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).
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?
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.