October 15, 2018
Black Brexit smoke
The events of the last 24 hours do not tell us whether or not there will be a Brexit deal. The sherpas, diplomats and technical staff were not able to pull it off. The disagreements are not technical but political. It will be up to the European Council to settle them on Wednesday. The chances that they will do so are wide-open. Anyone with experience in EU deal-making will recall countless occasions when a deal was preceded by gloomy no-deal warnings. Yet, the converse does not hold true either: happy endings can never be pre-ordained. What makes Brexit different from other negotiations is the unprecedented nature of the beast. This is a divorce agreement, not a treaty among EU leaders who have to look each other in the eye afterwards.
The big problem that came up over the weekend is that Downing Street underestimated the massive backlash against the idea of a customs union without a concrete time limit. Even Ruth Davidson, the moderate Scottish Tory leader, threatened to resign if Theresa May returned with any deal as part of which Northern Ireland would be treated differently from the rest of the UK. In this debate we are always returning to the same issue: an Irish backstop is inconsistent with an FTA. Chequers at least attempted to address that problem. The EU‘s rejection of Chequers was in our view a pivotal moment in the negotiations. It leaves a (semi)-permanent customs union/single market arrangement as the only alternative to no deal.
The FT reports Theresa May was calling the draft agreed by negotiators over the weekend a non-starter. Unless the negotiators find a way to insert a time limit, or something equivalent, we think it is going to be hard for May to agree at this stage. While we never underestimate the ability of EU negotiators to achieve a fudge, it would take some ingenuity to produce weasel words capable of hypnotising the hypercharged eurosceptics in the UK.
Over the weekend, the Observer newspaper reported Arlene Foster as saying that her talks with Barnier last week went badly, and that she now considered a no-deal Brexit as the most probable course of events. In addition to the DUP's 10 votes in the Commons, we think there must be at least 30-40 Tory MPs whom we consider as unyielding in their opposition to a customs union. They would prefer a no-deal Brexit. Even the threat of a second referendum no longer holds much sway with this group. It is for that reason that the probability of a no-deal Brexit, while impossible to calculate, is much higher than most people think.
We noted a comment in FAZ from Hendrik Kafsack, who made a point we have not read often in the German press but we may hear more frequently as people take the no-deal scenario more seriously. He said some of the EU‘s red lines were sensible, but the rejection of Chequers was irrational as a no-deal Brexit would also be massively damaging for the EU itself.
The rejection of Chequers was in our view an event that keeps on haunting us because Chequers not only respected the two sides‘ most important red lines, but would also have opened up a very narrow pathway towards ratification in the UK parliament. We are now in the situation both sides had sought to avoid: a looming confrontation that will end in a take-it-or-leave-it choice. Judging from some of the comments from EU leaders last time, it appears that some are still hoping for a Brexit reversal while some EU officials seem gung-ho about a no-deal Brexit.
This raises the question: is it possible that May herself becomes the champion of a no-deal solution? We think it is. Her first-best option would clearly be a deal ratified by the Commons. But we cannot see the other three options as viable candidates for second best: elections, a second referendum, or prodding on after parliament refuses to ratify a deal. All three embed the threat of a leadership challenge. Not agreeing to a deal that stands no chances of passage is indeed May's second-best option.
One other factor to keep in mind are self-fulfilling prophecies. If there is no deal by Wednesday and the EU and the UK move full-steam ahead with no-deal preparations, many companies in the UK and the EU will at this point unleash their no-deal plans. Within a few months, a no-deal Brexit will have become an economic reality. Much of the damage will have been done. At that point a no-deal scenario becomes less frightening. It, too, will be de-dramatised - to quote Barnier out of context.
The biggest obstacle to a deal right now is the illusion of false alternatives on both sides. The Labour Party rejects the deal on the grounds that it could negotiate a better one. Others like Kenneth Clarke reject it because he bets on a second referendum. The EU rejects a compromise in the unrealistic assumption that the UK will simply falter or, if not, that the EU will not suffer a lot. A deal will be easiest to reach once all of these dangerous illusions are buried - i.e. very close to the Brexit day itself.