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Brexit

Blog

Brexit

Unlike “The Song That Never Ends,” Brexit, though it has felt like an interminable process to those of us following its daily melodramas, should reach its conclusion at year’s end one way or another. British Prime Minister Boris Johnson has consistently rejected the possibility of extending the UK’s transition period beyond December 2020, and the European Union has gone along with it. Of course, the EU would prefer a deal, but as the EU’s chief negotiator on Brexit, Michael Barnier, made clear in a recent speech to Ireland’s Institute of International and European Affairs, there are limits to how far Brussels will go to secure one. In Barnier’s own words, the EU “will not sacrifice – never sacrifice – the EU’s long-term economic and political interests for the sole benefit of the UK.”

Even though Barnier’s words read less incendiary than some of the media reports after the fact made them seem, there is no hiding his disappointment with the current progress in Brexit negotiations. Barnier is “worried and disappointed” and feels that the UK has shown little if any flexibility or willingness to compromise. Germany apparently canceled plans for a high-level British-German diplomatic meeting on Brexit last month due to a lack of “tangible progress” and EU officials were leaking comments to the British press like the UK had “completely wasted” the summer. The EU’s disillusion has only been heightened by British lipstick haphazardly applied to the pig. Johnson wants to “settle the simplest issues first in order to build momentum” rather than tackling tougher questions on fisheries, state aid, and regulatory standards.

Such nonchalance might make sense if the transition period could be extended, or if the parties involved had more time to negotiate. But the EU and the UK have just three months left to hammer out the necessary compromises to avert a “hard Brexit.” Johnson’s concern hardly seems commensurate with the extent to which the UK depends on trade with the European Union. Last year, 43 percent of Brexit exports and 51 percent of British imports went to or came from the EU. Services accounted for 43 percent of British exports to the EU and 40 percent of those services went to the EU as well – 63 percent more than the next largest consumer, the United States. The EU is not anywhere near as dependent on trade with Britain. The UK was France’s sixth-largest export market last year (~7 percent of total French exports) and Germany’s fifth-largest (~6 percent of total German exports). As an aggregate, the UK consumed just 5.6 percent of EU exports in 2019.

To make matters even worse for Johnson’s government, Scotland and Northern Ireland – both of which voted against Brexit by convincing margins – depend inordinately on trade with the EU. 59 percent of Northern Ireland’s exports and 49 percent of Scotland’s exports went to the EU last year. Petroleum and petroleum products are the UK’s single largest export to the EU (12 percent of all UK goods exports to the EU and 68 percent of all UK exports of petroleum and petroleum products). Considering Scotland accounts for the vast majority of UK crude oil and natural gas liquids production, that adds insult to injury for Edinburgh. Wales, which voted leave by a 52.5-47.5 margin, is actually the most exposed of any UK country or region, with a whopping 61 percent of all exports bound for the EU in 2019. It might not take as much as you think to generate anti-UK sentiment in Wales despite its initial preference for Brexit.

As we noted in December and most recently in July, this makes Johnson’s negotiating position even weaker. Polls are now consistently showing Scottish support for independence has increased to greater than 50 percent. That is without a hard Brexit, which would result in economic pain Scotland could credibly claim is being tyrannically forced upon it without recourse. We would guess that pro-independence sentiment would increase markedly in Scotland, perhaps even skyrocket, in the event of a no-deal Brexit. Skeptics can drone on about how the EU will not accept Scotland all they want: they are only right as long as Scotland has not expressed a legal and legitimate preference for independence. Johnson can drone on about the “magic” of the “union of the United Kingdom,” but in practice, the British government has consistently ignored Scotland’s concerns. If Johnson cannot navigate the Brexit negotiation process to reasonable satisfaction, it is not just British economic statistics that will suffer. The Union Jack will be at risk.

All of which boils down to a single, inescapable conclusion: Johnson is bluffing. He will not and cannot abide a no-deal Brexit. The maths of a hard Brexit don’t work. The politics of a hard Brexit don’t work. When push comes to shove, Johnson will make whatever concessions are necessary to avoid a hard Brexit. On paper, there is no other reasonable conclusion to make. A hard Brexit is the worst scenario for all sides and Johnson is not about to be the last Prime Minister of the United Kingdom. Brexit is supposed to be Johnson’s Churchillian moment. To allow a hard Brexit to happen on his watch would be more like Edward II getting his butt whooped at the Battle of Bannockburn. Johnson is many things and arouses many strong feelings both positive and negative, but one thing for certain about the Prime Minister with the goofy hair is that he has a decent grasp of history – and history would not look kindly on leading Britain to such a dark and avoidable place.

Here, however, is the kicker: despite the myriad reasons a no-deal Brexit makes no sense, none of them is a guarantee it won’t happen. States do not always behave in their self-interest. Leaders do not always accept the truth staring them in the face, choosing instead to double-down on preconceived notions like sovereignty, British ingenuity, or imaginary decisive leverage over the German auto industry. Nor is the UK’s future unity assured even if Johnson can steer this ship through the storm. As dangerous and fool-hardy as it is to project such risks onto the machinations of financial markets, the underlying uncertainty about the UK’s intentions is perhaps reflected in sterling’s retreat in recent weeks. It may also be piling negative pressure on the euro, which has quite enough to deal with fashioning a bloc-wide coherent response to the COVID-19 pandemic without also having to deal with a British government flirting with mutually assured and entirely unnecessary economic catastrophe. The smart money is on the UK and the EU reaching a deal at the 11th hour, but we’ve all seen how the smart money has behaved so far in 2020. Tread lightly who lives in hope of pragmatic realism.