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November 19, 2018


May’s pushback is kicking in

As commentators, we know only too well that the strength of one’s opinions can sometimes correlate negatively with the depth of one's knowledge. The reason we believe that Theresa May’s Brexit plan will ultimately prevail is that it seems that she is the only senior politician who has actually read the 585-page withdrawal agreement, or at least the chapters that matter politically. Her Brexit strategy is accident-prone, but it is not doomed from the outset. Her relative preparedness puts her at a massive advantage over her opponents from the right and the left, who are both incoherent. 

We also doubt that a single political commentator in the UK has read the full document or even major parts of it. We are reminded of Kenneth Clarke’s infamous admission that he never read the Maastricht Treaty. A chronic disinterest in legal documents is one of the deeper reasons why the UK is leaving the EU.

May’s pushback started on the weekend with a media blitz that led even the uber-critical Daily Telegraph to express some admiration for her Lutherian here-I-stand attitude. It does not matter that Angela Merkel or Mark Rutte both said the deal was final. May says so herself. She will not renegotiate - beyond some technical details and of course the yet-unsettled question of the precise end date of a renewed transition period. It was left open in the draft treaty as 20xx. Michel Barnier is now proposing an end date of 2022, which is awkward for the UK's political timetable, as it takes the UK past the next scheduled elections. We presume that May will insist on a pre-election end-date. We are now talking about two or three transitional phases before a trade deal takes effect: the normal transition period running until December 2020; the extended transition with an end date yet to be agreed; and any period in which the all-UK backstop takes effect if there is no agreed trade deal by then. That period is open-ended, but legally finite nevertheless. The reason is that, under EU law, it is not deemed possible to use Article 50 to agree a permanent trade agreement. Which is why we are relaxed about the Hotel California/vassal state scenario. 

As we suggested on Friday, what appeared to be an imminent rebellion by Tory MPs seems to be in doubt. The number of applications for a leadership challenge was still well short of the target of 48. It might still go ahead but, even if it did, we doubt there is a majority among Tory MPs for replacing May as leader - given the alternatives. We will see over the course of this week whether the threat is for real. A leadership challenge could still damage May, as it would undermine her standing. A gang of five rebels, led by the semi-loyal Michael Gove, wants May to renegotiate the deal. But she already told them that she won’t and can’t. We always said that the UK political classes were delusional in their failure to recognise the take-it-or-leave-it nature of the withdrawal agreement. In this context we noted a Telegraph story according to which pro-Remain Tory MPs were discussing a fallback option with Labour MPs in favour of an EEA option. When these people start to acquaint themselves with the material, they might be shocked to realise that the EEA is not a menu choice at this stage. Accepting May’s deal is probably still the best option for those in favour of EEA membership. It can always be negotiated. However, the EEA precludes a customs union. Do they want this?

We would like to draw readers’ attention to two comments from the weekend. One is by Max Hastings in the Times, who despairs about the lack of realism in the Conservative Party - of which he is a supporter. He says the big issue facing the EU over the next decades will be mass immigration from Africa, and Brexit will do nothing to manage this problem. He is right of course. This is also true of the many problems facing the UK - the Londonisation of the country, a failing education system, excessive reliance on finance. He says the main job for the government is to restore lost consensus to UK politics. 

In his FT column, Wolfgang Munchau dismisses hopes of a Tarp effect - that financial markets would force the House of Commons to vote in favour of either May’s deal or a second referendum. Brexit is not a financial crisis as evidenced by the relatively muted market reaction after the referendum in 2016. There are very few hedge funds who are speculating on a dramatic downturn even in the case of a no-deal Brexit. It will have many effects - including short-term economic effects - but the long-term economic impact of Brexit is far from clear.

Our other stories

We also have stories on the risk to derivatives from a no-deal Brexit; on channels of contagion from Italy; on how Macron’s government is responding to grassroot protests; on the Franco-German draft for the eurozone budget; and on the incoherence of Italy’s EU strategy.

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