Brexit Breakdown and Confusion

I posted earlier this month on Brexit Breakdown suggesting that the aims of enthusiasts for the United Kingdom of Great Britain and Northern Ireland, leaving the European Union, have been eroded as the UK government’s positions drifts towards ‘soft Brexit’ accepting alignment with EU regulations on industrial goods and food, at the very least. This is still the case, but the situation has become increasingly complex, driven in an unpredictable way by contradictory forces, as I will attempt to explain below.

Full ‘soft Brexit’ would mean membership of the European Free Trade Association (EFTA), with almost complete adherence to European regulation. ‘Hard Brexit’ means eliminating any adherence to EU regulations, which in its most rock hard form means a willingness, even a preference, for crashing out of the EU with no agreement, resorting to World Trade Organisation rules to govern trade. On the other side are ‘Remainers’, including myself, who ideally would like to stay in the European Union after a referendum reversing the decision of two years ago; and who if this is not possible will work for the return of the UK to the EU at a future date.

It is still the case that over time the government has drifted towards soft Brexit, though not EFTA, and seems likely to end up agreeing to an even softer Brexit after EU negotiations are complete. The most notable area of likely compromise with the EU is to preserve an almost completely open border between Northern Ireland and the Republic of Ireland by allowing de facto membership of the EU Customs Union of Northern Ireland through a de facto border in the Irish Sea between Great Britain and Northern Ireland, largely in the form of EU customs inspections on ships between Northern Ireland and Great Britain.

The House of Commons anyway came very close recently to voting for the UK as a whole to form a customs union between the UK and the EU, so a proposal backed by the government for a form of customs union between the UK and the EU allowing an open border between Northern Ireland and the Republic without a customs border in the Irish Sea would certainly pass the House of Commons. It is one of the oddities of Brexit that a free vote of the House of Commons would result in the UK joining EFTA and this is resisted by the leadership of the two largest parties.

The Labour Party leadership resists EFTA (or any other way in which the UK stays in the Customs Union or the Single Market) though most Labour Party Members of Parliament, party members, and voters support remaining in the EU. The Labour leader Jeremy Corbyn supported Remain in the referendum though he has always looked like a socialist critic of the EU as a capitalist club. The Conservative Party leadership resists EFTA, though most Conservative MPs supported Remain in the referendum and would vote for EFTA now, and the leader (who is also Prime Minister), Theresa May, supported Remain during the referendum. In the case of the Conservatives though, party members and voters are mostly Leave and hard Brexit.

Theresa May gathered her Cabinet at the Prime Minister’s country residence, Chequers, recently to force through a soft Brexit package, in the hope of ending increasingly public conflict on the issue. Two members of the Cabinet have since resigned and Brexiteers in the House of Commons have forced some concessions, though of a rather secondary kind, which might disappear in further negotiations with the EU and the final parliamentary vote on the exit deal.

The consequences of recent political manoeuvres are as follows:

  1. The government has moved towards a softer Brexit,
  2. Hardcore Brexiteers have pushed back with some success,
  3. A second referendum seems more likely though not the most likely scenario,
  4. A no deal hard Brexit seems more likely though not the most likely scenario.

These four things do not seem to go together and what has happened is a drift from what seemed like the overwhelming probability of a hard Brexit with an agreement, to a relatively chaotic situation in which it is becoming harder and harder to decide on the most likely of the possible outcomes.

Hard Brexit without a deal has come to seem more likely because hard Brexiteers in the Conservative Party may undermine any agreement the Prime Minister (who has recently started to exercise direct control over negotiations) may reach with the EU and there are signs that the United Kingdom Independence Party (UKIP) will take voters from the Conservatives in the case of a soft Brexit. Theresa May is trying to achieve a position which can get most MPs behind her, and most Conservative MPs will probably support any deal she proposes. However, the hard Brexit people are willing to do anything to undermine a deal they consider inadequate and may vote with Labour in voting down a deal, though for very different reasons.

May’s hold on the Conservative Party is weak after her very poor performance in last year’s general election and no one expects her to be the leader at the next election (though given that the impossible seems to be becoming possible maybe we should not accept this as a given). Any election for the leader requires a contest in the parliamentary party to determine two candidates, with the Conservative Party membership as a whole deciding between them. The membership will undoubtedly vote for the more hard Brexit candidate, which at the moment seems likely to be Boris Johnson or Jacob Rees-Mogg. Rees-Mogg has absolutely no governmental experience at all, which would create an unprecedented situation if he does become Conservative leader and Prime Minister.

Neither Rees-Mogg nor Johnson is popular with the parliamentary party, so there must be a real possibility that neither makes it the final list of two candidates, presuming the parliamentary party does not persuade the candidates behind the leader of the first round to abandon the contest, which is what happened in May’s case. This could set off a major crisis in the Conservative Party.

The possibility of a second referendum (labelled a People’s Vote by its main advocates) is increasing because it seems likely that hard Conservative Brexiteers allied with the Labour Party will vote down any soft Brexit, and it also seems likely (but less likely as hard Brexiteers are more willing to vote against their own government) that an alliance of soft Conservative Brexiteers and the Labour Party will vote down any hard Brexit. It also seems very possible that the EU will reject any UK offer, as the arguments within Parliament and the Cabinet on the terms of Brexit refer to what can be agreed within British politics, not what the EU might find acceptable. At the very least it seems increasingly likely that substantive Brexit will be postponed, apart from withdrawal of UK representatives from EU institutions, for at least a couple of years after next year’s formal withdrawal.

The various forms of deadlock described above have not yet made a second referendum likely, but are increasing the likelihood of a second resort to the People to find a solution, though the question that would be asked, the form of any such referendum, its timing and so on remain unclear. Opinion polls show increasing support for a second vote and for then remaining in the EU, while the media is giving more coverage to the possibility. I would be happy to see such a result myself. The increasing uncertainty about what Brexit means itself undermined Leave claims that it would be an easy exit. Nevertheless, I have to say that the UK is probably leaving and that a no-deal Brexit is also increasing in probability.

Brexit Breakdown

Ir has been obvious for at least a month now that soft Brexit has won out in the UK, though the Prime Minister Theresa May would never admit such a thing directly. Government discussion of access to the EU internal market at its existing level, or very close, and keeping the border open between the Republic of Ireland and Northern Ireland (a fundamental of the peace settlement in the north) would at the very least require continuing regulatory alignment in goods (that is, following the rules made by the European Union).

It seems very likely that negotiations of the terms of exit with the EU itself would make even this partial alignment with the internal market inadequate in order to get the desired level of access. At the very least EU negotiators would demand some inclusion of services (financial services are the big issue here) and something at least resembling free movement of labour.

That inclusion would be full UK access to the internal market after exiting and would require at least a Swiss style relationship with the EU, in which there is full market access in exchange for accepting EU rules and something close to free movement of labour. Such a relationship would mean accepting judgments of the European Court of Justice even if they are not incorporated into UK law. The UK might not follow Switzerland into EFTA (European Free Trade Association, see paragraph below).

It has even been suggested that the UK might find it necessary to adopt a ‘Norway’ solution, in which the UK is directly a member of the European Economic Area. Norway has free movement but opts out of common agricultural and fisheries agreements. It is not part of the EU customs agreement. Like Iceland, Lichtenstein, and Switzerland, it is a member of the European Free Trade Area, which essentially harmonises regulations between these countries and the EU; that is, EU regulations are enforced by EFTA institutions.

It is clear that most Conservative MPs and businesses (though more large business than small business) regard something like the arrangements above, soft Brexit, as preferable to hard Brexit (trade agreement with the EU as a completely external country, possibility of no deal). These MPs and business people, along with most Treasury economists and economists in general, believe that keeping complete access to EU markets is more valuable than vague claims of a trade boom through deals with non-EU states across the world.

Hard Brexiteers believe that economic growth of other parts of the world requires breaking free of EU shackles on global free trade. The soft Brexit, as well as Remain, argument is that membership of the EU does not prevent trade with the rest of the world and that some EU countries are already doing that very well compared with the UK. On this argument, geographical proximity will always make EU trade disproportionately important so that limiting access to EU markets in the hope that non-EU countries will want free trade agreements is unnecessary and probably very damaging.

May’s drift towards soft Brexit after presenting herself as the guardian of hard Brexit has the support of most of the Cabinet, and Conservative MPs, but has been disappointing hard Brexiteers for some time. An agreement of the full cabinet at the Prime Minister’s country residence for soft Brexit has led to the resignation of the two most hard Brexit-oriented ministers.

It seems unlikely this this will deter May from a soft Brexit policy, which everyone agrees can only become more soft in negotiations with the EU to achieve an agreed exit. It also seems unlikely that most Conservative MPs will resist this policy. The biggest problem for May could be that the opposition parties want to vote against the government in call circumstances, so could vote with hard Brexit Conservative MPs to bring down any Brexit agreement.

At this point Brexit might completely break down, with the UK becoming a full member of EFTA, so in practice a member of the EU which exchanges some opt-outs for absence from the decision making processes and institutions. It might even lead to a suspension of Brexit, or a second referendum in which the electorate chooses between the exit package and staying in the EU.

At present, the most likely options in descending order are: 1. soft Brexit, outside formal association with the EU, but like that in practice, 2. formal association with the EU, maybe meaning membership of EFTA, 3. the complete breakdown of Brexit. This could change and so far change has been to move further and further away from hard Brexit.

Personally I support continuing membership of the EU. It is inevitable that large parts of the UK economy will ‘align’ with EU regulations, so it is best to be part of the institutions and processes which decide on these regulations. That is the most pragmatic version of my argument.

I am also a strong European integrationist, even a federalist romantic. The qualification of this idealism is that integration should not go further than public opinion or institutional capacity can accept at any one moment and that economic realities should guide the relationship with Europe for and against the kind of integration I favour at heart.

My own ideal is a kind of revival of the medieval dreams of ‘universal’ (i.e. European) Empire. The poet Dante was a great exponent of such a vision in his classic of political thought On Monarchy, which does not exclude city republics, even favours them under a high European sovereign. We can join it with Marsiglio of Padua’s slightly later call for an empire with elections to have something like democratic federation for Europe.

Leaving my European romanticism aside for the moment, the current realities are that the UK’s exit from the EU has become more and more complicated by the disadvantages of disentangling complex and far reaching institutional and economic links, particularly when most people involved want to keep an open border with the Republic of Ireland and keep 100% of the current level of access to the internal market.

Ricardo and Ringo for a free-trade Brexit

maxresdefault

My colleague, Shruti Rajagopalan, points out that today is the 200th Anniversary of the publication of David Ricardo’s  On the Principles of Political Economy and Taxation. It was here that the notion of comparative advantage began confounding protectionists and nativists. Shruti offers this famous example of it in practice:

Apparently, when asked if Ringo Starr is the best drummer in the world, John Lennon quipped, “Ringo isn’t the best drummer in the world. He isn’t even the best drummer in the Beatles.” And while Lennon may have fancied himself a better singer, guitarist, songwriter, and drummer, than Ringo, the Beatles are still better off with Ringo at the drums.

The essence of comparative advantage is that you don’t need to possess a great talent to benefit from trade within a group, whether we are talking about individual people or nations. So long as there exists some variation in relative talents, people will be able to benefit from specialization and trade.

This message is as relevant as ever. The British Parliament has just voted to hold fresh elections. This is supposedly to strengthen the Prime Minister’s hand when negotiating new terms of trade when Britain leaves the European Union. Politicians act as if trade is dangerous, always a threat to the national interest unless carefully constrained. They negotiate complex deals and regulation on market access, essentially holding their own consumers hostage, preventing them from buying foreign goods unless other countries agree to open their own markets. They fear that their domestic producers will be out-competed by superior, or cut-priced, businesses from abroad.

What comparative advantage shows is that even if that happened to be true for every single industry, domestic businesses could still specialize so as to be competitive on the world market, and improve domestic living standards at the same time. Britain could open its ports and wallets to foreign goods and services with no tariffs, even without any reciprocal deal from the EU, and yet still benefit from trade.

Why? Because it doesn’t matter if you have to be the drummer, just so long as you are in the band.