        When I’ve then responded that in that case it’s naive to assume that the conflict will remain limited to the financial/trade realm — because people existentially threatened tend to respond in kind if they can find a way — and that this conflict between the EU and the UK will therefore expand if the EU proceeds with the UK as it did with Greece, she and other NC regulars like Clive have been outraged that I should suggest the possibility.

        I still think they’re naive. Tsipras and Varoufakis’s central problem was always that Greece was in the Eurozone and most of the Greek people wanted to remain there, and that Greece with its back against the wall still could do very little damage to the EU. Those factors don’t apply with the UK. A hard brexit could mean a 12 percent decline in GDP and will mean a change of government. If matters proceed badly, a UK with its back against the wall and harder-minded leadership could take an attitude of ‘if we’re going to go down, you’re going to come with us’ and look around for ways to damage the EU back.

        We shall see.

        1. makedoanmend

          Whilst I have no problem, whatsoever, with the analysis and outcome scenario you highlight, I rather thought a certain hostility was also baked into the UK’s position at this point anyway. Once May (a remainer) went gung-ho on Brexit, my view of the entire process changed. I view the Tories by their deeds, and their deeds are most certainly in the zero-sum game category – i.e. your loss is my gain. Tory Austerity policy has very much followed this plan.

          Given this socio-economic viewpoint, let’s turn the tables. Say the EU tomorrow decides that they shouldn’t “confront” the UK and that the UK deserves everything for which they ask. Deal done. The UK floats off with it borders in tact and a world free trading country without any ties to the continent. Will the UK use this goodwill wisely? Will they think of the continent when finalising their super trade deals and seek to ameliorate any detrimental affects of their deals might have on the continentals? No, they will be clear-eyed, goal oriented business people and be greatly admired for being so.

          1. Because of Tory in-fighting and supreme arrogance and hubris the Tory party brought Brexit to a referendum.
          2. Because of supreme self-confidence (to be polite) the Tories invoked Article 50 without a short, medium or anything other than a vague long term plan;
          3. more importantly, the Tory/Brexiteers didn’t bother to do their homework. It’s become increasingly obvious that the Tories/Brexiteers didn’t have a clue about the complexity of the issues they face
          4. Tory/Brexiteer bravado is now turning into slow panic. c. 30% (of total negotiation time) has been spent by Tory/Brexiteers wasting their time on in-fighting, opportunistic domestic politics (the election) and useless MSM PR excercises

          Of course the Tories/Brexiteers are going to howl about those perfidious continentals just like HRC is howling about the Russians. It’s everyone else’s fault! When those who perceive themselves to be supremely strong find out they aren’t as strong as they thought, they always look for scapegoats. History is riddled with people and nations who’ve used scapegoats. EU capitulation won’t change that one jot.

          1. Mark P.

            @ makedoanmend –

            [1] I fully agree that if the EU somehow had decided that they would let the UK off the hook, the Tories wouldn’t use the goodwill wisely. By and large, the Tories are scum, whose incompetence has been equaled only by their arrogance. This being said ….

            [2] The EU simply weren’t ever going to let the UK off the hook. It was clear from Greece in 2015 and Varoufakis’s account how the EU would proceed. Part of what’s so appalling about the Tory pols who played the Brexit card is that they carried on about how hard and self-serving the EU was, yet they’re now unprepared and crying because the EU is, indeed, being hard and self-serving. However, my aim isn’t to push a moral judgement about the virtues (or lack of such) of either the UK’s or the EU’s position.

            I’m simply suggesting that the strong likelihood is that constituencies within the EU will — like the Tories would have in their place — press their maximum advantage, aiming to win and to see the UK suffer and be humiliated. It won’t be like the build-up to 1914 nor the post-carnage peace settlement in 1918 where the French imposed impossible reparations on the Germans, with the consequences that Keynes’s Economic Consequences of the Peace predicted. It will be the same kind of inflexibility, though, and the probable result will be escalating conflict and damage inflicted on both sides over the coming decade. That’s all.

            How differently Corbyn and Starmer — if they came to power — would play the UK’s hand I can only speculate about.

            1. makedoanmend

              Thanks for the Reply Mark P.

              I can understand and agree with your viewpoint – mostly. It certainly has valid historical pedigree, as you’ve point out; and it seems to be human nature to want to come out of negotiations with some advantage. OTOH, the historical precedents you cite also might become important reminders of what happens when intransigence becomes embedded in the process. We shall almost certainly see the results if the present course plays out.

              Yet, there is scope for both sides to gain a wee bit of advantage here and give a wee bit there in order to build momentum – given the huge scope of issues to be addressed. Will it happen? How much does the EU need to shift relative to the UK given the power relationships? As time slips away and the Tories play games, the EU seems to be in an increasingly better position.

              As for Labour, yeah, there’s huge room for speculation but I tend to think Corbyn doesn’t have the Tory “hard Leader” image as a burden. Also he/Labour might be more amenable to horse trading in order to procure more international trade freedom and domestic policy freedom while still being a tangential and contributing part of the EU.

              Brexit need not be a disaster but the Tory’s, and I would argue their socio-economic ideology, is taking the UK down this road.

        2. Clive

          The problem with the “if you want a fight, we’re going to give you a fight” game-theory is that it assumes all conflicts have a clear winner-loser outcome.

          But this is reductionism. Let’s take one issue in play, the Irish border. What the EU is demanding is, in effect, a United Ireland. Na gonna happen. But what the U.K. government is demanding is continuation of the customs union and the single market (certainly within the U.K. and the Republic, at least) as if this can somehow be “contained” just between those countries. Na gonna happen either.

          So where does the U.K. government somehow taking some sort of harder line get them? A border has two sides. The U.K. cannot implement a unilateral open border, Eire can still impose, at the EU’s behest, customs checks. What’s the UK’s response supposed to be to that? Shoot their way through? So playing hardball has its limits.

          1. makedoanmend

            No, I wan’t really positing a reductionist game theory position for both sides. Such tactics from any one side during negotiations (given competent negotiators) would quickly lead to stalemate, imo.

            Rather I was responding to a poster whose viewpoint suggested that the EU was being confrontational. I, instead, suggest that Tory domestic policy and Brexit rhetoric may have a zero sum game element inherent in its approach to these negotiations from the activation of Article 50 to the present moment. If one disagrees, then one can assuredly reject this viewpoint, but I never suggested both sides were in reductionist “win-all” mode. I put that squarely in the Tory box.

            In fact, your Irish border reference is rather an interesting example. The EU from the get-go put up has publicly stated its opening positions. Some may see these tactics as some sort of blocking device or aggression, so be it. But I have nowhere seen that the default position of the EU negotiation team to be a United Ireland. Some have stated their preference for this outcome, but then we only have to look to Tory Tebbit for a similar type, but opposite, response:

            “We have a winner… Lord Tebbit has just told peers the best way to resolve the border issue is for Ireland to leave the EU”

            [Esther Webber
            Reporting for @BBCParliament @BBCPolitics. I tweet about all the essentials: the House of Lords, buses, and Mariah Carey. DM /]

            Now I don’t believe even the most ardent Tory really believes Ireland is going to get on Normy’s bike and peddle out of the EU to satisfy the UK’s problems, no more than I believe the UK is going to promote a United Ireland.

            1. Clive

              The EU would never of course say they think a United Ireland is the solution.

              But by stating that a solution to the Irish border must either impose border or customs controls (if there is no remaining in the customs union for the U.K.) contrary to the Good Friday Agreement or give the Republic an effective veto on how the border looks and acts if the U.K. is to retain membership of the customs union gives the Eire government a stranglehold over the six counties.

              So to loyalists, it has the optics of a United Ireland however the EU tried to sell it as brim apolitical. That’s why the DUP is a pro-Brexit party. It believes that the EU already acts as a nudge towards the weakening of partition because both the north and the south lose some of their respective sovereignties to the EU. I’m not saying I entirely accept this argument, but it doesn’t matter what I think, it’s how it would play with unionists. Whether it is the South or the EU which is “meddling” in the North’s decision making and autonomy, to unionists that is all just the same weakening of the union.

          2. Mark P.

            Clive wrote: ‘playing hardball has its limits’

            If that’s addressed to me, I’d say that in the EU vs UK context, game theory actually suggests that the EU would be better off in the long term by not taking a hardball approach. In other words, the EU in an ideal world should go for the post-WWII Marshall-plan benevolent style of play, as opposed to the play for maximum advantage post WWI-type of settlement, since otherwise the situation will descend to a tit-for-tat, retributive style of play.

            In the real world, though, the benevolent strategy isn’t going to happen, in part for the reasons makedoanmend suggests above when he asks how things would be if the tables were turned and answers his own question: a Tory UK government would only arrogantly proceed to exploit every advantage. The EU will proceed similarly. Therefore, the probability is that hardball tactics will (unfortunately) prevail, whether or not there’s any strategic advantage in them because the aim will become simply the imposition of damage on the ‘enemy.’

            That’s what I’m saying.

            1. Clive

              Both the U.K. and the EU may well try to play hardball. But there are limitations as to how hardball the U.K. can pretend to be playing before it looks ridiculous. That’s why the Blazing Saddles clip was embedded in an earlier post on Brexit a could of days back. Anything but threatening the EU with a wet noodle lashing will simply make the U.K. seem like it’s threatening to shoot itself if it doesn’t get what it wants.

              The EU, by contrast, can make a meaningful threat to shoot the U.K. It’s going to end up with a blood-spattered shirt, but it won’t be in as bigger mess as the U.K. will be in.

              So there are limits to how hardball the U.K. can play. There are little if any limits on how hardball the EU can play. It isn’t correct to imply both the U.K. and the EU can play equally hardball.

  9. Frenchguy

    Also an interesting article in the Times from Simon Nixon (of the WSJ also). His point in short: a specific transition deal would actually be very difficult to design and, since time is short, the only form a transition could take would be by extending the deadline for article 50. But as he points out at the end:

    [E]xtending Britain’s EU membership beyond 2019 would be politically fatal for the current government, though it’s possible a majority would support it in parliament.

    It would also be politically toxic in the EU: there is a growing consensus that this is a bad marriage that just needs to end, says one senior European diplomat. And extending Article 50 raises serious practical issues, including whether the UK would participate in EU parliamentary elections in 2019 and the next EU budget.

    1. vlade

      Norway deal _might_ (and that’s a very big _might_) work. The only other options really are total revocation of A50, or crashing out.

      1. Synoia

        The only other options really are total revocation of A50, or crashing out.

        My understanding is Britain cannot revoke A50 without agreement of all EU members.

        May’s, and probably the UK’s big mistake was invoking Article 50 without the two years of careful and detailed planning and legislating required.

        However, May go the top job, as her ambitions required, and she has “grasped the nettle.”

        1. vlade

          You’re pretty much right on both counts.

          A50 revocation means EU cooperation, which would mean quite a bit of grovelling.

          Theoretically, the easiest way for EU would be to let UK crash out (to let them feel the pain), burn for a few days/weeks, and then graciously let them apply and fasttrack the application – which would have the advantage that the UK would automatically lose any and all advantages/opt-outs they ever had, and it would not even be up for consideration (under new application).

          A50 invokation w/o proper planning was idiocy, but she was under a very large pressure from the ultras, and given her slender majority, I believe March was as far as she was able to push it – it would be pretty impossible to go into Tory conference w/o A50 invokation, it woudl be suicidal. So it’s more of Tory party idiocy than May’s – if it’s a reflection on May it’s a reflection on her shaky position.

    2. Yves Smith Post author

      Oh, that is an important bit of intelligence. I had assumed if the UK asked for a reversal of Article 50, the EU would give it, and that the Florence speech (which was risky to May) reflected some back-channel discussions. If the EU makes the UK give up its discount on EU dues as the price of a waiver, it can present the result as a win. But maybe those chats were only with the UK’s friends in the EU, and not with Barnier’s team.

      1. Yves Smith Post author

        The Guardian today says EU leaders say Barnier overstepped in his dealings with the UK, so it could have been Barner’s team after all.

        1. Frenchguy

          Probably. By the way, I am not sure if you are aware of this but, and this ties very well with your (excellent) point that Barnier has every incentives to see the talks succeed, there are persistent rumors that Barnier has the ambition to become EC president after Juncker.

          Of course, he is far from the only one with those kinds of big dreams for himself but it seems clear that he does not see “Brexit negotiator” as his last assignement before retirement…

          1. Mark P.

            @ Frenchguy –

            Given his remit, Barnier seems refreshingly capable, especially by comparison with his British opposite numbers — as even most Brexiteers recognize. For sure, a vast improvement over Juncker.

  10. JustAnObserver

    Question for those commenters from the UK (PK, CS, Vlade, David, …): How many of the current batch of Tory MPs are of the no-deal, who cares if we just crash out of the EU persuasion ?

    If May were to come back from her talks with Merkel with a tentative agreement that, after 40+ years of integration, the 2 year A50 thing is way out of date and *any* country leaving the EU is going to need more time than that. Put this to Parliament as a confidence vote i.e. if it fails its general election time. Sort of taking a leaf out of Callaghan’s book in the way he kept Labour alive during the second half of the 70s. If the Tory Ultra headbangers want to keep power they’ll have to vote for it since otherwise they are likely to be out of power for a generation. It depends on whether there are enough Ultra’s+followers to mount an internal party coup.

    Although not, probably, what she intended June’s election result combined with the referendum has handed her the power to do what Cameron wanted to do and neuter what I used to call Redwood’s Crazies. This assumes, of course, that May isn’t actually one of the Crazies herself ?

    From a purely political PoV this would mean, as per Yves comment, that May remains as PM for a lot longer than anyone currently thinks possible. But only if she shows political skills at the level that kept the Callaghan government alive.

    1. PlutoniumKun

      I’ve no deep insights to the Conservative Party internal wrangling beyond what I’ve read in the newspapers, but figures I’ve seen suggest that maybe 60 or 80 MP’s are ‘no compromise’ hard Brexiteers – i.e. about 20%. This is complicated by the fact that while plenty of MP’s are probably fairly worried about what would happen, the Conservative grassroots are very strongly pro-Brexit so there is a lot of pressure behind the more pragmatic MP’s.

      I think its a classic case of Yeats’s ‘the best lack all conviction, the worst are full of passionate intensity’. While there are plenty of Remainers – and that may well include the majority of the cabinet – they are weak and are afraid of letting Corbyn in, so they simply don’t have the ability to stand up to the Brexiteers.

      In truth, I don’t actually see what sort of deal May could realistically do that would avoid calamity and yet would satisfy the hard core of her party. If Labour voted with a deal, she could probably live with a hundred or so defectors, but that could well tear the Tory party apart. The sensible thing would be to seek a 3-5 year postponement of Brexit to allow a proper deal to be done (I think Labour would find it hard to oppose it), but I don’t honestly think the Brexit hard core would support that. And I don’t think the EU would agree a postponement unless it involved Britain being a full contributor to the budget, while having no blocking vote on any EU business. They might agree on other minor matters in order to give some face saving crumbs to her (or her successor, its widely believed that the EU believe May will be gone in months).

      I suspect that if some sort of a deal is done, it can’t be done by May. Some have suggested that David Davis is the only leadership candidate with the sort of cred with Brexiters who could persuade them to back a compromise deal. But I haven’t seen any evidence that he has the skills or the brains to do it even if he did grab the top job.

      1. Anonymous2

        PK pretty much nails it IMO.

        May and Juncker are said to have had a friendly and constructive discussion tonight which it is said should accelerate negotiations.

        Call me an old cynic but I interpret this as trying to kick the can down the road for a little longer.

        Some day we are going to run out of road?

      2. Mark P.

        PK wrote: In truth, I don’t actually see what sort of deal May could realistically do that would avoid calamity and yet would satisfy the hard core of her party.


        Anonymous2 wrote: Some day we are going to run out of road.

        Arguably, it’s already Road Runner territory, where the road has run out and we just haven’t looked down.

      3. Grebo

        I think May will be there until she quits, simply because no-one with any brains would want to take over the job. I’m too out of touch to be able to name anyone with brains in the Tory party, except perhaps Ken Clarke. None of the brainless would be able to successfully challenge her, even the zombies have a residual sense of self-preservation.

        1. Anonymous2

          Yes. I was going to add a rider to my previous comment. The former senior Tory I spoke to two weeks ago thought May would be kept in place until Brexit is resolved. Whoever does a deal will be blamed whatever they do because no deal will deliver the sunlit uplands the Leavers were promised. The Tories need at least one scapegoat of their own and she has been nominated. Of course all of that could be out of date by now.

          1. PlutoniumKun

            I don’t disagree that the Tories may well have decided that its better that she is in place long enough to take the flack when it all goes wrong (no doubt they are all busy calculating the timing of a new leader giving a fresh face and promising ‘better days ahead’ before the next election). But from what I’ve read from well sourced Brussels based journalists, the consensus among EU leaders is that she is going out the door, so there is no point wasting too much time on her. This may well be one reason why she had quite an easy ride from Junker, etc., yesterday.

            This is of course yet another reason why progress before the new year is highly unlikely.

  11. RBHoughton

    Clive is right to mention the ‘low trust society’ in UK and I am grateful to Yves and NC for reciting it. Politicians have brought this on themselves. I remember President Clinton speaking long ago of creating political capital to expend on pet projects. Does anyone in London do that? What UK needs is one of those persevering politicians who press on assiduously with their plans. Perhaps one of the up and coming young chaps – fluent, trustworthy, equable and without any trace of crookedness.

    These could be exciting times for the people of UK, particularly the youth, if the great changes that are being forced onto the country, the increased reliance on the domestic economy, were seen as opportunities instead of hazards and inconveniences. First make our cake ……….

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