Fake Brexit or no Brexit

Financial Nigeria Magazine - - Contents -

Since last year's (read 2016) Brexit ref­er­en­dum, the United King­dom has been likened to a sui­cide who jumps off a 100-storey build­ing and, as he falls past the 50th floor, shouts “so far, so good.” This com­par­i­son is un­fair to sui­cides. The real eco­nomic and po­lit­i­cal mes­sage to­day is “so far, so bad.”

The “deal” to be­gin ne­go­ti­a­tions for a post-Brexit re­la­tion­ship, an­nounced at the EU sum­mit on De­cem­ber 15, followed Prime Min­is­ter Theresa May's ca­pit­u­la­tion on all of the de­mands made by Euro­pean lead­ers: €50 bil­lion ($59 bil­lion) of bud­get con­tri­bu­tions, Euro­pean court ju­ris­dic­tion over the rights of EU cit­i­zens in Bri­tain, and a per­ma­nently open bor­der with Ire­land.

The last con­ces­sion was a game changer. The open bor­der in Ire­land has forced May to aban­don her prom­ise to “take back con­trol” from the EU and its reg­u­la­tory frame­work, as con­firmed in the sum­mit com­mu­niqué: “In the ab­sence of agreed so­lu­tions, the United King­dom will main­tain full align­ment with those rules of the In­ter­nal Mar­ket and the Cus­toms Union which, now or in the fu­ture, sup­port North South co­op­er­a­tion.”

The re­sult of this cru­cial con­ces­sion on Ire­land is that both sce­nar­ios usu­ally pro­posed for Bri­tain's re­la­tion­ship with the EU can now be dis­missed. With no par­lia­men­tary ma­jor­ity to re­voke the agree­ment, a “hard Brexit,” in which Bri­tain breaks free of EU reg­u­la­tions and trades sim­ply on the ba­sis of World Trade Or­ga­ni­za­tion rules, is no longer pos­si­ble. And a “soft Brexit,” which at­tempts to pre­serve the com­mer­cial ben­e­fits of EU mem­ber­ship with­out the po­lit­i­cal obli­ga­tions, is equally im­pos­si­ble, be­cause Euro­pean lead­ers re­ject any such “cher­ryp­ick­ing” – and now have the whip hand over Bri­tain.

If hard and soft Brexit are both ex­cluded, what other op­tions are there? The ob­vi­ous one, ap­par­ent af­ter May's failed elec­tion gam­ble, is some form of as­so­ci­ate EU mem­ber­ship, sim­i­lar to Nor­way. Bri­tain would re­tain many of its cur­rent com­mer­cial priv­i­leges, in ex­change for com­ply­ing with EU rules and reg­u­la­tions, in­clud­ing free move­ment of labour, con­tribut­ing to the EU bud­get, and ac­cept­ing the ju­ris­dic­tion of EU law. While May fool­ishly re­jected all three of these con­di­tions early this year, the likely re­sult of the Brexit ne­go­ti­a­tions will be to blur all her “red lines” out of ex­is­tence.

While busi­nesses, in­vestors, and economists would wel­come such a Nor­we­gian-style “fake Brexit,” it would carry a huge po­lit­i­cal cost. Bri­tain would have to ad­here to EU laws, reg­u­la­tions, and le­gal judg­ments in which it would no longer have any say. In­stead of a rule-maker, the United King­dom would be­come a “rule­taker” – or, in the emo­tive lan­guage adopted re­cently by Brexit hard­lin­ers, Bri­tain would be re­duced from an im­pe­rial power to a “vas­sal state” or a “colony” of the EU.

This “rule-taker” sta­tus is what the UK has al­ready re­quested for a two-year “tran­si­tion pe­riod,” be­gin­ning in April 2019. May claims that this will be a “strictly time-lim­ited” ar­range­ment, while she ne­go­ti­ates a free-trade agree­ment with the EU. But the EU has re­peat­edly made clear that two years is too short a pe­riod to ne­go­ti­ate even a sim­ple FTA, never mind the “imag­i­na­tive, be­spoke” deal that May is seek­ing.

In truth, there is al­most no chance of Bri­tain ever ne­go­ti­at­ing the “deep and spe­cial part­ner­ship” May has promised. It is sim­ply in­con­ceiv­able that Euro­pean lead­ers would of­fer Bri­tain's ser­vice in­dus­tries ac­cess to the EU sin­gle mar­ket with­out im­pos­ing the le­gal and bud­getary con­di­tions ac­cepted by Nor­way and Switzer­land.

What, then, will hap­pen at the end of the tran­si­tion pe­riod in April 2021? The only plau­si­ble an­swer is a fur­ther tran­si­tion, if only to avoid an eco­nom­i­cally dev­as­tat­ing rup­ture in trade reg­u­la­tions just be­fore the

UK gen­eral elec­tion due in 2022. And, as­sum­ing the tran­si­tion is ex­tended from 2021 to, say, 2023, aren't fur­ther ex­ten­sions likely, prob­a­bly evolv­ing into a quasiper­ma­nent ar­range­ment? Nor­way's EU re­la­tion­ship via the Euro­pean Eco­nomic Area, also de­signed as a brief tran­si­tion, has now lasted 24 years.

This “Ho­tel Cal­i­for­nia” sce­nario, in which “you can check out any time you like, but you can never leave,” would ul­ti­mately en­rage both Brex­i­teers and Re­main­ers. So what are the other op­tions?

If a hard Brexit is eco­nom­i­cally un­ac­cept­able to Bri­tish busi­ness and Par­lia­ment, a soft Brexit is po­lit­i­cally un­ac­cept­able to EU lead­ers, and a fake Brexit is un­ac­cept­able to al­most ev­ery­one, that leaves just one al­ter­na­tive: no Brexit.

It is still en­tirely pos­si­ble to aban­don Brexit by re­vok­ing Bri­tain's with­drawal no­tice un­der Ar­ti­cle 50 of the Treaty on Euro­pean Union. This de­ci­sion would have to be made by Par­lia­ment be­fore the treaty dead­line of March 29, 2019, and it would prob­a­bly have to be rat­i­fied by an­other ref­er­en­dum.

A nec­es­sary con­di­tion for this se­quence of events would be the col­lapse of May's gov­ern­ment, per­haps caused by a Brex­i­teer re­volt against the “vas­sal state” con­di­tions im­posed by the EU dur­ing the tran­si­tion pe­riod. Un­der these cir­cum­stances, a gen­eral elec­tion would al­most cer­tainly pro­duce a Labour-led coali­tion based on a prom­ise to “think again” about Brexit. This was ex­actly the sce­nario sug­gested last month by one of May's few re­main­ing loy­al­ists, Health Sec­re­tary Jeremy Hunt, who be­came the first se­nior Tory to ad­mit pub­licly that Brexit might never hap­pen if zeal­ous Euroscep­tics ever re­belled against May.

For the time be­ing, the threat of a Labour gov­ern­ment has been suf­fi­cient to in­tim­i­date Brexit hard­lin­ers. But the forced qui­es­cence of the Euroscep­tics makes it more cer­tain that May will ne­go­ti­ate a “vas­sal state” tran­si­tion that evolves into the Euroscep­tics' night­mare of an in­escapable “Ho­tel Cal­i­for­nia,” based on the Nor­way model.

As the Brexit hard­lin­ers grasp this log­i­cal co­nun­drum, they could well de­cide to bring down May and risk a gen­eral elec­tion rather than col­lab­o­rate in Bri­tain's de­mo­tion to “vas­sal state­hood.” The sui­cide jumper is still fall­ing, and, un­til he passes the first­floor win­dow, we will not know whether he is at­tached to a bungee cord. Ana­tole Kalet­sky is Chief Econ­o­mist and CoChair­man of Gavekal Drago­nomics. A for­mer colum­nist at the Times of London, the In­ter­na­tional New York Times and the Fi­nan­cial Times, he is the au­thor of Cap­i­tal­ism 4.0, The Birth of a New Econ­omy, which an­tic­i­pated many of the post-cri­sis trans­for­ma­tions of the global econ­omy. Copy­right: Project Syn­di­cate

While busi­nesses, in­vestors, and economists would wel­come such a Nor­we­gian-style “fake Brexit,” it would carry a huge po­lit­i­cal cost.

Fake Brexit or No Brexit

Ana­tole Kalet­sky

From left: Bri­tish Prime Min­is­ter Theresa May and Pres­i­dent of the Euro­pean Com­mis­sion Jean-Claude Juncker

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