The Brutal Reality Of Brexit

 forbes.com  11/16/2018 6:05:54 AM  2

Theresa May’s chickens are coming home to roost. The deal she agreed with Brussels is unravelling fast, and her premiership along with it. So far, seven of her ministers have resigned. Letters calling for her replacement are pouring in to the powerful chairman of the Conservative Party’s 1922 Committee: once he receives 48 letters, there could be a vote of confidence in her leadership, and perhaps a leadership challenge. Other Tories are calling for a second referendum. Meanwhile, the Labour party is slavering at the possibility of an early General Election. The political crisis that has been simmering since 2016 has erupted with a vengeance.

Britain's Prime Minister Theresa May gives a press conference inside 10 Downing Street in central London on November 15, 2018.  (PMATT DUNHAM/AFP/Getty Images)Getty

The political fallout from Mrs. May’s latest attempt to square the Brexit circle is understandable. Her Brexit deal is horrible. It would lock the UK into a “frozen Brexit”, neither in the EU nor completely out of it.  The U.K. would be forced to accept EU decisions over which it would have no say, and continuing to contribute to the EU budget despite no longer being a member. It would also be unable to enact its own trade deals with the rest of the world until the freeze ended. And it would be unable to end the freeze unilaterally.

The idea is that this “frozen Brexit” would initially be only for a transitional period ending in December 2020, when it would be superseded by a free trade agreement. But the proposal allows this date to be extended, if necessary for decades, if no free trade agreement is negotiated. And if the transition ends without a free trade agreement, then the entire U.K. would remain in a customs union with the EU indefinitely, but Northern Ireland would have a closer relationship with the EU than the rest of the U.K.

For Brexiters and Remainers alike, this is the worst of all possible solutions. But horrible though it is, this deal satisfies the conditions set by Mrs. May in her Lancaster House speech. It also satisfies the EU’s conditions. No other proposal achieves this. It is, therefore, the best deal available. The U.K. Government has struck a deal that allows Britain to have its cake and eat it - but the cake tastes so disgusting that no-one wants to eat it.

The hard-Brexit European Research Group (ERG) seems to think that if it succeeds in replacing Mrs. May with a hard Brexiter, he or she could negotiate a deal more to its liking. On the other side of the political divide, the Labour party seems to think that if it succeeds in replacing Mrs. May with Jeremy Corbyn, he will be able to negotiate a deal more to its liking.

Both are deluded. The EU has no incentive whatsoever to renegotiate any of the deal. The road to this point has been long and painful, and the U.K. government has negotiated in bad faith throughout, repeatedly saying one thing to the EU then the opposite to its own politicians and the British press, and hurling insults when things don’t go its way. There is very little goodwill left on the EU side, and negotiation fatigue has well and truly set in.

Once again, the Tories are fighting among themselves rather than facing up to the reality of what they have done. Votes of confidence and leadership challenges will achieve nothing. They simply waste precious time.

And the Labour party is no better. Voting down the deal in the hopes of forcing a General Election is stupid beyond belief. The EU would no doubt grant an extension to Article 50 to allow a General Election to take place before Brexit, but that doesn’t mean it would be willing to renegotiate the deal. Jeremy Corbyn could well suffer the ignominy of being presented with Mrs. May’s deal as a “take it or leave it” choice.

Anyway, Mrs. May does not have to call an election even if Parliament votes down the deal. She can simply say that Parliament has chosen no-deal Brexit and her job is to implement it. Her repeated statement in today’s press conference that “politicians will be held to account for the decisions that they make” suggest that this is exactly what she would do.

The looming prospect of no-deal Brexit is already spooking markets. Sterling tanked today, and the cost of CDS protection on U.K. government debt rose. Shares in Britain’s state-owned bank RBS fell by 9%. While a no-deal Brexit would no doubt be priced in ahead of the actual event, there would clearly be considerable market disruption.

No-deal Brexit could also have catastrophic economic consequences. The IMF, which recently concluded its Article IV assessment of the U.K. economy, said that no-deal Brexit could cause GDP to fall by 5-8%, a similar fall to that the U.K. experienced in the Great Recession of 2008-9. Other independent forecasters have similarly concluded that no-deal Brexit would knock a very large hole in the U.K. economy. And there have been repeated warnings of the consequences for U.K. jobs and livelihoods, not to mention supplies of essentials such as medicines, if the U.K. were suddenly cut off from European supply chains.

The British people did not vote to have their lives wrecked by a completely avoidable economic crash. They voted for an orderly exit from the EU. But if Parliament votes down this deal, then the only options left on the table are no-deal Brexit – or no Brexit at all.

There are growing calls for a second referendum. But such a referendum could not simply hand over to the people of Britain a choice between this horrible deal and a disastrous no-deal Brexit. If there is a second referendum, the ballot paper must have three options: Mrs. May’s deal, No Deal, and No Brexit. Only then will we discover whether the British population’s longing for “sovereignty” really trumps their rational desire for jobs, economic stability and prosperity.

But if there is no second referendum – and at present neither the Government nor the Labour party seem to be seriously considering it – then Parliament must decide whether a complete break with the EU in the interests of sovereignty, even at the cost of a deep economic recession, is better or worse for the British people in the longer term than “frozen Brexit”. Or, of course, whether it is best to call the whole thing off.

There is now a real danger that the U.K. will sleepwalk its way into a disastrous no-deal Brexit. British politicians must stop their games and take their responsibilities towards the people of the U.K. seriously, before it is too late.

« Go back