What does May’s Deal lead to?

If the UK Parliament were to pass the Brexit withdrawal agreement, the UK would leave the EU in an orderly fashion, but the future relationship would remain largely undecided. For once, I agree with Corbyn that this is “Blind Brexit”. I also think that hardline Brexiteers have a point that the backstop should not be seen as a remote possibility – it is the default – and if we have learned one thing from this 2-year debacle, it is that there are no alternative ideas on the Irish border that would work! The reason Rees-Mogg’s group has never come up with a suggestion for the Irish border is because a solution does not exist and without a solution we end up in the backstop.

How to achieve having the UK outside the customs union

No Deal!
It is not clear to me how much of the support for this option rests upon the delusion that the UK can achieve it by playing chicken with the EU, which ultimately would lead to a No Deal scenario. Although this would cause an economic crash, it would be possible to reconstruct the economy outside the EU framework achieving the political goal for the UK to have a separate identity from the EU. By this stage however, we cannot decide what the UK is comprised of e.g. does it include N Ireland? Scotland? England is separated and that is the goal.

How to achieve No Deal?

  1. Make it the default option – tick
  2. Sabotage any attempts to make a deal – tick (Special mention for Davis and Raab)

This is a clear minority view for both Parliament and the electorate but retains real power because it is the default option and the paralysis of the political opposition to implement a change in policy.

The vote for the Brady amendment last night is a victory for this group and it further continues their traditional path of making demands that are both impossible and vague. “Alternative arrangements” without any suggestion of what they might be is frankly genius if the goal is to not make any progress.

How to achieve Leave but have the UK inside the customs union

Vote for May’s deal, and default option thereafter is that UK is inside customs union (via backstop)

Given the intractability of the Irish border issue, the likely way out of the backstop is a negotiated permanent membership of the customs union. The details of the arrangement need to be decided and are politically contentious. If the soft Brexiteers can gain a mandate through public support, there is no reason we could not end up with a Norway like status.

This is the option that likely has a parliamentary majority. But this is also the route that was voted down by a record margin!

The way to make sense of this contradiction is that this deal has the misfortune to be advocated by a PM who is both deeply partisan and incompetent. She has turned Brexit in to a party-political battle designed to appease her right-wing ultras which makes support from Labour MPs very difficult. We also have a similarly narrow-minded opposition leader who would prefer the No Deal option anyway, especially if he can blame it on the Tories. The dynamics are dominated by the Tories only listening to their own members and Labour ignoring theirs.

How to achieve Remain?

I see no credible path to this. Irrespective of whether Remain would win the popular vote I cannot see how a parliamentary majority could be formed to call a referendum. Perhaps a combination of

  1. Labour adopt as party policy
  2. Labour win no-confidence vote and there is a General Election
  3. Labour win the election
  4. Get referendum legislation passed with Remain as an option
  5. Remain win the referendum
  6. Remain win the next referendum (this issue is not going away)

That is quite a long list of independently unlikely things.

The way forward

A recent precedent for how implacable face-offs can be resolved is to look at Trump vs Pelosi on the funding of the wall. The issue was not decided by power or logic. It came down to the opinion polls – once it became clear that Trump and the GOP were being blamed for the shutdown they found a way to end it.

For Brexit we do not yet have any movement in the polls. Hardline Brexiteers and Remainers are still fighting for their preferred outcome. Neither have any interest in compromise.

What we need is for the silent middle to form a view. The people who are just completely sick of Brexit and want to move on. Then the moderate MPs will follow them.

Brexit – The Will of the People

In this post, I would like to move away from discussion of the rights and wrongs of Brexit but instead concentrate on what outcome people currently prefer. What would be the democratic solution?


Condorcet Paradox

This is a useful part of economic theory that does not get enough attention when discussing democracy. It may seem a little dry but please bear with me because it is very important.

A central concept in economics is preferences:

  • I prefer Apples to Bananas (A > B)
  • I prefer Bananas to Carrots (B > C)

Given this, you would also expect that:

  • I also prefer Apples to Carrots (A > C)

This is called having “transitive” preferences and is a key part of what economists mean for behaviour to be “rational”.

The Condorcet Paradox (https://en.wikipedia.org/wiki/Condorcet_paradox) shows that even if individuals within a group have transitive preferences, the group as measured by majority preference may not have.

In the example above

  • A majority of people in a group may prefer Apples to Bananas
  • A majority of people also prefer Bananas to Carrots
  • However, a majority of people prefer Carrots to Apples

It is entirely possible and logical, even though its it rather counter-intuitive.

Application to Brexit

In Brexit terms, I would have transitive preferences:

  • I Prefer Remain to May’s Deal (R > M)
  • I prefer May’s Deal to No Deal (M > N)

and completely consistently:

  • I also prefer Remain to No Deal (R > N)

For the main groups within the population, let’s imagine 1st, 2nd and 3rd preferences for the various outcomes in the below table:

In my imagined universe:

  • Remainers – would prefer May’s Deal to No Deal
  • May-Dealers – would prefer No Deal to Remain
  • No-Dealers – would prefer Remain to May’s Deal
    It may seem an odd choice but, for example, this is Dominic Raab’s expressed view.
    It seems for some, defeat is emotionally more acceptable than compromise.

Now let’s have a contest and see who wins if we ran a Referendum on each pair of outcomes:

In this case, the overall population makes these choices:

  • Remain is preferred to May’s Deal
  • May’s deal is preferred to No Deal

You may think therefore that Remain is preferred to No Deal but this is not the case. Actually:

  • No Deal is preferred to Remain

In this imagined case, there is no overall preferred outcome.

What do people actually prefer?

Polling data in the UK is consistent with this problem. Support for the three options is pretty evenly split, and even taking into account second preference, we are no clearer. Each head-to-head matches would be too close to call contests.

How is this relevant?

If means the UK, as a whole, DOES NOT HAVE A PREFERENCE and therefore there is no single “democratic” correct answer. Representative democracy, with parties and elections, has been our way of dealing with issues like this. Having a referendum on an issue with more than 2 possible answers just leads to nonsense, just as happened in the initial Brexit referendum.

Identity politics vs Pragmatism

The Brexit ultras who want No Deal can be seen as being driven by identity politics. This means that national identity is overwhelmingly important compared to economics. If you are a Remainer for whom Brexit is a matter of identity politics then for you then wanting a referendum is very logical. That is the only feasible route to Remain and anything other than Remain is a loss.

For economic pragmatists supporting a referendum is very dangerous. Remain is by far the best outcome but No Deal Brexit is catastrophically worse than any deal and avoiding a catastrophe is the most important thing.

For political pragmatists supporting a referendum is very dangerous. The result will be close and will not close the issue. There will not be any clearer sense of legitimacy for the outcome and after another 6-month campaign our divisions will be even more entrenched.

Should we have another Referendum?

As an ardent Remainer, you would think that I support another Referendum. But I do not.
Partly given the logic above, I do not think Referenda are consistent with our democratic system and thus a sensible way to resolve a complex issue like this. But also more pragmatically, I think Remain may struggle to win again and there is a good chance No Deal is the eventual winner; or even if Remain were to win, it would not be by a sufficient margin to close the debate.

Brexit – What happens next?

This is the question I am most often asked and also the hardest one to answer.
I will try to provide a framework for the many overlapping threads:

The possible outcomes

  1. No Deal (Chaos Brexit)
    It is often said that there is no majority in Parliament for this, however there is also no majority for anything else. The key point is that, if nothing happens, on March 29th, the UK leaves the EU with No Deal, and there must be an Act of Parliament to stop it. It is the default option and, as such, this chaotic outcome should not be underestimated.

To avoid it, one of the other outcomes needs to find a way to a majority.

  1. May’s Deal
    This option will have be voted on in Parliament and is universally expected to fail.
    The fundamental problem is that this deal spells out that Brexit is clearly worse than Remain and clearly worse than Fantasy Brexit.But to be fair any Brexit deal would have the same problem.
  1. Remain
    With the news today that Labour may be attempting to form a coherent policy on Brexit, this option has gained a glimmer of a realistic chance.

Non-possible outcomes

  1. “Fantasy” or “Have cake and eat it” Brexit

Given that it would require more compromise from the EU, the EU is never going to offer anything like this and will not allow any renegotiation for this purpose.

  1. Delay Brexit while we work out what to do

A delay would need the unanimous agreement of all 27 EU countries, so it seems rather unlikely for them to do so.

 

If the options are so simple, why is it all so complicated?

The simplest answer is that this situation is unprecedented so there is no clear procedure to follow.
Here are some of the wild cards:

  • Vote of No Confidence in May.
    This requires letters from 48 Tory MPs. However, they have not managed it yet, and may never get there. Even if they manage to get enough to trigger a vote, it is likely that May would win and then she could not be challenged for another year, her position strengthened. But if May lost, then we head to a new leadership election which is a lengthy process, pretty much running down the clock to Mar 29th. This is why only the most hardline Chaos Brexiteers champion such a route.
  • Vote of No Confidence in the government.
    It is highly likely that Labour will call for one after May loses the vote on her deal (and probably if she lost a vote of No Confidence within the Tory party), but it unclear if they expect to win it. If they did and forced a general election, it would be fascinating to see what the manifestos would say. With May as leader, it seems likely she would stand on a platform of her deal. Do Brexiteer rebels have to honour the manifesto pledge? Note there is no time to replace her with another leader before an election!

There is another important reason this is so complex. A lot of UK politicians do not understand the EU because they have never tried to. They really believe the EU can be forced to renegotiate. Talking to politically engaged people here, I get the sense that they are so engrossed in Westminster and party politics, they miss the point by assuming that important decisions are made here in the UK, without considering the viewpoint of our negotiating partner. I have previously used the example of Greece; if you misunderstand the EU then you play chicken and lose. Unfortunately, political journalists seem to have the same issue. They are obsessed with covering domestic political gossip here in the UK and so the coverage focuses on Westminster intrigue and the related confusion, whilst simultaneously missing the issues that are relevant.

  • Another Referendum?
    I think that a large majority of MPs and the electorate do not want this, but it still may happen if Parliament cannot agree any deal. The important issue here would be what question is asked. One aspect of this that I have not seen discussed is that the EU would have to agree to a 6-month delay to Brexit to allow this to happen. Therefore, the EU would have to agree with the question posed; if the vote was between Remain and May’s Deal, they might agree; if No Deal were one of the options, I do not see why they would do this. 

 

My personal forecast

I still think that the most likely outcome is that something close to May’s deal is agreed.
Perhaps losing the first vote will actually help her bring the rebels into line?

  1. Voting pattern could resemble the TARP votes in the US in 2008
    i.e. the politicians want to make a statement that they hate the deal before reality strikes and they have to vote for it the second time
  2. Labour officially endorse a new referendum which brings the Brexiteers into line
  3. May renegotiates a softer Brexit (recent EFTA talk) and gets enough Labour MPs to support
  4. We crash out of the EU, have chaos for a short period and then ask the EU if we can have the deal please and they allow it.

How bad is No Deal Brexit?

We have all seen the headlines yesterday with Bank of England estimates of a 25% hit to the currency and the Brexiteers talking about how the economy will be better off.

I will try to lay out what drives their wide disparity.

1 . ‘No Deal Brexit’ will cause limited problems

This is the case made by people like Krugman. Essentially the value of UK exports to the EU is 15% of GDP. Even with a really disruptive Brexit, this would fall by at most 1/3 i.e. 33% loss of exports. Given domestic substitution, the case could be made that this is still far too high a number and so GDP would be less than 1% lower, depending on exact elasticities.

2 . ‘No Deal Brexit’ will cause no problem – it maybe even better than the current situation

Take the analysis above and add in fantastic trade deals with the rest of the world which will more than make up for the lost EU trade. Trade deals may well take a little while to negotiate so there will be a minor cost short term, but longer term the UK will be better off.

I could take issue with any number of assumptions in the argument above. In particular, the gravity model of trade makes a mockery of the idea that you can replace an enormous market on your doorstep with markets halfway across the globe. Furthermore, it is hard to see why the UK would get better trade deals than the EU currently gets; negotiating deals with reduced clout, it seems obvious such a deal will be worse.

But leaving this aside for now, we can see the order of magnitude of potential benefits of new trade agreements with the rest of the world as perhaps 1% of GDP at best.

3 . ‘No Deal Brexit’ is Chaos Brexit

The reason for this is we do trade with the EU is a simple manner – we have highly embedded supply chains across vast swathes of the economy.

The classic example is of course the car industry (https://www.theguardian.com/business/2017/mar/03/brexit-uk-car-industry-mini-britain-eu)

It is important to recognise that these movements of goods do not form part of the official figures for exports to the EU. National Accounts are based upon transactions – i.e. the final sale of goods. When a company moves parts around between different factories in the EU it is not doing a transaction. It does not sell them to itself. Imports within the EU are called “acquisitions” not imports. Note that they are recorded for VAT purposes however, based upon the change in value (value added at each stage in the process), but this does not give a sense of the importance of intra-company physical movement of goods across the border.

The mistake in the analysis of people like Krugman, is to have a very simplistic model in which the UK and the EU are the sole creators of goods and they trade with each other, much like a model of trade between two parties in an economic textbook. The reality is that the UK and EU are intertwined in the production process and the impact of this is grossly underestimated by only looking at the destination of the final product.

It is worth then considering the likely reaction of industry.

If making cars in the UK is subject to expensive issues and frictions in the supply chain with a possible tariff when you try to sell into the EU – then why make them in the UK at all? Make them entirely in the EU. Will there remain a UK car industry selling to UK buyers? Well possibly – but given the enormous economies of scale in manufacturing, it seems far more likely that production moves to the EU. Then we not only stop exporting cars, we have to import even more of them. With over 1 million people in the UK currently employed in the wider automotive industry that is a huge problem.

The way we get to a real economic catastrophe is very similar to what we saw in the financial crisis. You take a well-functioning system and smash it. Then stand back and be very surprised by the unintended consequences.

Brexit – The Endgame

Quick Recap thus far

The path of Brexit up to this point has been depressingly predictable. I have previously laid out the logic of the issues and nothing meaningful has changed in the past 2 years which is why I have found nothing new worth writing about. The EU has been very clear at all times on its approach whereas the UK seems yet to work out what it wants Brexit to mean.


Options for the UK

  1. Remain
  2. Leave EU but maintain very close economic ties
    This makes the UK a rule taker and is very similar to being in the EU except with no say. A clear loss of sovereignty with no obvious benefit i.e. Brexit means “Giving Up Control”
  3. Leave EU and break economic ties
    clear rise in independence but at a very severe economic cost. This could be

a.  Orderly i.e. a negotiated transition or

b.  Disorderly i.e. “No Deal” Brexit.

The current strategy of the UK is to move to a transition that leaves options 2 and 3 both open.
In this way many decisions are deferred, however the Irish border is an obstacle that makes it difficult to fudge.


The Irish Border Problem

The issue can be stated very simply, either

A. UK has no customs border with the EU
This is much the same as the current situation and so is unacceptable to the Brexiteers. May has committed that we will not do this.

B. UK has a customs border with the EU
If so where?

  • Around the UK i.e. a land border between Northern Ireland and the Republic
    This breaches the Good Friday Agreement and, as one of the red lines, is unacceptable to the EU. May has committed we will not do this.
  • Around Britain i.e. a border in the Irish Sea.
    This is unacceptable to the DUP. May has committed we will not do this.

You will notice that the UK government has strongly and categorically ruled out all possible options to appease different factions. How can this be resolved? The main approach so far appears to participate in magical thinking, but we fast approaching the point where choices have to be made. Furthermore, denial of the issues and refusing to make a choice at this stage becomes a choice with ramifications.

 

Brexiteer solution

It is important to recognise the Brexiteers do not form in any way a unified group with a plan. They are united in their opposition to the EU, not in their plans for what comes next.

  • Boris Johnson – resigned so he could continue to talk nonsense and magical thinking solutions from the side-lines. He will claim whatever happens was not his fault, would have worked out much better if he were in charge, and therefore should now be PM.
  • Michael Gove – wants the exit from the EU to be as smooth as possible e.g. temporary Norway, thereby not risking a 2nd referendum or a “no Brexit” but leaving the difficult issues for later. Presents himself as the pragmatic face of Brexit and therefore he becomes the next PM
  • Liam Fox – had tried to follow the pragmatic line of Gove but recently has been dragged into arguments on sovereignty, with the ECJ involvement in the Backstop quitting arrangement.
  • Jacob Rees Mogg – profoundly does not care about Ireland and thinks it is ridiculous that the independent future of England could be impacted as such. Taking his values from the 18th century, his attitude to the Irish is no different. The border is not important to him and he dismisses anyone who suggests it should be or that he should come up with a proposal.
  • The DUP – I do not have the foggiest clue as to what they want. A return to the Troubles perhaps?

Some of these factions are aligned with May in aiming for an agreement with the EU that fudges the Irish border issue (the EU are masters of drafting wording which can be interpreted any way you want). However, others are demanding clarity and will vote down any deal with does not have it, believing that a game of brinksmanship with the EU will lead to a better outcome.

This leaves us at a point of impending chaos which makes it the hardest stage to predict. I found this BBC graphic a helpful guide as to some of the possibilities (https://ichef.bbci.co.uk/news/624/cpsprodpb/125F1/production/_104294257_brexit_flow_chart_12_11_640-nc.png)

 

Brexit – where are we going? An alternative view

May says that the deal may be struck in the next 24 hours, and so at the risk of being immediately proved wrong, I will lay out another potential path, with the help of a little recent history

A Greek tragedy?

In all the analysis of the various complexities of the negotiations, I have not read anything which draws upon the similarities to the Greek financial crisis. This is surprising given the clear precedent on how the EU behaved during a negotiation and furthermore, how it reacted to a crisis.

 

Recap

Greece spiralled into a huge government debt crisis starting in 2009 and couldn’t contain it domestically. To fund the large ongoing budget deficits in addition to historic debt burden, it was forced to turn to the IMF and the EU for loans, resulting in the first Greek bailout package in 2010.

A key part of the bailout terms involved Greece submitting to austerity demands from the EU. This then developed into a narrative within Greece over the next few years (note the echoes for today)

  • Germans are the enemy – they are imposing this pain on us. Lots of references to World War 2 and reparations (read The Telegraph in the past 2 years?)
  • The EU needs us more than we need them. If we drive negotiations to the brink they will cave in and offer us better terms (listened to any Brexiteer in the last 3 years?)
  • Varoufakis claims his clever negotiating strategy (i.e. not engaging in any meaningful dialogue) will force the EU to give in and back down (David Davis past 2 years and still!?)

 

Pushback from Greece?

In 2011 amid public anger over austerity, the Greek Prime Minister called for a referendum on a second bailout, attempting to pushback on the EU’s demands. However, when it came to it, the Prime Minister called off the referendum and then resigned; Greece backed down and applied for a second even larger bailout with expanded austerity.

 

Crunch-time

  • Early 2015
    Having been elected in January on an anti-austerity ticket, the Greek government did not want to agree to the third bail out terms. The EU said there would be no improved offer and that any further deal would likely have harsher austerity conditions
  • 5 Jul 2015
    The Greek government calls a referendum, telling the electorate to reject the terms of the EU offer as it would give the government more leverage in negotiations and they would secure a far better deal.

The referendum votes down the bailout offer by 61% to 39%

EU does not improve its offer

Greece faces immediate economic collapse
(already in default after missing a payment on 30th June 2015)

EU banking system does not collapse.

EU allows Greece to choose to leave the Euro if it wants to.

  • 13th July 2015
    Greece accepts a revised bailout from the EU with harsher austerity conditions
  • Aftermath
    The Greeks seem to view all this as a great success in standing up to the Germans

 

What does this teach us?

It shows us that the EU is highly predictable. It does exactly what it says it will do. The EU does not back down in a game of chicken against a smaller nation. When the EU tells us that it would prefer “No Deal” to breaching its red lines, it means it.

The UK, on the other hand, will not be able to secure a better deal from the EU via a repeated game of brinkmanship. If the Greek saga is anything to go by, the deal will likely get worse.

It also shows that nations are capable of material self-harm in the name of independence. We should not assume that the UK will not end up with a “No Deal Brexit” just because it is horrific.

 

What happens if we are Greek?

  • May agrees a deal with the EU
  • Either the Cabinet or Parliament vote it down and we move towards No Deal.
  • Corbyn’s Opposition continues to fail to come up with any alternative plans and just wants to use the chaos to claim power.
  • We wait for the EU to offer us a better deal, which of course they don’t.
  • The market and economic implications start to bite, but perhaps not enough for us to agree to make the deal.
  • We drop out of the EU into chaos
  • After a week of chaos we go back to the EU and take whatever terms they offer us.
  • We call Brexit a triumph.

 

Sovereignty and Power

I have been pondering in what sense does Brexit affect UK sovereignty. In simple terms, the UK’s sovereignty is unchanged. The UK has the right to leave the EU, therefore it has independent authority whether it chooses to use it or not.

What is Sovereignty?

Wikipedia defines Sovereignty as the “power of a governing body over itself, without any interference from outside sources or bodies.” This suggests that we need to consider degrees of power, and this takes us rapidly beyond the simple terms above.

In one regard, the definition above suggests leaving the EU would clearly increase the UK’s sovereignty. Currently there is a lot of interference from EU bodies that a Hard Brexit would remove.

Sovereignty – to give it away or to exercise it?

Another way to think about degrees of power is to consider effectiveness i.e. the power to do or get things you want. While a country might claim theoretical power to do anything it wants to, in practice all countries enter in binding agreements with other countries which put constraints on some behaviour in return for other benefits. For example, a trade treaty creates easier trade once you agree to certain standards, or joining NATO because you care about your economy and your security. In this way, you exercise your sovereignty, giving up some of your autonomy in exchange for a benefit you value more highly. To use an analogy to the individual: you lose autonomy by having a job (you have a boss and you have to go to work) but you gain power to do what you want by having money.

Relative power

Relative power therefore, is an important determinant of the effective sovereignty of a country.
If you are very powerful compared to another country, then a treaty you enter into will likely be better suited to your preferences than to theirs. Whilst superpowers and small states are both sovereign, in practice the superpower gets to set the terms a lot more often.

Smaller states can change this is by clubbing together: finding like-minded states, forming coalitions, standing up to larger powers by, in effect, acting like a large power themselves. If your internal values and goals are similar, then the loss of independence is more than made up for by the increase in power you gain. Thus, the EU is a greater global power than any of its constituent countries. The US, when thought of as constituent states, is similar. Under this approach, you could even suggest “sovereignty” has been increased by pooling it, rather than diminished.

And finally back to Brexit….

The question for the UK is whether it had more effective sovereignty by pooling its sovereignty within the EU or by going it alone. This is a way to think about why people voted the way they did.

  1. Is the UK pooling its sovereignty with countries with which it shares values?
  2. If the UK left would it be a significant global power?

For people older than me, my guess is that they do not feel an affinity with continental Europe let alone its values, and at same time retain clear memories of when Britain was a significant global power.

For people younger than me, there is a much greater affinity for European culture and values, and a very limited sense that the UK is an important independent state if it were alone on the global stage.

Thus, one group sees a freedom from EU control, and with that an ability for the UK to use its power without restraint. The other sees a separation from modern liberal values, towards political extremism and a rapid decline in economic and political power.

Brexit – where are we heading?

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:

  1. 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.
  2. 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.
  3. 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:

  1. Loved by Brexiteers. Obviously, I think it is madness.
  2. No-one wants this outcome. Clearly worse than staying in.
  3. This is the mainstream view that Leavers and Remainers will find common ground.

And the EU view:

  1. It would be the UK’s choice. Looks insane but if they want it, the EU cannot stop them.
  2. Ideal. No economic shocks and would get rid of the troublesome UK.
  3. 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.