On the one hand, a great deal appears to have happened with respect to Brexit in the last two weeks, with David Davis and Boris Johnson resigning from Government and Theresa May stating that she will lead the Brexit negotiations. Despite the threat of an ouster, she’s still the last woman standing.
However, in reality little has happened, save some of the fog is lifting, so the profile of the terrain is becoming more visible. The odds of a crash out Brexit now appear to be 80%. I’m going to be more terse than I normally would be, so forgive me if my simplifications are arguably oversimplifications.
Some reasons why:
May’s rejection of the Irish backstop. Resolving Ireland was a precondition to sorting out other issues. EU chief negotiator Michel Barnier can’t change that order of battle nor can he change substantive parameters without going back to the EU Council. Barnier’s response to May’s renunciation, and her White Paper the trade deal the UK wants, has a thicker veneer of faux politeness than his earlier responses. Some commentators opined that the EU is taking more care so as not to give the UK fodder for blame-shifting (although they’ll do that aplenty regardless).
Let’s be clear: no deal on the Irish border means no deal.
As I read Barnier’s response, he hit the ball back over the net and told the UK that they’d committed to having a backstop, so if they didn’t like the one they’d signed on to, they needed to come up with another one. The EU has already rejected the UK Rube Goldberg machine of a techno-border as well as agreeing to have regulatory alignment, which is tantamount to creating special joint rules and joint oversight. As far as the EU is concerned, a divorce is a divorce, and they have made clear they are not going to set up new co-habitation arrangements, particularly since the UK’s barmycakes proposals would give it a better deal than it had in the EU.
Incoherent White Paper on trade. The UK keeps asking for a special, novel arrangement with the EU when the EU ruled out anything like that the morning after Brexit.
Barnier resorted to his old form with the the White Paper, and for good reason. From the Scottish Centre on European Relations:
The white paper is a ramshackle affair: it attempts to keep the UK almost as close to the EU as it is as a member state, with the crucial exception of services, while denying that closeness and re-emphasising its red lines to Brexiters in the Conservative party and to ‘leave’ voters more widely.
After all the drama, resignations, non-existent rebellions, threats, demands and dodgy dealing the Tory white paper falls at the first hurdle. Theresa May might just as well have said, "Oh do what you like, the country's screwed anyway." #Brexit #ToriesOuthttps://t.co/iRUlSuL6fG
— Maxine Fisher #NHSLove (@Sargent_Sellers) July 20, 2018
Another EU nien on the UK’s request for a special financial services regime. From the Financial Times on Monday:
Brussels has rejected the UK’s proposals on how to govern the City of London’s access to the European market after Brexit, saying Theresa May’s latest financial services plan would rob the EU of its “decision-making autonomy”…
Mr Barnier told ministers that the plan would ride roughshod over the EU’s stance that equivalence decisions must be made unilaterally by Brussels. He said it would amount to a “system of generalised equivalence that would in reality be jointly run by the EU and UK”.
The UK white paper called for equivalence to be “expanded”, saying it was “not sufficient to deal with a third country whose financial markets are as deeply interconnected with the EU’s as those of the UK are”.
It also envisaged a unique system of joint governance and a “safeguard for acquired rights”, to prevent the UK’s access to the EU financial services market from being easily withdrawn.
Let’s translate, as we did in January 2017, when the EU was even as of then re-rejecting a UK pitch for equivalence:
This is tantamount to asking the EU to overturn its legal system to accommodate British bankers. Na ga happen.
Lack of agreement among the Tories for any particular flavor of Brexit. This has long been apparent with the soft Brexit wing, led by Philip Hammond, at odds with the Ultras marching behind the likes of Johnson and Rees Mogg. But the press is now starting to admit that the deep divisions in the Tories mean no consensus, and that puts the UK on the default path of a crash out.
Parliament also thinks it has a say over matters that are outside its power. For instance, May lost a vote on an amendment that obligated the UK to seek an agreement that would allow it to stay in the European medicines regulatory framework. But this is silly, since only members of the EEA can belong. This is part of a pattern, like some MPs pressing for the UK to remain in the EU customs union as if that would produce frictionless borders, when it won’t, of embarrassing lack of comprehension of basic issues. So the depth and pervasiveness of stupidity on the UK side is another major impediment to securing an agreement.
May’s “no” to second referendum. We’ve already said it is too late to complete another referendum in time for the UK to back out of Brexit if the vote went the other way. But the Prime Minister’s pronouncement somewhat reduces the delusion factor among those holding it out as an option.
Lousy negotiating dynamics. Recall that May to the Irish backstop in December, so she’s just shown the UK to be dealing with the EU in bad faith. Chris Grey explains why, even if the UK and EU actually do manage to start working on a deal, it will be even more difficult to agree on detailed terms:
It would be a silly season story, but Brexit is now a year round silly story so when Dominic Raab pronounced that the UK might withhold paying its outstanding debts to the EU if there was no trade deal agreement it has to be taken seriously….This is a payment that Britain has already undertaken, in the phase 1 agreement, to make…
Thus Raab’s threat is, in a sense, meaningless. But that does not mean it will have no effect. Its effect is to further undermine trust, just when it is most needed. Just as his predecessor David Davis’s airy dismissal of the phase 1 agreement on the Irish border backstop made it vital to the EU to nail that down in a legal text in the Withdrawal Agreement, so will Raab’s statement strengthen the case to make the agreement on the payment watertight.
After all, this payment will not be made in one lump sum but over many years into the future. It is absurd to think that the EU would leave any wriggle room on it, especially with all the noises off from the Ultras that, once over the March 2019 line, anything agreed is up for grabs again…It is a posture which damages not just negotiations with the EU but to Britain’s more general credibility as a reliable negotiating partner. And trust matters in international negotiations.
If this isn’t distressing enough, consider:
May is putting herself at a further disadvantage by negotiating herself. The only time I’ve seen CEOs do well negotiating themselves is when they grew up in industries where pretty much everyone negotiates all the time. And the only industry where I’ve seen that to be the case is media. The top guys in that business are killers and run rings around people in financial services.
But it isn’t just that May flatters herself by thinking she’s up to going mano a mano with Barnier, or go over his head to Tusk or Merkel or Macron. It’s that principals should never negotiate with agents. Never.
May is a principal. She can commit her Government.
Barnier, by contrast, has negotiating parameters set by the EU27. He has to go back to his principals to go outside them.
The agent can use the need to go back to the principal to great advantage, for instance, by getting a concession from the other side in return for something it says it will try to get from its side, then coming back and saying it can only get 2/3 of what it hopes. The other side has already moves psychologically and has become more committed to the deal process by having made a concession. It will probably accept the only partial move from the other side, or will be satisfied by only a cosmetic addition.
But of course it will be the EU’s fault that the UK can’t get its fantasies met.
UK denial and worse inaction in the face of crash out downsides. I hope to address this at more length in later posts. One example is continued UK whinging about derivatives risk (see here for a recap). These remarks look designed to pressure the EU into giving UK banks the equivalence deal it keeps pushing.
The reality is all these UK firms have or will get EU licenses. The derivatives agreements are currently under UK law. That means Parliament and/or the regulators could solve this problem in any of a number of ways: forced reassignment of the agreements to EU entities (just as US courts interpret agreements written under the laws of other states, so too I imagine the European courts could enforce contracts under UK law although it might annoy the hell out of judges). Or the contracts could be force novated into EU-equivalent agreements as of, say, March 28, if the parties to the agreement has not substituted them or cancelled them of their own accord. And yes, there would no doubt be screw ups and hiccups and some chump customers who get exploited, but if the UK and ISDA wanted to solve this problem, as opposed to try to use it as a negotiating wedge for UK banks, I am sure they could come up with solutions for a very high proportion of the cases, and that assumes that contract parties would fail to get out of the way as much as they could themselves.
By contrast, the UK seems to be engaging in handwaves as far as dealing with requirements for ports and air traffic are concerned. Richard North has the patience to watch political TV, and in a series of recent posts, he chronicles how UK officials are acting as if the air transport issue will solve itself. By contrast, Heathrow has raised enough funds to enable it to ride out two months of no revenue. That means its leadership considers that to be a potential worst case scenario.
One of the most interesting moments of the Dominic Raab (aka midair bacon) interview with Andrew Marr yesterday was the line of questioning on the EU-US open skies agreement.
Marr specifically put to the Brexit secretary that: “with no deal we fall out of that”, to which Raab said quite simply, “Yes”. As a follow-up, Marr asked: “That does mean that the planes can’t carry on flying in at the moment doesn’t it?”, to which Raab responded: “I think we would resolve that issue”.
There we have it in blunt terms. Yes, a “no deal” Brexit would mean that UK airlines would lose their access to US skies. And while Raab blandly assures us that “we would resolve that issue”, can we really be certain that President Trump would give us the access we want, immediately, and without asking for significant concessions elsewhere?
The thing is, though, if Rees-Mogg truly believes that the WTO option is “nothing to be frightened of”, we are dealing with a man who is either nurturing a staggering level of ignorance or is setting out to deceive.
Either way, this has his co-conspirator, John Redwood, asserting that, under his fabulous WTO regime: “Planes will fly & lorries will move thru ports the day after we leave just as they did the day before.
Bearing in mind just the one example of exports of foods of animal origin, where (when such exports are permitted) goods must be submitted for inspection at the ports to a Border Inspection Post, one wonders whether these ERG zealots have asked themselves why the Port of Calais has brought 17 hectares (42 acres) of land, which could house inspection posts for sanitary checks and logistics warehouses…..
The same must also apply to his recent comments on aviation in the wake of Leo Varadkar’s observation that the UK is part of the single European sky. If we leave the EU a “no-deal”, hard Brexit next March, he said, the planes would not fly, adding: “You cannot have your cake and eat it. You can’t take back your waters and then expect to use other people’s sky”.
This elicited a front-page headline from The Sun, proclaiming: “AIR HEAD Ireland’s PM has been branded ‘mad’ for threatening to stop British planes flying over Ireland as revenge for Brexit”.
There are several issues which arise from this, not least the idea common in the media that somehow things such as restrictions on airline flying are something which are imposed on Britain, either by the EU or Member States such as Ireland, effectively amounting to a “ban”.
The point, of course, is that freedom to fly for UK airlines, variously a right or a privilege, is specifically granted by virtue of EU legislation, in this case Regulation (EC) No 1008/2008. When we leave the EU, that regulation – as it applies to the UK – lapses. There is no ban as such. It is Brexit and the UK’s decision to leave the EU which will have the effect of removing the permissions for its airlines to operate outside domestic airspace.
Some pundits who should know better point to the 1944 Chicago International Air Transport Agreement, arguing that such rights are conferred by this agreement, upon which the UK can rely.
But here one has to understand that the Chicago Agreement does not in itself confer any rights. Rather, it requires contracting states to grant to the other contracting states what are known as the “freedoms of the air”. Thus, such rights do not take effect until contracting states formally agree between themselves bilateral or multi-lateral treaties, generically known as Air Service Agreements.
In the EU context, as between Member States, these have been absorbed into the regulation, the benefits of which will no longer apply to the UK after Brexit. Unless there is then a specific air service agreement between the UK and the EU, there will be no reciprocal rights. The result, as Varadkar quite rightly says, is “planes would not fly”.
In other words, the UK would need to have a massive team trying to get Air Service Agreements in place now. There is no evidence anything of the kind is happening. And these agreements cover critical issues like safety standards. No airline is going to assume the liability of flying into a country and having its equipment serviced by airports who are not party to agreements setting forth the needed safety standards (among many other issues). In addition, aircraft leases would also prohibit it. The air transport issue is a massive Brexit risk that the Government is simply punting on, as if London is obviously so important that the rest of the world will surely bend to the UK’s needs.
The UK is about to get a very rude awakening, and it’s on track to begin on March 30, 2019.