I outlined my thoughts on the progress in Brexit discussions back in August (“Brexit means no Brexit!”), at a time when the UK government was attempting to give energy to the talks, already appearing to stall. May’s speech this week, again an attempt to break the deadlock, largely confirmed these opinions i.e. we still have no proposal on either Ireland or financial obligations and we prefer not to talk about them. The Conservatives are united around holding out for an impossible deal, Labour has united around agreeing not to talk about Brexit.
Concessions?
The UK media, on the other hand, seems to create a false impression that progress is being made, for example with talk of “concessions”. It is indeed a concession for the UK to ask for a 2-year transition, but not, as often misleadingly reported, a concession of the UK to the EU. It is a concession between different squabbling wings of the UK government, with the hardliners eventually agreeing to it. The UK media also present this transition deal as certain to happen i.e. the views of the EU are presumed to be irrelevant. These “concessions” are better thought of as the continuing struggle for the UK government to work out its opening negotiating position. This further support my views in the previous post that we have made very little progress.
Where next?
I have spent some time thinking about what the outcome of these negotiations will be. I see 3 broad possibilities:
- Hard Brexit
The UK leaves Single Market and Customs union without a clear replacement, relying upon rebuilding global trade. (it could be with or without a transition period).
In this way, the UK joins N Korea in prioritising sovereignty over economics. - Soft Brexit
The UK stays inside Single market, accepting the EU’s rules. This is pretty much the same as being inside the EU, except the UK gives up participation in the EU government. I thought this sounded a bit like being a colony, closer to what the Leave campaign said the current situation is. Maybe like America before the War of Independence. - Bespoke deal
Ideally a “have cake and eat it” deal but could also be more reasonable. Some form of customised new relationship for mutual benefit, where the UK retains good trade links, but is able to stop free movement of people.
Let’s think about the UK’s view on these possible outcomes:
- Loved by Brexiteers. Obviously, I think it is madness.
- No-one wants this outcome. Clearly worse than staying in.
- This is the mainstream view that Leavers and Remainers will find common ground.
And the EU view:
- It would be the UK’s choice. Looks insane but if they want it, the EU cannot stop them.
- Ideal. No economic shocks and would get rid of the troublesome UK.
- This is the interesting one – see below…
Does the EU even want a bespoke deal?
The evidence so far suggests the answer is a clear no. Statements from the major EU politicians have been entirely consistent i.e. for free market access to EU markets, you need to abide by EU rules (freedom of movement and oversight by the ECJ)
But in negotiations words are cheap, so let’s look at the EU’s behaviour. If the EU wanted a bespoke deal, it would share in the UK’s anxiety to get moving on talks now, as any delay adds to the risk that a complicated deal will not be made. However, they seem not to be in a hurry at all, happy to have negotiations sit where they are. It also implies that even if the UK makes an agreement on the EU’s
three red lines, they will be sorely disappointed by what the EU puts on the table next.
Which is better? No Deal or a Bad Deal?
May initially declared that the UK would prefer “No Deal”. But after the general election result,
it’s clear that only the hard line Brexiteers really believe that. At least in the UK….
I think it might be the case for the EU however. A bespoke deal is a nightmare for them. It would threaten the integrity of the Single Market, the political concept of the EU and be a loss of sovereignty. Why would the EU agree to have regulation done in partnership with the UK? Surely, they will just do their own regulation and if the UK wants to freely access the EU market, then the UK can agree to subordinate its regulation to the EU.
Transition
This brings us back to transition periods. In my previous post, I described how the EU and the UK think differently about transition. For the EU, it is a bridge between the current situation and a known destination. For the UK, it is a lifeboat while you work out where you want to go.
I previously suggested this made a transition period highly unlikely, but I had not considered another option, a transition with virtually nothing changing. This seems highly likely to me as it would suit both sides. The UK will legally have left the EU, with no option to change its mind, thus pleasing the hardcore Brexiteers. For the EU, the UK would then have even less negotiating leverage. The UK can either stay as an EU satellite state or leave as it chooses.
Conclusion
The UK desperately wants a bespoke deal. Ideally a favourable one but anything that is better than the economic disaster of Hard Brexit and the political disaster of Soft Brexit. Desirability bias (“Desire – The Fatal Flaw”) makes the UK think a good deal is likely. But the EU is not cooperating, which leads me to believe that it has no interest in any such deal. I think that the EU may offer the UK a choice between Hard Brexit or abiding by all the rules without a seat at the table.
Applied Macro 