Sunday, November 20, 2016

Brexit means Hard Brexit, let's move forward, shall we

Labour has come aboard the Brexit train. A YouGov poll shows that a pro Brexit Labour may get fewer votes than the LibDems in the next election. But the next election is in 2020 and Brexit will have happened by then.

Let's recap. The ref was 52-48 for Leave. It was non binding legally but it was the will of the people. One can ex post facto say that Remain did not campaign as hard and as early as it should have (not officially as Remain but as pro EU) but all is now history.

Some in the UK entertain the notion that Article 50 can be reversed. My opinion differs. What they basically wish for, and that includes the LibDems, is that the exit deal the UK gets is so bad that a new ref will vote for Remain!

So let's assume that the European Court of Justice says that Article 50 triggering can actually be reversed. Let's also assume, notwithstanding legal issues in the UK, that it is triggered as the government intends to, in March 2017. So let's say we are in late 2018 and negotiations have taken place and the deal looks bad. The LibDems seem to operate under the assumption that a new ref can be called to decide on Brexit! Now, a ref is usually a binary choice. You choose A or B. A would be "accept the deal". What would B be? Go for "Soft Brexit" (with free movement) or Remain (after all)? Or simply "reject the deal"? Has anyone thought through that? Now, since the election law was changed in 2010-2015, which government will decide? A Tory government with most likely May at the helm. Most likely, a ref won't be decided at all. Elections won't happen until 2020, keep that mind.

So what's the deal?

What this realm of thinking also misses is that the Brexit negotiations does not include a new trade deal. Plus trade deals take a long time to negotiate. The deal is WTO rules, ie the default. Of course the May government now operates under the notion that it can keep the EU Single Market without free movement, so not change in the status quo for goods, services and capital, only for people.

Other negotiations issues will include the payments to the EU as part of the UK membership, the status of EU officials of UK citizenship, the status of EU citizens in the UK and of UK citizens in the EU27 member states.

So what will be the benefit of hindsight in late 2018? How complicated all this is? By late 2018 everyone's nerves will have been tested.

Recent pres articles in the UK have suggested that the EU plans to come down on the UK hard, "punish" the UK, so that other members are kept in line and do not ask what the UK will get. But what is there to punish the UK for? Surely the UK can get a CETA (EU-Canada) type of deal but his will take more than 2 years and won't include freedom for services and capital, ie financial services and other business services that the UK should care about. But is that "punishment" or simply playing by EU rules? Spin is nice, but reality is even better.

So will the 2 years in effect from now until late 2018 will spent to either
a) Help Remainers come to terms with Leave, or
b) Push Leavers to change their minds re Brexit or free movement - immigration?

Unless May is doing this on purpose and plans to take the fall so that the UK remains in the EU (see relevant post), which is unlikely, the May government has chosen Hard Brexit and will proceed with it.

For all practical purposes we can assume that Brexit means Brexit and a hard one. And let's move on.
To where?

Companies have to assume that they will deal based on WTO rules. For goods that is tariffs of less than 4%, no customs union (like Turkey), no Single Market. For services there's a vacuum. For the City, loss of passporting rights.

For EU nationals in the UK who qualify for UK citizenship, they will probably have to do so. For UK citizens in the EU27, the same, different states have different rules (re minimum stay before you apply). Some of the people already in the UK and in the EU27 won't have fulfilled the criteria by the time the "divorce" happens.Those who are not are in limbo.

The UK will also have to start doing trade deals with the countries the EU currently has deals with (and cover the UK too for now).

So where's the beef (to borrow a phrase from an old US election)?

The UK hopes to use its market as leverage to have EU27 exporters to the UK push for single market to the UK. The German BDI has followed Merkel's lead and said that this is not possible since it would undermine the whole EU.

The EU27 think and say that such a deal would make others ask for it too. Who are these others? Norway, Switzerland and maybe EU members. But which EU member would like to lose free movement for its citizens? The Visigrad 4? Unlikely. Romania and Bulgaria? No.

Technically such a deal is possible, while EU Single Market is written in the EU Treaties that does not prevent a deal that emulates the Single Market without free movement with a non member (eg the UK). But who wants that? The UK's best hope is EU27 exporters to the UK.

UK based companies are already looking into plans for relocation, who is willing to wait those 2 years, especially services firms.

EU27 companies exporting to the UK are getting used to the idea of export with some tariffs. There is no indication that EU27 services are that present in the UK, those that are stand to lose too.

UK citizens who want controlled immigration are happy. Same as those who do not want Brussels rules on the UK.

The May government has decided to make Brexit hard (no free movement) but try to keep the Single Market. There is no indication that the hard Brexit stance will yield. Two years from today we will probably all be at the same point but simply more aware of the effects. The likely scenario is that no side will give in. A standoff.

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