BREXIT Breakthrough Followed by Threat of Breakdown

Author: William Witherell, Ph.D., Post Date: November 16, 2018
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On November 13, British Prime Minister Theresa May and her Brexit negotiating team reached agreement with the European Union (EU) negotiators on a draft withdrawal treaty. The next day, after a very difficult five-hour meeting, May secured the agreement of her cabinet. Following the cabinet meeting, she told reporters “The choice before us is clear: This deal, which delivers on the vote of the referendum, which brings back control of our money, laws and borders, ends free movement, protects jobs, security and our Union; or leave with no deal, or no Brexit at all.” She reportedly told her cabinet that the deal, while not perfect, was as good as the UK can get.

It was evident the deal was not good enough for some of her cabinet members, and resignations were likely. Still, the country was shocked today (November 15) by the resignation of May’s Brexit secretary, Dominic Raab, her chief Brexit negotiator, who could not support the deal. Several other secretaries have resigned, and more may follow. A deep political crisis is developing for May, for the country, and also for the EU.

The deal may be the best the UK could have obtained at this point, considering that, as the Financial Times said today in an editorial, “The UK has a weak negotiating hand, and the May government has played it poorly.” The 585-page draft agreement had to address many issues. The most difficult has proved to be the Irish border. Recall that Northern Ireland is part of the UK and along with the rest of the UK will be exiting the EU next March, while the Republic of Ireland is an independent nation that will remain in the EU. A very important element in the Irish peace process has been the elimination of a visible border with checkpoints. Both the UK and the EU are committed to avoiding the restoration of such a border. In addition, the UK and particularly Northern Ireland are opposed to creating any border between Northern Ireland and England.

The draft agreement involves a so-called “backstop arrangement,” which is a common customs arrangement for the UK and the EU, a “single customs territory” (which would eliminate the need for border checks), together with some provisions specific to Northern Ireland, requiring alignment to some other EU rules and standards. This arrangement is supposed to be a temporary solution. There would be a transition period ending in December 2020, during which there would be negotiations on a permanent arrangement. The transition period could be extended until an agreement is reached on an arrangement that negates the need for border checks. During this period, the UK would continue to follow all EU rules and therefore would remain under the jurisdiction of the European Court of Justice. It appears that the UK probably would be unable to negotiate trade agreements with other countries during this period.

Dominic Raab’s resignation letter summarized the main reservations of the pro-Brexit MPs. He believes the proposed regulatory regime for Northern Ireland, which includes provisions not required of the rest of the UK, “presents a very real threat to the integrity of the United Kingdom.” He also opposes what could become an “indefinite backstop arrangement where the EU holds a veto over our ability to exit.” He also underlines the evident fact that the proposed deal falls short of the Tory party’s promises in its election manifesto. Indeed, as the Financial Times notes in its editorial, the draft withdrawal agreement exposes the “harsh realities of UK’s position.” Under the agreement the UK will weaken its many ties with its most important trade partner while having “less say over the rules that govern its economy.” Unfortunately, the alternative of a no-deal Brexit would be much more disruptive to the UK and also to the EU.

The immediate threat to May is the real possibility of a challenge to her premiership, led by pro-Brexit hardline Tory MPs in the European Research Group. They have been encouraging cabinet members to resign and say they have in hand the 48 requests from Tory MPs that would be needed to call for a vote of no confidence. Should these requests be tabled, it would take a majority of the Conservative law makers, at least 148, to force a leadership change. Whatever their reservations about the draft agreement, the Tory party members would have to consider the implications of rejecting May and thereby the terms of this agreement. Doing so would mean that the prospect of a no-deal Brexit in which the UK is ejected from the EU with no transition period becomes highly likely and would increase the likelihood of a new election and the threat of a Labour government.

Should May survive the leadership challenge, the next essential step will be to seek the agreement of Parliament sometime before Christmas. The intense political debate within the UK now begins. She does not have a majority and has had to rely on the Northern Ireland Democratic Unionist Party (DUP) for key votes. Arlene Foster of the DUP has indicated they will not support May on the Brexit vote. Nor will a number of the Eurosceptic Tory MPs. The Labour Party has indicated that it is opposed to the deal, although a number of Labour MPs have supported May’s Brexit efforts to date. The Liberal Democrats have issued a statement indicating their opposition to the deal. While the Tory party whips express confidence, the prospects for getting this deal through Parliament are not looking good. Success may depend on whether members recognize the highly disruptive implications for the UK of a no-deal Brexit.

The European negotiators, like their British counterparts, had to make significant concessions in order to reach the agreement on the draft exit treaty. An EU summit to seek agreement from the 27 remaining EU states will be held on November 25, assuming the UK parliament approves the deal. EU approval appears to be likely. Donald Tusk, the president of the European Council, said today that “We have always said that Brexit is a lose-lose situation, and these negotiations were always about damage control.” Difficult negotiations to produce the final text of the withdrawal agreement and a political declaration outlining the future relationship between the UK and the EU will need to proceed. Time is very short, as the UK is due to leave the EU on March 29, 2019.

For investors, Parliamentary agreement of the proposed deal would reduce but not eliminate uncertainty. Financial markets in both the UK and the EU would likely respond positively, and the pound and the euro would likely strengthen somewhat. However, the long-term future relationship of the UK with the EU would remain in limbo. The incentive for financial firms in particular to move operations to the EU would remain. Rejection of the deal would increase the odds of a no-deal Brexit significantly and would be strongly negative for markets.

William Witherell, Ph.D.
Chief Global Economist
Email | Bio


Sources: BBC.com, Financial Times, Bloomberg, New York Times, The Economist


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