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August 24, 2016

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Towards a hard Brexit

Politico has a good story about the hard unilateral Brexit option, which is apparently very much on the table at the British government. It is easy to dismiss it as unrealistic until you realise that some of the intermediate options that people have been discussing are even less probable. Unless Britain accepts to become a member of the European Economic Area - the Norway option - it is hard to see how the City of London can maintain its single passport. Since Theresa May and members of her team have already ruled out EEA membership - by insisting on immigration control as a red line - the question of a hard Brexit comes naturally. What's the point of prolonging the uncertainty, if all you get in the end is a lousy bilateral trade deal anyway? 

The authors have talked to eurosceptic MPs who noted, rightly in our view, that the Brexit vote has ended the split in the Tory party: they are all leavers now. The question is now which strategy should be pursued. One option still on the table is that of a unilateral Brexit under which May would trigger Art 50, followed by a unilateral vote to repeal the 1972 European Communities Act. While we think that this particular course of action is unlikely because it is potentially too disruptive, we agree with the article when it says there is a hidden message behind this position. The Tory MPs want a hard version of Brexit. And since a hard version is much easier to negotiate with the EU than a soft one, we should take this position very seriously indeed.

The article says No 10 has quietly taken soundings of backbench MPs during the summer which produced an overwhelming consensus in favour of immigration controls. The eurosceptics are confident that their position will prevail for two reasons. May's chief of staff, Nick Timothy, was a strong supporter of Brexit. And May herself is firm on immigration controls. Even pro-EU Tories no longer appear to contest the position of immigration controls. One pro-EU conservative minister is quoted as saying he does not want a half-way house, but would favour a bilateral trade deal as well.

A unilateral Brexit would constitute a breach of an international treaty and would give the UK pariah status - something no responsible government would risk at the time of Brexit. A far more likely option is that of a negotiated hard Brexit with a transition period. However, as the article points out, there is a core group of 30-40 hardliners among Tory MPs who will not settle for anything less than immediate sovereignty. Much of the political haggling will thus be about the nature and the length of the transition.

We noted that the media coverage of Brexit is now focusing on the impact of the vote on various policies. Frankfurter Allgemeine notes that Brexit would make it harder for the EU to reach its climate control targets, and may open up a confrontation between the eastern and western European member states. The eastern states have already protested that the targets were too stringent, and they would not be happy to shoulder the additional burden that comes with Brexit.

And Clive Cookson has a good article on the impact of Brexit on UK science. Brexit has unsettled continental European scientists who live and work in the UK. And, despite the UK government's pledge to match EU science funding post-Brexit for a limited period, Brexit will have important implications for joint research projects - from which Britain will now be excluded. What surprised us about Cookson's article is the still rather balanced view of the UK science community. While they overwhelmingly supported the case for Remain, many are willing to see the upside potential of the decision. Less regulation may in particular help biomedical research.

Our other stories

We also have stories on whether there is a pact of Ventotene; on how NPLs weigh on Italian banks; on the end of August holidays in France; on hard-to-value assets; on the approval of the CGD recapitalisation; on the rise of Greek debt; and on the debate about nominal GDP vs higher inflation targets.

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