Wednesday , December 19 2018
Home / Peterson Institute / Theresa May Plays Brexit Chicken

Theresa May Plays Brexit Chicken

Summary:
It is easy to understand why British advocates of leaving the European Union responded to the Withdrawal Agreement that Prime Minister Theresa May forged with Brussels with jeers, cries of outrage, and groans in Parliament in mid-November. The plan would ensure that the UK economy remains closely integrated with the other 27 EU nations and renders impossible the kind of independent UK trade and economic policies the Brexiteers championed. Since the European Union has made it clear that the withdrawal deal is not renegotiable, the prime minister is gambling that her alternative will secure a yes vote ahead of the deadline of March 30, 2019. As many have understood for a while, the Withdrawal Agreement amounts to Brexit postponed: a full customs union and basic economic integration with

Topics:
Jacob Funk Kirkegaard considers the following as important:

This could be interesting, too:

Scott Sumner writes NOW you want easier money?

[email protected] (Cyril Morong) writes Is Christmas Gift Giving Inefficient?

Timothy Taylor writes Tragedy of the Commons: 50 Years Later

Tyler Cowen writes Tuesday assorted links

It is easy to understand why British advocates of leaving the European Union responded to the Withdrawal Agreement that Prime Minister Theresa May forged with Brussels with jeers, cries of outrage, and groans in Parliament in mid-November. The plan would ensure that the UK economy remains closely integrated with the other 27 EU nations and renders impossible the kind of independent UK trade and economic policies the Brexiteers championed. Since the European Union has made it clear that the withdrawal deal is not renegotiable, the prime minister is gambling that her alternative will secure a yes vote ahead of the deadline of March 30, 2019.

As many have understood for a while, the Withdrawal Agreement amounts to Brexit postponed: a full customs union and basic economic integration with Europe during a transition period, including adherence to European regulatory structures and freedom of immigration between the United Kingdom and the EU27. London will be a "rule taker" and not a "rule maker" for its first 21 months outside the European Union.

Three Possible Paths after 2020

For the period after 2020, the parties' intention is that the two sides will pick one of three alternative paths in mid-2020. A major goal is to ensure that there is no border in the future between Northern Ireland, which is part of the United Kingdom, and the Irish Republic, which would remain in the European Union.

1) The first option would require a newly negotiated permanent economic relationship preserving the open border between Ireland and Northern Ireland. The one-year timetable for negotiating the future relationship gives little time for an alternative and would probably end up with the United Kingdom entering into something close to the European Economic Area, as well as the EU Customs Union, a relationship resembling what was set up for Norway following its rejection of EU membership in 1994. (Norway has its own currency but contributes to the EU budget and must adhere to EU internal market regulations without having any say in their making.) Embracing a looser permanent economic relationship between the United Kingdom and EU27, for instance in the form of a free trade agreement similar to the one recently concluded between the European Union and Canada, would require either a far more comprehensive set of border arrangements between Northern Ireland and the rest of the United Kingdom1 or the magic appearance by mid-2020 of new "technological solutions" to ensure that no physical border infrastructure would be required on the Northern Irish border. Neither are feasible for the foreseeable future.

2) The second option entails kicking the can down the road and simply extending the transition period until—this is the term described in the draft Withdrawal Agreement—the year "20xx." Under this alternative, the United Kingdom would remain a rule taker for longer, and the EU27 and the United Kingdom would be required to agree to a new level of British financial contributions to the EU budget for the duration of the extended transition period. Michel Barnier, the chief EU Brexit negotiator, has recently proposed extending the transition until 2022.

3) The third option is the so-called "Backstop," which would kick in if neither option 1 nor 2 are chosen and would rule out a new border between Northern Ireland and Ireland. The Backstop option entails some new trade barriers between the EU27 and the United Kingdom as a whole, some new barriers between Northern Ireland and the United Kingdom, but no barriers between Northern Ireland and Ireland. All of the United Kingdom would remain in a single customs territory with the EU27, ensuring that no tariffs, goods quotas, or rules of origin apply for trade between the two. Being outside the EU internal market, many other new nontariff barriers would arise between the United Kingdom and the EU27, however.

Northern Ireland would have to enforce the full EU Customs Code (i.e., no customs inspections would be required on the border with Ireland) as well as all EU regulatory standards. These steps would ensure the continuation of all elements of the Good Friday Agreement, the 1990s-era accord that established Northern Ireland's attachment to the United Kingdom, while guaranteeing that no border infrastructure would be required in Northern Ireland. But the Backstop option would consequently entail a regulatory border in many sectors of the economy between Northern Ireland and the rest of the United Kingdom.

In addition to these cumbersome special geographic arrangements, the United Kingdom would have to ensure a "level playing field" with the EU27, disavowing any effort to lower its regulatory standards in order to gain unfair competitive advantage.  This aspect of the Backstop option would necessarily align the United Kingdom with future EU rules on competition and state aid  (as overseen by the European Court of Justice, ECJ), while committing not to lower environmental protections and social and labor standards, and to adhere to the European Union's principles on good governance of tax. In other words, under the Backstop option, the United Kingdom would be subject to EU27 extraterritoriality across a wide range of frequently controversial public policy areas.

This third option is unlikely to work, however, without additional side deals to facilitate economic integration, such as a provision governing road transportation and the ability of UK trucks to serve the EU market (see the Financial Times's Alex Barker and Jim Brunsden). Other agreements would be needed to cover veterinary and phytosanitary standards permitting cross-border trade in the perishable food and agricultural products trade between the EU27 and the United Kingdom. The parties would have to agree to common regulatory standards for goods and regularized border checks. Under the Backstop, the United Kingdom would likely not be able to join the EU27's trade agreements with the rest of the world, unless the European Union and its other trading partners agreed to change the rules of origin provisions for UK goods.

Without such side deals, the Backstop would create formidable new trade barriers between the United Kingdom and EU27. Moreover, were the United Kingdom to accept a separate regulatory area for Northern Ireland, allowing it to continue to be integrated with Ireland itself, the Scottish nationalists would be sure to demand the same deal. The Backstop arrangement would thus entail a level of economic and regulatory integration between the EU27 and all of the United Kingdom far above just a "basic customs union."  In political terms, the Backstop hence approaches the functional equivalent of a Switzerland piecemeal membership of the EU Customs Union and many parts of the internal market.

Accordingly, it is unlikely that the EU27 or UK governments will choose the Backstop option in mid-2020, especially as it would require mutual agreement for the United Kingdom to pull out of it later.  

In summary, no matter what happens under May's Withdrawal Agreement, the United Kingdom will be entering into something equivalent to permanent Norway-style rule taking.

Will May's Gambit Work at Westminster?

For all the turmoil over May's proposal in Parliament, the approval of her Cabinet (over the objections of 11 out of 28 members, some of whom resigned) enables her to secure the agreement of other EU governments on November 25.

The EU27 has already signaled that no material renegotiation of the Withdrawal Agreement will be possible, though discussions about the accompanying political declaration concerning the future relationship continue. Though some analysts have discussed the possibility of a second referendum, such an option is impossible as a practical matter. There is simply not enough time for a democratically legitimate second vote before the 2019 deadline.3 It is this deal or no deal as far as May and the EU27 are concerned. Parliament could conceivably pass a new law overruling the 2016 referendum result, but that is hardly likely, even if the EU27 accepts a unilateral UK abandonment of Brexit before March 30, 2019.

An open question remains whether conservative MPs will launch a leadership challenge against May in the coming days. Just 48 Tory MPs must demand such a challenge for it to go ahead, but a majority of 158 voters for another Tory leader is required to depose May as Conservative leader and prime minister. Brexiteers may not have the 48 to call for a vote, or much less install one of their own as new Conservative leader. A failed leadership challenge in the coming weeks, however, would strengthen May politically, because there would not be another leadership challenge for 12 months.

The May deal may well go down in defeat in Parliament. The Democratic Unionist Party (DUP), which is a crucial part of her parliamentary majority, opposes the regulatory barriers between Northern Ireland and the rest of the United Kingdom under the Backstop scenario. If the measure goes down, the financial market would likely plunge into some turmoil, adding political pressure on MPs. The British government will then have the option of resubmitting –the Withdrawal Agreement to Parliament at a later stage, but still before the March 30 Brexit deadline—a scenario similar to the US Congress's successful second attempt to pass the US Troubled Asset Relief Program (TARP) bailout.

The prime minister might also—perhaps as a last resort after a second failed parliamentary vote on the Withdrawal Agreement—call an early election in January or February 2019 ahead of the Brexit deadline. Such an election would be highly uncertain. May would be campaigning to salvage her deal and avoid a no deal Brexit supported only by a deeply divided Conservative Party, with hardline Brexiteers calling her agreement treasonous. The UK Independence Party (UKIP) would harvest many Tory "sovereigntist votes." On the other hand, the vote would solely revolve around Brexit, neutralizing the popular leftist economic platform of Labour and its leader, Jeremy Corbyn. Moreover, because the May agreement resembles Labour's position on Brexit, the vote would come down to whom voters trust, May or Corbyn, to implement their shared vision. Corbyn's unsteady party leadership and mishandling of charges of anti-Semitism could rebound to May's benefit.

Were Corbyn to win, he could easily accept May's Withdrawal Agreement with only minor changes, as it is Labour policy to keep the United Kingdom inside the EU Customs Union, while insisting on renegotiating the accompanying political declaration concerning the future UK-EU27 long-term relationship, putting the United Kingdom on a more pro-European path.

Though these scenarios are the most likely, a collapse into a catastrophic no deal Brexit cannot be ruled out. Moreover, continued close economic integration with and rule taking from the EU27, as May's plan envisions, may not be politically sustainable in the United Kingdom in the long run.

Yet going forward, with young British voters far more pro-EU than their parents, the "European question" in British politics will likely not be how to achieve a "real Brexit" but rather if and under what terms the United Kingdom should rejoin the European Union. Certainly, EU Council President Donald Tusk is playing the long game when he consistently reminds the British that they are welcome to change their mind on Brexit.

Notes

1. It furthermore seems overwhelmingly likely that the EU27 would insist on various "level playing field" commitments from the United Kingdom in order for even a looser Canada-style FTA to be concluded.

2. An extension of the transition period would stretch into the next EU Multiannual Financial Framework period from 2021–27 for which national member state contributions have not yet been agreed. Hence, the level of UK contributions in an extended transition are also still to be decided.

3. The EU27 will only be willing to extend the Article 50 period by a few weeks because of the European elections in late May—at which point they want the United Kingdom to have legally left the European Union—and would only do so if a second referendum explicitly allowed for Brexit to be abandoned completely.

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.

Leave a Reply

Your email address will not be published. Required fields are marked *