Oz Blog News Commentary

Brexit Scenarios and some Advice for Brexiteers

March 2, 2018 - 20:30 -- Admin

Brexit is the main political issue in the UK, competing with sex for the attention of the public. It is a daily gamble whether the news headline is about some politician fondling a knee 55 years ago or a row over Brexit.

For the last 18 months, the debate in London has been surreal. Unhindered by much expertise about the issues, the politicians have given full reign to fake news, ranging from Boris Johnson who kept pretending there would be more spending on health outside the EU, to the latest improbable claim by some Minister that he has 21 agreements with countries outside the EU ready to sign after Brexit.

Rather than laugh at these statements, one should see them as the logical, and indeed intelligent, reaction of politicians to a situation neither they nor their voters like: they pretend a bad reality is simply not true and waffle on about what they do want to be true. That may be bad economics, but it is good politics. The UK has been the home of fake news for over 2 centuries, and still going strong.

If we forget about the current smokescreens by the politicians and think about the end game, a key question is just how easy or difficult it would be to stop the Brexit process. In the press, both in the UK and in the EU, the March 2019 deadline has been presented as an immutable wall, one that forces parties to agree to something before the end of 2018 so that 28 parliaments\governments can ratify the agreement.

I think that ‘mainstream scenario’ is absurd. Each of the three ingredients in that mainstream scenario seem highly unlikely to me. Just ask yourself: do you believe that the Brits could internally come to an agreement before the end of 2018? Do you think they could then negotiate that agreement with the EU negotiators within a few months? And do you buy the idea that 28 parliaments\governments are going to agree without using the opportunity to be difficult? I don’t expect any of these three things to happen, and I doubt that the more intelligent politicians ever expected it to happen. So nearly everything you read in the press about deadlines and watersheds is missing the real game.

What then? How can this saga end?

Well, funnily enough, a quite plausible scenario is that is simply doesn’t end at all but is rolled over, much like a loan that supposedly has to be paid back at a particular date, simply leads to another loan to pay back the previous one.

How would that go? It would involve the British PM writing to the EU that Britain withdraws its application to Article 50. I understand that that would end the process and would mean the UK remains in the EU. The EU president has already indicated that this would be acceptable in that it is up to the UK to have ‘no Brexit’. No referendum or anything else is needed. And, of course, the PM could one week later invoke Article 50 again, giving the UK another 2 years to negotiate its exit.

If it sounds like a trick, then you are right: it is a trick, but one that is in the interest and the capabilities of many of the key players. They could actually do this, unlike most of the other scenarios.

Who benefits from this scenario? The chief beneficiary is Theresa May and the Conservative Party. It would allow them to hang onto power without another election and without having to truly decide something that ruptures their Party. That is a huge plus for them, and the decision is up to them.

The politics of this of course have to be finely tuned. They cannot just perform this trick and get away with it. It would appear childish and irresponsible, a betrayal of the outcome of the Brexit referendum. No, it would be much better if this trick was ‘forced upon them’, ie if the politicians were asked to do this.

So it is entirely in the political interest of Theresa May and the Conservatives to create a last-minute crisis. The bigger the crisis, the better for this scenario. When the whole of the business community, the unions, and the regions beg Theresa May to avert the impending economic disaster: that is the moment to roll over the Brexit negotiations. Rather than appear opportunistic, they would look like saviours. And yet, the Brexiteers in the Conservative Party would still have their desired Brexit process. Everyone would simply have more time.

For the EU too this is not such a bad outcome. It keeps the UK in the EU, but without the Uk deciding anything and yet still giving up some benefits by having quite a few organisations and companies come to other cities in the EU, such as the Medical Agency and the trading platforms. The beauty of this scenario is that the EU countries do not even need to vote about anything, so no 29 parliaments that need to be convinced.

Of course there would be the immediate suspicion that the UK government would pull the same trick for decades, but that is not the UK’s problem. If the EU doesn’t like it, the EU would then be forced to do something about its own rules. That wont worry the UK government at all. It can do this unilaterally.

Is any agreement scenario likely? I don’t think so because that requires ratification by 29 parliaments. 29 political venues with a strong incentive to be difficult and to demand extra things, without much incentive to agree to a final outcome. This holds in particular for countries with little trade with the UK and yet with some historical axe to grind. Greece falls into that category, and I can just see them grandstanding indefinitely about how they would want back the Elgin Marbles in return for an agreement with the UK.

What about a truly hard Brexit then: no agreement at all, but no roll-over of the process either?

Think about how that would work: on 29th March 2019, the UK would suddenly no longer be in the EU. In principle this means that the UK would be treated like any other country with whom there is no agreement, like Somalia. Border patrols in Northern Ireland and in Calais would have to be instigated and the EU would unilaterally need to decide about the status of UK nationals living in EU countries. Tariffs that apply to non-EU countries would overnight apply to the UK (though you can bet that smart companies would have gamed that so that a lot of trade is dated before the deadline!).

The biggest loser from a hard brexit would be the financial centre of London. Frankfurt, Paris, Amsterdam, and other big cities would lobby the EU to impose hefty barriers against London. And the EU would have no incentive to protect London: on the contrary, as an example of what happens to those who walk away, the harshest financial regime would be imposed.

The UK economy would of course eventually re-orient itself and recover, but the initial shock to its trade and hence to its employment would be large, prompting an immediate recession for which the government would be blamed. It must be doubted that the minority UK government would survive that kind of disruption.

Wind back the clock to March 28th 2019 and pretend you are the UK PM. Your advisers tell you what I just told you about the likely disaster to yourself and your party if Brexit were to happen. And they tell you there is an easy trick to save your bacon and keep muddling along.

What else do you do but write to the EU and say you retract the invocation of Article 50? And a week later, you start the process again or write out another referendum. What is not to like?

A final bit of advice to the current Brexiteer ministers, meant only partially in jest: I know it is a big problem for you that all the economic reports on Brexit say that there will be a major recession. And I know that you cannot find any set of assumptions to put into the economic models under which Brexit starts to look like a good idea. Let me help you with that one.

The key to economic models is always what you assume to happen without the policy you are contemplating. Economists are lazy and optimistic in their models, so they naturally presume the absence of any problems if you don’t do anything, which is the key bit that makes Brexit look so stupid. Changing the default scenario is key to how Brexit appears in the models.

You should commission an economic Brexit report under the presumption that the Euro will fail and a major financial and trade crisis in the EU will occur. You should instruct the model builders to work out whether the UK’s economy is better off more removed from the current EU regulations when the Euro fails. That is a broad remit, which allows you to sketch the scenario of a Euro failure in your favour.

This is actually a quite reasonable and likely scenario: the Eurozone is not sustainable in its present form because of the structural imbalance between the North and the South of Europe. Its implosion should thus be the baseline scenario for whether Brexit is good or bad economics. If you instruct the model builders to presume that London and the UK pound will be regarded as safe havens when the Euro collapses, I bet you that Brexit will start smelling of roses in those economic reports!