Could no-deal Brexit preparations become a self-fulfilling prophecy?
It is normally sensible for both sides in a negotiation to make preparations for a no deal. We also think it is perfectly sensible for negotiating partners to say that no deal is better than a bad deal. If you don't say it, you end up with a bad deal.
It was the game plan of the UK's Remainers to use a parliament procedure to rule out the possibility of a no deal for that precise reason: it would have forced the government to agree a bad deal, which would then have been defeated, followed by a procedure that would have paved the way for a second referendum. The meaningful-vote amendment would have delivered such a procedure. Because of its defeat, people have to take the possibility of a no-deal Brexit much more seriously, as evidenced by recent announcements from companies like Airbus and BMW.
We still see an agreed Brexit as the more likely outcome, also in view of Donald Trump's now-daily threats to impose tariffs on EU products. Neither side in the Brexit negotiations can afford to erect another tariff barrier, which would be the result of a hard Brexit.
The probability of a no-deal Brexit is rising, however. First of all, industry is creating facts on the ground by reducing investment. The more this goes on, the smaller the value of a transitional agreement for the UK. If the negotiations go all the way until the end of the year, with rising expectations of a no-deal Brexit, it is quite possible that the UK government may conclude that the political cost of an agreement is too high and the benefits from a Brexit transition followed by a customs union are too low, given the changed economic situation.
We noted a story yesterday that investment in Britain's car industry has fallen from £647m to £347m between the first six months of 2017 and 2018 respectively, according to figures the Society of Motor Manufacturers and Traders. This is the lowest figure since the financial crisis. The society attributes the fall to conflicting messages about the Brexit process. BMW also questions its level of investment in the UK. A no-deal Brexit would not necessarily threaten its Oxford plant, where it produces the Mini. But it would threaten the UK-based production of parts for the global supply chains of its main production sites in Germany.
This is why a decision by the UK to join the EEA, or a customs union with the EU, has a declining economic value the closer it gets to the Brexit deadline. We are now well into the phase where people have to make preparations, and those preparations create irreversible facts.
We also noted a story in Politico about the Commission telling diplomats that member states need to prepare their airports and the aviation sector for a no-deal Brexit. If there is no Brexit deal, the UK would also drop out of its aviation agreements with the EU. At that point all operating licences for air carriers to and from the UK would cease instantly. The UK would also drop out of the European Aviation Safety Agency. And member states would also have to deal with the logistical implications of additional customs checks.
Being prepared for eventualities is a good thing, but we also have to be aware of the extent to which the preparations themselves increase the probability of a no-deal scenario. It was the fear of a no-deal Brexit which drove both sides closer together. There seems to be a lot less urgency in the talks, as the UK government in particular remains largely unchallenged by various potential rebellions.
The big issue to watch out for is the Trade Bill, which could yet result in a successful amendment to call on the government to negotiate a goods-only customs union. But, since the EU already rejected this idea, such an amendment would probably not constitute a strong constraint on Theresa May's negotiating position.
We still think a deal is most likely, but accidents can - and probably will - intrude.