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May’s Brexit Will Be Both Hard and Risky

Summary:
British Prime Minister Theresa May presented her opening gambit on January 17 for the upcoming Brexit negotiations. She signaled  that her government strives for a clean and hard Brexit, including a UK departure from the EU Internal Market and—apparently—the EU Customs Union. Control over immigration, an end to the jurisdiction of the European Court of Justice, and stopping UK contributions to the EU budget are also among  her political priorities. May confirmed “that the Government will put the final deal that is agreed between the UK and the EU to a vote in both Houses of Parliament before it comes into force,” but in contrast to what many observers believe, a no vote in parliament would not kill Brexit and continue the status quo. Rather the UK would experience an even harder Brexit, as

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British Prime Minister Theresa May presented her opening gambit on January 17 for the upcoming Brexit negotiations. She signaled  that her government strives for a clean and hard Brexit, including a UK departure from the EU Internal Market and—apparently—the EU Customs Union. Control over immigration, an end to the jurisdiction of the European Court of Justice, and stopping UK contributions to the EU budget are also among  her political priorities.

May confirmed “that the Government will put the final deal that is agreed between the UK and the EU to a vote in both Houses of Parliament before it comes into force,” but in contrast to what many observers believe, a no vote in parliament would not kill Brexit and continue the status quo. Rather the UK would experience an even harder Brexit, as it crashes out of the EU without any agreements on Article 50 transition or a future trading relationship. This conclusion derives from how May in her speech separates the issues of repealing the European Communities Act, e.g., the application of EU law in the UK, and a vote by parliament on the deal she will be negotiating. In other words, there is nothing in May’s promise that makes Brexit any less likely, and the parliament would have to initiate its own legislation to stop Brexit from happening. Indeed, letting the UK parliament reject a “bad deal with the EU” would conveniently shift the political responsibility for such a deal away from the prime minister herself and onto members of parliament.

May states that she wants to negotiate a transition agreement—in her description “a phased approach”—to minimize legal and economic disruption facing businesses from a sudden dramatic change.  But her breezy optimism and appeals for a quick transition are unrealistic. The EU-27 countries are not remotely willing to entertain the kind of process she wants. Her positions are simply not acceptable to the rest of the EU.

As highlighted by chief  negotiator Michel Barnier, in his response to May’s speech, the EU-27 will insist on negotiating the  Article 50 divorce before  negotiating future  trade and economic ties with the  UK. His stance is the opposite of May’s desire to have reached an agreement about our future partnership by the time the two-year Article Fifty process has concluded.” 

Once Article 50 is invoked by Britain, a two-year deadline for negotiating the divorce starts. The EU-27 are not likely to extend that time frame, which means that  the UK would automatically drop out of the EU in the absence of a transition agreement, raising the cliff-edge risk of an economic shock. The EU, by  insisting on an Article 50 negotiation preceding a negotiation over the future relationship, is ensuring that concluding both will not be possible within two years. But because the EU has  announced that it will seek the payment of up to €60 billion from the UK to settle any outstanding commitments, the political challenges seem immense. May omitted any reference to the potential for such a large EU financial claim in her speech. In so doing she failed to prepare her domestic political ground for what is likely to come. The omission might kill prospects for a quick  transition agreement, which could precipitate UK-located businesses planning  for the worst come early 2019. Only a quick transition agreement really avoids the cliff-edge scenario and benefits the UK economy.

May also declared that she would rather have no deal than a bad deal for the UK, which may be a good negotiating position. But when combined with her added threat to create an “offshore Britain” and race to the bottom on corporate tax rates and regulation with the EU, this position is not likely to produce a quick deal with the EU-27—especially since this threat is hardly credible, given the UK’s already strained fiscal position and May’s ambitious domestic spending priorities.

Of course, as May said,  a no deal scenario would economically hurt the EU, enhancing her bargaining power in theory. But her comment that “for the EU, it would mean new barriers to trade with one of the biggest economies in the world” recalls the old (fictitious) headline:  “Fog in Channel, Continent Isolated.” In reality, UK exports to the EU-27, as a share of its GDP, are far higher than EU-27 exports to the UK, and the UK economy, being more dependent on foreign direct investment (FDI), is far more vulnerable to disruptions of supply chains and financial transactions from a cliff-edge scenario than is the EU. May’s argument that Europe needs a deal more than the UK is thus unconvincing.

The prime minister vowed in her announcement to go out into the world and seek new trading relations with more distant economic partners. But her bravado ignores the gravity relationship in trade, which holds that proximity and size are conspicuous factors in bilateral economic interactions. Her claim also  flies in the face of recent decades of experience in international trade negotiations, where it takes years to reach meaningful agreements. Here May’s boisterous statement that “President Elect Trump has said Britain is not ‘at the back of the queue’ for a trade deal with the United States, the world’s biggest economy, but front of the line” seems particularly risky.

Trump, the dealmaker, is probably right that it could be economically advantageous for the US to negotiate a quick bilateral free trade agreement with the UK. Merely to start such negotiations would benefit May politically, providing a credible alternative to the EU divorce. But Trump knows that she would thus be more eager to strike such a UK-US deal than he is. Given that Trump already thinks that the US has the leverage to bully its trading partners, he is certain to seek to use this to his maximum advantage.  May might quickly discover that the economic and political advantages of such a negotiation are limited.

The recent collapse of the government in Northern Ireland, resulting in new elections on March 2, moreover, puts another of May’s pledges to an electoral test. She promised to address the so-called Common Travel Area with Ireland, which with the UK’s departure from the Internal Market will be undermined by the need for new customs and immigration controls at what will now be the external EU border between Ireland and Northern Ireland. Recalling that Northern Ireland voted to remain in the EU in the referendum, voters there are unlikely to look favorably upon May’s hard Brexit and a possible reinstatement of the land border with Ireland.

At least voters in Northern Ireland will get to vote soon on Theresa May’s Brexit strategy.

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Jacob Funk Kirkegaard
Jacob Funk Kirkegaard, senior fellow, has been associated with the Institute since 2002. Before joining the Institute, he worked with the Danish Ministry of Defense, the United Nations in Iraq, and in the private financial sector. He is a graduate of the Danish Army's Special School of Intelligence and Linguistics with the rank of first lieutenant; the University of Aarhus in Aarhus, Denmark; the Columbia University in New York; and received his PhD from Johns Hopkins University, School of Advanced International Studies.