September 06, 2016
Eliminating the impossible
In the Brexit debates we are slowly, very slowly, inching towards more clarity the Sherlock Holmes way:
"...when you have eliminated the impossible, whatever remains, however improbable, must be the truth."
We still don't know what Brexit means, but we are in a gradual process of elimination. Theresa May ruled out the EEA as a model and, over the last few days, made two further important qualifications about the future relationship. The first is her rejection of a point-based immigration system. This does not mean that she is going soft on immigration, let alone abandon the idea of controls. From the EU's perspective, this makes little difference in any case. She wants a system that is not based on qualifications, but on the needs for British industry and the economy at large. It is the ability to control the inflows that she favours, not a semi-automatic framework. In doing so, she is rejecting a system that has the support of some of her cabinet ministers, including Boris Johnson and Liam Fox.
We broadly agree with Robert Peston's analysis that Brexit probably means a Canada-plus style trade agreement - one with specific components for the UK services sector. They won't call it that, he notes. They are still talking about a bespoke agreement. But that's just words. It is going to be Canada-plus simply because May concluded that, politically, membership in the single market would be too costly.
The second important statement is that May also has not ruled out contributions to the EU budget, but in the form of voluntary payments that yield specific benefits. It is very much an association-type agreement she is looking at, short of membership.
The Wall Street Journal reports that Francois Hollande is putting pressure on May to get all the preparations done by the end of the year, which he called "a reasonable deadline". Further delays would weaken the British and European economies. We think he is right on this. May needs time to formulate a coherent Art 50 strategy, but we doubt that the marginal benefits of an extra year of pondering will outweigh the marginal costs from the economic impact of a delay.
What is also not clear is whether the UK will have another general election. The fixed-term parliaments act, which remains in force for the currently legislative term, prescribes elections in May 2020. UK commentators seem to agree that this can easily by circumvented. We are less sure about this - for political reasons - but the now likely re-election of Jeremy Corbyn as Labour leader will give Theresa May a good opportunity to trigger a new election to give her a firm Brexit negotiating mandate.
Janan Ganesh reminds us in the FT that, while political careers usually end in failure, premierships always start in success. But May's honeymoon will not last forever. If she repeats Gordon Brown's mistake and does not seek her own mandate, she will make things unnecessarily difficult for herself.
And finally, we noted a forecast by Goldman Sachs according to which the UK will still weaken, but not nearly as much as the Project Fear campaigners had forecast. The cumulative effect will be about 2% of GDP. Just why Remain campaigners thought that this would have been the killer argument, still eludes us.