January 18, 2017
Will she walk?
Theresa May’s Brexit speech did not contain all that much hard information we did not know already, but it was still an important speech, one that marks an important moment, perhaps the point in many people’s consciousness that Brexit may actually happen. Beyond the symbolism, it is worth looking at some aspects of her speech in some greater detail. To us the two most important bits of her speech were her preference for an interim agreement, and a clearly stated negotiating position that she would walk away from the deal if there is none.
Sebastian Payne made an important point yesterday. It was clear that David Cameron wanted a deal badly, which is why he did not get a good one. May’s credible commitment to walk away from a bad deal makes a deal more likely. A treaty-less Brexit is a scenario the EU clearly wants to avoid, given the multiple crises it already has to deal with. Since May explicitly ruled out continued membership of the single market, the EU-27’s blackmail potential is significantly reduced. All the Brits want is a symmetric trade deal with a transitional arrangement - Canada+ as some people call it - which seems a reasonable proposition.
While May expressed a preference for a transitional agreement, the nature of the transition remains murky. She talked about becoming “an associate member of the customs union in some way”, which does not make sense to us. When you are in a customs union, you must respect its third-country trade arrangements. When you are outside, you can do your own. The customs union is binary. She talked about phasing-in Brexit, without giving a time frame in her speech. This suggests that the shape and length of the interim agreements remains the biggest uncertainty about Brexit - and one that clearly cannot be resolved ex-ante because it also depends on the other 27.
We will not summarise her twelve points - some are duplicates, all are known.
More important perhaps was the positive tone of the speech. She held out the possibility of co-operation with the EU in areas such as security and crime prevention.
The pound shot up yesterday in response to the speech, by about 3% in the afternoon, which we see as confirmation that the worst news is out now.
Donald Tusk welcomed her speech as realistic - presumably because it falls inside his own framework of “a hard Brexit, or no Brexit”. It will be a hard Brexit - in the sense of a complete withdrawal from the EU, its institutions, and its legal framework.
Charles Grant made an interesting point on the transition phase:
“Sensibly, May has committed herself to an implementation phase’ to start when Article 50 is concluded, which will in practice last until the various negotiations are completed. But it was unwise of No 10 to brief after the speech that everything would be negotiated in two years, because it will not be.”
This seems right to us. The negotiations will not take ten years, but they cannot be wrapped up quickly either. Sebastian Payne offers the following comment in the FT about May’s strategy:
“Mrs May’s Brexit approach is to abandon all elements of EU membership and then claw some back, notably on customs and security. It is a strategy designed to satisfy the country’s political mood...Aside from the unnecessary threat that Britain will walk away if offered a ‘bad deal’, the tone and content of the speech was well judged. After plenty of stick brandished in Europe’s direction, there were lots of carrots in the talk of friendship and a new ‘strategic partnership’.”
And finally, we may recall our rant in yesterday’s briefing that politicians and journalists on the continent were still hopeful that Brexit may never happen once the British wake up from their nightmare and see the light. We assume that the clarity of her presentation will have persuaded at least some people to take Brexit a tad more seriously. One person who did not was Alain Lamassoure, MEP, a French Republican. He called her statement incomprehensible because it was in the clear interest of the UK to stay in the single market, which has been, presumably, his working assumption about Brexit. The same goes for a number of German MEPs. Politico quotes Lamassoure as saying:
“It’s a kind of economic and business suicide that makes it hard to understand what is going on over the other side of the Channel.”
That’s a vast exaggeration of the benefits of the single market, the kind of unthinking lose talk you keep on hearing in Brussels. Whatever the benefits of the single market may be, the political reality that has escaped Lamassoure and many other continental politicians is that for the first time in living memory a British prime minister no longer prioritises economic output at the expense of everything else.