We use cookies to help improve and maintain our site. More information.

June 16, 2017

The emerging Brexit consensus

There are a large number of comments out there that are essentially now using the cyclical downturn in the UK economy (and the cyclical upturn in the eurozone) to peddle the message that Brexit is already an economic disaster and that undoing the whole thing should still be considered an option. We expect the number of Brexit laments to increase in the coming year.

Mercifully, there also appears to be a slowly-emerging consensus towards a solution we have been advocating ever since the Brexit referendum: use the Norway option, or a reduced version of it, for a long transitional period which would serve three fundamental purposes: 

  1. buying time to prepare for Brexit;
  2. defusing the Brexit bill issue politically - since the UK would be indirectly contributing to the EU budget;
  3. after Brexit, it allowing a smooth return to the EU via Article 49, if the UK electorates wants this, or, more likely, a transitional agreement.

Philip Hammond has been reported to be considering this option in his scheduled Mansion House speech last night, but he cancelled the event because of the London fire. 

Among comments, the most succinct is Andrew Duff’s analysis. He writes that, since both Conservatives and Labour campaigned in favour of Brexit, the option of revocation is now foreclosed. He predicts that there will be no further elections during the Article 50 negotiations, and the chances of an Article 50 agreement are actually increased. The nature of Brexit is likely to be softer because of the election result, as a bust-up would lead to the collapse of Theresa May's government and another general election. The Tories thus have every incentive to conclude a deal.

He also makes a series of other important points. One is that, while the UK and the EU will not conclude a parallel trade agreement, the nature of the relationship will have to be defined with some clarity because the Article 50 agreement will depend on it. Like us, Duff also believes that by far the best option for the UK would be to remain a member of the customs union during a transitional period.

One other factor likely to add pressure for a softer Brexit transition is the slowing economy and the rise in inflation. The Bank of England came close to voting in favour of an interest-rate rise, as inflation has hit 2.9% recently. The monetary policy committee voted by 5-3 in favour of leaving rates unchanged. One of the hawks, an external member, will quit the board at the end her term, leaving two open positions to fill.

Show Comments Write a Comment

June 16, 2017

On the economics of supply chains

Paul Krugman offers a very useful reminder of how small changes in global transportation costs can have a massive impact on global trade. The observation he offers has important implications for current policy debates such as Brexit, but also about the dependence of many European economies on international supply chains. He gives the example of a manufacturing process with intermediate goods imports and a final assembly. In his example, if transport constitutes 10% of the costs, the emerging country would need to offer a cost advantage of 38% to become competitive because it would have to pay for the cost of transporting in the intermediate goods, and transporting out the final goods. He says reductions in transportation costs, mostly through containerisation, were the biggest factor driving the expansion of global trade in the 1990s and the last decade. But this is a one-time effect. 

The lesson is that small changes have large effects. The same goes for tariffs. If the US started to impose tariffs on German companies, for example, or if trade relations between the EU and the UK were to become subject to WTO tariffs, expect to see quite a dramatic reversal of this process as cross-border supply chains would become economically less viable.

Show Comments Write a Comment

This is the public section of the Eurointelligence Professional Briefing, which focuses on the geopolitical aspects of our news coverage. It appears daily at 2pm CET. The full briefing, which appears at 9am CET, is only available to subscribers. Please click here for a free trial, and here for the Eurointelligence home page.


Recent News

  • October 16, 2017
  • What‘s the deep meaning of the elections in Lower Saxony?
  • Can Brexit be revoked?
  • Macron's grand narrative
  • April 19, 2017
  • Shadows of money
  • Breppe Grillo vs Eurointelligence
  • October 20, 2016
  • No games please, we are Europeans
  • April 25, 2016
  • The death of the Grand Coalition
  • Insurrection against TTIP
  • Juppé to benefit from Macron hype
  • On optimal currency areas
  • Why the Artic region could be the next geopolitical troublespot
  • From a currency to a people
  • September 18, 2017
  • Why Germany cannot lead Europe, let alone the free world
  • Will Macron help to build up Mélenchon?
  • Boris' Coup
  • May 12, 2017
  • What to do with Germany’s tax windfall
  • How Macron counts on building a majority
  • Options for the eurozone
  • January 05, 2017
  • French Socialist primaries - old wine in new bottles
  • Le Pen's hard ecu
  • Will Tusk get a second mandate?
  • Themes of 2017
  • August 30, 2016
  • Brexit facts on the ground
  • Burkinis and Republican primaries
  • The SPD and TTIP
  • April 25, 2016
  • The death of the Grand Coalition
  • Insurrection against TTIP
  • Juppé to benefit from Macron hype
  • On optimal currency areas
  • Why the Artic region could be the next geopolitical troublespot
  • From a currency to a people
  • January 05, 2018
  • Catalonia's government by Skype
  • The case for EEA membership
  • December 11, 2017
  • A new era for the French right
  • Growing scepticism of a grand coalition
  • November 24, 2017
  • Irish snap elections in January?
  • Alternatives to single market membership
  • Are the Irish bluffing?
  • November 08, 2017
  • Spain's attorney general personally sought pre-emptive prison for Catalan rebels
  • Spain's finance ministry to control Madrid city spending
  • National identity with a new twist
  • October 23, 2017
  • Macron's plans for the European Parliament
  • First phase of Brexit negotiations in final stretch
  • Why the left hates Europe
  • October 09, 2017
  • UK is starting to prepare for a no-deal Brexit
  • Why Germany will resist meaningful eurozone reform
  • September 25, 2017
  • Where does this leave eurozone governance reform?
  • Is Mélenchon losing his momentum?
  • Lost in Florence
  • September 13, 2017
  • Why the Turkey negotiations will continue
  • September 01, 2017
  • Rutte deflates Dutch labour party like a hot air balloon
  • August 21, 2017
  • Soft, getting softer
  • Tsipras' chances of a boost
  • On the fallacy of a middle-ground option for the eurozone
  • August 02, 2017
  • On the importance of a Brexit transition
  • To kill a referendum, starve it
  • How to spot a moron?
  • July 25, 2017
  • The impact of Duda's veto
  • How to undo Brexit
  • Front National: Frexit or not?
  • July 17, 2017
  • What Tony Blair's Brexit confusion tells us
  • Schulz advocates compulsory investments
  • Italy’s government has effectively lost its majority
  • July 11, 2017
  • The political fallout of the G20 in Germany
  • July 05, 2017
  • Europe’s next migration crisis
  • Philippe: French need to kick spending addiction
  • June 30, 2017
  • Recurring Brexit myths
  • On EU citizen rights
  • On Brexodus
  • June 26, 2017
  • Brexit - the central case and the tail-risk
  • The German fear of Macron
  • June 21, 2017
  • Why has the SPD deflated?
  • Berlusconi’s strategy
  • June 19, 2017
  • SPD to focus on inequality
  • On radical uncertainty
  • June 16, 2017
  • The emerging Brexit consensus
  • On the economics of supply chains