Three signals suggest that we have entered the ‘No Deal’ phase of the Brexit negotiations.
(B) The eerie silence post-Theresa May’s meeting with French President Emmanuel Macron (any positives would have been announced with great jubilation!)
(C) The Telegraph story suggesting that the EU is legally obliged to provide the UK with a good deal🔒 — i.e. a preemptive blame assignment.
All of this is in the context of the Chequers agreement, unpopular in the UK and largely rejected by the EU.
Paraphrasing Alexander Clarkson’s elegant framing, the government will always, at some point, have to confront the unpalatable choice between:
explaining why large sections of the UK economy need to be restructured (e.g. in a ‘No Deal’ situation);
explaining to Leave voters that the Brexit they thought they were voting for is unachievable (e.g. an EEA type situation).
Both choices are sufficiently unpalatable that the focus of government policy has been to avoid either of them by pursuing a Brexit ‘third way’, of which Chequers is the most recent iteration.
Unfortunately, the third way approach has failed. And its supposed remedy, a direct appeal to the member states, also seems to have failed — this, I suspect, is the key significance of Brégançon.
The question is: what happens next?
It helps if we make the simplifying assumption that the government’s principal motivation is, quite simply, to stay in government.
Because of the Fixed-term Parliaments Act (FTPA), the most likely situation in which the government’s position would be threatened (albeit by a change of personnel rather than party) would be a leadership challenge.
Returning to the framing above, if the government acted today in such a way as to make the promised Brexit unachievable, there would most likely be a leadership challenge.
At the same time, the alternative course, the restructuring of large parts of the UK economy (and related impacts) is not a decision that currently needs to be confronted until later in the Article 50 period.
As a result, it makes sense (in a wrong-headed way) for the government to pursue a ‘No Further Compromise’ / ‘No Deal’ preparation strategy in the hope that something changes in the meantime.
If we accept the argument that in the short term the government’s interest is best served by not shifting position, then the next question is: how might this situation change?
The answer is by making the political ‘cost of carry’ of the government’s current position much more expensive.
At this point, we should consider the primary and secondary objectives of the European Union’s negotiating position (leaving citizens’ rights to one side for the moment).
Primary is the protection of the integrity of the Single Market (‘indivisibility’). Secondary is the avoidance of a ‘No Deal’ situation (to the extent that the primary objective is not materially compromised).
Returning to the UK, we are confronted to the ‘No Deal’ paradox.
The only way to shift the government’s position is through a ‘No Deal’ type of event. But ‘No Deal’ would be disastrous for the UK and very damaging (and unpredictable) for the European Union.
To lessen the damage from a ‘No Deal’ situation, it makes sense to have the ‘No Deal’ crisis as far as possible before the end of the Article 50 period. This is ‘preferable’ (vs a last minute ‘No Deal’) for a number of reasons.
The UK is still part of the EU. There is still some time (albeit not enough) for ‘No Deal’ preparations. There is also enough time for a course change.
But, crucial point, this would still be a ‘No Deal’ situation — both the European Union and the UK would have got themselves to the position where ‘No Deal’ had become the base case outcome.
An obvious moment for this to occur would be a breakdown in talks at the resumption of negotiations in mid-August (In my view, this is quite likely).
At this point, a number of things are going to start happening. The pound will suffer a material fall in value. All impacted businesses will have no choice but to activate their contingency plans. Confidence will plummet.
The net effect of all of this would be to make the political cost of carry of the government’s current position very expensive and, perhaps, result in a shift to a more moderate and achievable Brexit stance.
Of course, the best outcome would be an agreed and mutually beneficial deal, but that does not seem likely at the moment.
For the various reasons mentioned above, we have likely entered a ‘No Deal’ phase. If that’s true, the best outcome would be an early crisis that is sufficient to trigger a position reset.🔷
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(This piece was first published as a Twitter thread and turned into the above article with the purpose of reaching a larger audience. It has been minorly edited and corrected.)