August 17, 2016
UK Cabinet ministers have briefed Robert Peston that they will be seeking a Canada-style free trade agreement. It is the first time that we have heard of any concrete plans since the new government came into office seven weeks ago. We think this is a plausible strategy - though the article omits any mention of the intermediate regime, which is almost certainly necessary because a bilateral trade agreement will take many years to negotiate. Peston writes that he had been told the government would insist on three pillars defining its future relations with the EU: discretionary control over immigration policy; also over lawmaking; and no contributions to the EU budget. This would rule out the EEA option and other hybrids such as the Swiss agreement (which will not be on offer in any case). The newly created ministry for international trade, which will be in charge of negotiating the bilateral trade deal, is working on a deal similar to that of Canada, except that it would include a big element for the service industry. His sources are hopeful, but not sure that such a deal is realistic. Peston's article touches on an important issue we are very likely to discuss in future years. Will this be treated as a simple EU-wide trade deal, which would not require national ratification? Or will this require unanimity, based on national ratification? Peston's bet on the timeline is that Art 50 will either be triggered in March, still the most probably date, or late in 2017, given the electoral timetables in Europe.
We also noted an FT interview with Sandro Gozi, Italy's Europe minister, who warned that a further delay of Brexit could delay progress in talks on the future of the EU, which will start with the Bratislava summit next month. Italy is pressing for a further push in European integration. We don't see that a short delay in Brexit is going to have a big impact on those discussions. What is far more damaging to this process is the paralysis due to the Dutch, French and German elections next year. Bratislava may kickstart a process, but there will be no meaningful progress until 2018 at the earliest. By that time Art 50 will have been triggered.
We noted an interesting comment by Barry Eichengreen, who admitted that the economics profession overreached with its dismal predictions about life after Brexit. While the economic implications are not yet clear, the impact will not be anywhere nearly as bad as in 2009 simply because the financial sector is in much better shape. And, even though the banks had hoped for a Remain victory, they did prepare for the possibiity of a Brexit. His prediction, which seems reasonable to us, is that of a U-shape recession and recovery. The slump will be less severe than in 2009, but the recovery will not be as swift since policy makers will not be able to remove uncertainty. His prediction is that the government may not trigger Art 50 for many years, until new trade agreements are in place.
And finally, Rachel Sylvester writes in the Times that Brexit supporters will be shocked to learn that the costly Brussels bureaucracy will now be replaced by a much more cumbersome Brexit bureaucracy, especially now that there are three government departments in charge of Brexit - the foreign office, the new Brexit ministry, and the new international trade ministry. Lawyers, economists and trade negotiators are being hired at great cost. The departments are already squabbling over personnel, and are duplicating work.
We think the most likely course of events is an Art 50 trigger at some point in 2017 - we assume Q1, but it could be later - followed by a time-limited interim EEA deal that could be prolonged, and finally by a bilateral trade agreement. This makes more political sense than not triggering Art 50, because failure to do so would increase the probability of a reversal after the next elections. We do not think the Conservative Party is mad enough to agree to this - especially since it is possible to agree a vanilla EEA transition regime.