Too Big to Fail – Why All the Talk about a ‘No Deal’ Brexit?

As Brexit negotiations between the UK and the EU move towards an endgame series of summits among the leaders of the EU27, little new has emerged about whether Prime Minister May’s ‘Chequers Plan’ – or a variation of it – will be acceptable to the EU.

Although reports were circulating that the EU’s Chief Negotiator, Michel Barnier, had described the plan as ‘dead’, European Commission President Jean-Claude Juncker – in his annual State of the Union speech– appeared to offer some hope to the UK that an ‘ambitious new partnership’ could be forged on the basis of a free trade agreement as envisaged in the Chequers Plan. Nonetheless, he also warned that a state that left the EU and its Single Market could not enjoy the same privileges as an EU Member State. Prime Minister May also knows that even if her Government can reach an agreement with the EU, there is no guarantee that MPs will endorse it.

Noticeably, the UK Government has been talking up its arrangements for a ‘No Deal’ Brexit. In August, the Brexit Secretary Dominic Raab outlined the UK’s preparations for a disorderly departure from the EU. An initial series of technical papers were issued by his Department, indicating the likely effects of leaving the EU without a legal framework to govern future trade and cooperation between the UK and the EU. With 80% of the Withdrawal Agreement in place – including settlements of the UK’s financial liabilities – Raab noted that the scenarios identified were not what the Government expected or wanted, and instead presented the publications of the papers as a government planning ‘for every eventuality’.

With the UK publishing a further round of No Deal technical papers on 13 September, the volume of No Deal chatter seems to have gone up considerably. The Prime Minister even hosted a special meeting of the Cabinet apparently to discuss contingency planning should the UK leave the EU without a deal. The Governor of the Bank of England, Mark Carney, also attended for part of the meeting and was reported to have told the Cabinet that a major property market crash would be a likely outcome of a No Deal Brexit.

Meanwhile the Brexit Secretary amplified remarks he made earlier in that week that ‘nothing is agreed until everything is agreed’ and that included the settlement of the UK’s financial liabilities as agreed in the first phase of Brexit talks. While repeating that the UK would honour its obligations, Raab made clear that should a No Deal Brexit occur, the agreement reached at the end of 2017 would lapse. At her weekly Prime Minister’s Questions session in the Commons, Theresa May had similarly noted that in respect of the accepted so-called ‘Divorce Bill’, in the event of a No Deal Brexit, ‘the position changes’.  To be clear, the Government accepts it has financial liabilities and it is not suggesting it will not meet those liabilities. Nonetheless, the threat to take that settlement off the table is a further instance of the consequences of a No Deal Breit.

All this talking up of a No Deal Brexit appears aimed at a range of audiences.

The technical papers are supposed to give guidance to stakeholders about how the Government intends to implement regulatory arrangements governing goods like medicines and services like mobile phone use and data roaming.  Yet much of this guidance does not get beyond telling businesses that the UK will legislate to allow EU-based manufacturers and service-providers to continue to access the UK while leaving enormous uncertainty as to what degree of reciprocal arrangements – if any – UK companies will experience in 27 other countries. The same goes for citizens’ rights after Brexit. If the deal done on those rights in 2017 disappears, the UK could legislate to replicate the terms of the deal for citizens of the EU27: a point that Raab has also made in interviews. But again, this does nothing to provide reassurance for UK nationals resident in any of the EU27 Member States with the potential for those states to take divergent approaches, subject to any common EU legislative rules.

Given that real certainty and clarity can only come from a Withdrawal Agreement that includes a clear transitional framework, and from some sense of what the future relationship between the UK and EU will entail, the No Deal chatter is really aimed at different political audiences.

In seeking to sell her plan to the public, discussion of a No Deal Brexit helps to prepare people for the reality that things will be different outside of the EU. For those ideologically committed to Brexit, the risks and downsides of EU withdrawal have often been dismissed as ‘Project Fear’: the Brexiteer equivalent of ‘Fake News’. The release of technical papers describing some of the potential fall-out from life outside the EU, allows the PM to worry the public just enough to make her plan seem like a less bad outcome.

At a domestic political level, talking up the risk of a No Deal Brexit is no doubt an attempt by Prime Minister May to focus the minds of MPs – as well as members of her own Cabinet – that her Chequers Plan is the only basis for an orderly exit from the EU. In her Panorama television interview, Mrs May repeated that the choice was between a deal based on the Chequers Plan or a No Deal departure from the EU. Were her own MPs and colleagues to reject a deal negotiated by her and to remove her as PM, the risk of falling out the EU without a deal increases. Avoiding that eventuality also means keeping her in No 10. The PM is using her own weakness and the threat of the UK crashing out of the EU to garner political traction for her Chequers Plan and to keep her in office (for the time being).

But another audience for all of this is the leaders of the EU27. The UK has been asking Barnier and his team to show flexibility and not to stick to the models of how they have done deals in the past. Raising the threat of a No Deal Brexit may be intended to appeal directly to the EU leaders to redefine or reinterpret the negotiation mandate of the European Commission to allow for talks to reach a positive conclusion. An upcoming informal summit of those leaders may be an opportunity to do just that although it is not clear that the Member States would actually change the mandate rather than clarify the EU’s endgame position. Again, it is the weakness of the UK that turns out to be its strength. Like a major bank during the financial crisis, the Brexit talks are too big to fail and the UK is probably pinning its hope on the EU27 to avert a failure given the terrible consequences of failure.

We do need to keep in mind that the current talks cannot and will not define the future relationship between the UK and the EU; it can only settle the ‘framework’ for that relationship. And so there is always the potential to kick the can down the road by agreeing a thinner rather than a thicker version of that framework. Indeed, the value of Sterling recently rose on the back of a Bloomberg report that Germany might accept a more minimal framework agreement.

Paradoxically, then, the current preoccupation with a No Deal Brexit is an indicator that some serious political thought is now being given to how to ensure that the Brexit endgame produces a Withdrawal Agreement. It is the political and economic consequences of failure that is driving the parties towards an agreement. The question is whether the concept of ‘too big to fail’ will be enough to ensure that any political agreement reached will also be endorsed either by MPs or by the public should a ‘People’s Vote’ transpire.

Now is not the time for a ‘least worst’ Brexit – it’s time for a referendum on Brexit itself

There are 340 days to go until the UK leaves the EU.

The time remaining for the UK and EU to negotiate a withdrawal agreement is even less than that.

Domestic legislation still needs to be passed to retain EU law in national law. Time will also be needed to give domestic legal effect to any withdrawal agreement.

Time is short even to do what the UK Government wants to do, namely to leave the EU, its Single Market and Customs Union, and instead negotiate with the EU a new relationship based on a free trade agreement.

And yet we still seem to be talking about alternative options. Indeed, the term “least worst Brexit” seems to be gaining some currency as politicians and others wake up to the reality of what the UK intends to give up from its EU membership as well as all the difficulties and limitations associated with what the UK Government aspires to achieve.

A prime example of these attempts to temper the effects of Brexit is the idea of remaining in a customs union. The focal point for this debate is Parliament, with both the Lords and the Commons seeking to steer the Government towards a customs union.

For the Commons, a debate will be held on Thursday on a motionthat calls on the Government ‘to include as an objective in negotiations on the future relationship between the UK and the EU the establishment of an effective customs union’ between the UK and the EU. It will be a debate with no immediate legal consequences and the reference to a ‘future relationship’ may look beyond the immediacy of current negotiations. The Lords, however, have gone further in amending the European Union (Withdrawal) Billto make the repeal of the European Communities Act 1972 conditional on Ministers laying before both Houses of Parliament a statement concerning the steps taken in negotiations under Article 50(2) to negotiate an arrangement to continue participating in a customs union with the EU.

In response to these moves, the UK Government has today repeated its position that the UK will be leaving the customs union. So what should we make of attempts by Parliament to push for a least worst Brexit?

The first thing to be clear about is that the UK Government is not negotiating in Brussels according to a mandate that Parliament has set for the UK Government in advance of negotiations. Our constitutional set up is instead one in which Parliament’s role is to legislate to implement international agreements and, in more recent times, to signal its approval of such agreements prior to ratification so as not to lead to the circumstance in which a Government is confronted with a Parliament unwilling to legislate for a deal that it does not like. We are now 15 months on from the Lancaster House speech in which the UK Government set out what sort of Brexit it wanted. We are also more than a year into the negotiations that will lead to the UK’s withdrawal from the EU with likely less than half a year left to finalise the deal. This hardly seems the moment for Parliament to decide it wants to instruct the UK Government on what it should be negotiating.

Secondly, Parliament cannot simply legislate for a customs union. The UK is leaving the EU and any future relationship can only be negotiated between the UK Government and the EU. The Lords amendment to the Withdrawal Bill does recognise that in the sense that it only demands that Parliament is informed about those negotiations. As such it is also an amendment whose condition is easily satisfied. After all, ministers may simply state to Parliament that ministers have taken no steps to negotiate a customs union as it is not government policy to have one with the EU.

Given that the Government is clear about what it wants, the only real option for Parliament is to bring the Government down one way or another. And if this Government is gone, are we really talking about forging a least worst Brexit or something else all together?

Because if there is a strong enough political momentum to reject the Government’s Brexit strategy and to argue instead for a customs union and likely also the Single Market, then perhaps there is political momentum to push for retention of EU membership itself.

As I argued in Brexit Timeand as I have been suggesting here, Brexit is a choice in time and of time. In the time that remains before the UK leaves the EU, I think the choice is not between the UK Government’s form of Brexit and a least worse version. It is between what the Government is seeking or the UK remaining in the EU.

So I have come to a conclusion. There should be a referendum on the question whether the UK leaves the EU on the terms that the UK Government negotiates, or the UK remains a Member State of the European Union. There is no time for a third way option and all the chatter that suggests that such an option might be viable is, to my mind, a distraction.

I fully understand those that believe another referendum could be divisive. But to be clear this would be a referendum on a different proposition. And it seems to me that people on both sides of this argument need to have the courage of their convictions. Either the Government is right to push for an end to EU membership on the terms it negotiates, or it is wrong and the status quo should prevail. As I have also argued on this blog, if there is to be another referendum, time is limited.

This is not the time for Parliament to try and find a middle ground. It is time for Parliament to allow the electorate to make a decisive choice. If Parliament wants to legislate for anything it should be to for a referendum.

A Customs Union Without a Single Market : Is Corbyn’s Position Credible?

In speeches this week, the Leader of the Opposition and the Prime Minister are setting out their visions for the UK’s future relationship with the EU. Things got underway today with Labour’s Jeremy Corbyn announcing that Labour would press for the UK to remain in the Single Market and a Customs Union with the EU through a transitional period, with the possibility of concluding a permanent Customs Union a “viable option”, provided the UK could have an “appropriate say” in future EU trade deals with non-Member States.

The political intention is to create clear water between a Labour Brexit and a Conservative Brexit. Under a Conservative Government, the UK will leave the EU, its Single Market and its Customs Union at the end of any transitional period. The Conservatives see this as vital to deliver on its promise to regain control over regulatory policy and trade policy once the UK leaves the EU. As part of its “Global Britain” strategy, the Government wants to be free to enter into free trade arrangements not just with the EU but with other non-EU states. Labour, by contrast, has decided that the pursuit of an independent trade policy is not something that makes the electorate vote one way rather than another. Instead, it is content for the UK to have tariff-free trade with the EU through a Customs Union. Crucially, and despite the insistence of some parts of the Labour Party, the Labour leader has not committed to keeping the UK in the Single Market after the end of the transitional period. This is for two reasons. Firstly, and despite contrary analysis even from Labour supporters, the Labour Leader continues to believe that EU competition and state aid rules would prevent a future Labour Government carrying out its economic programme. Secondly, and despite the warm words in his speech about EU nationals, the Labour Leader is not willing to accept free movement of people in return for free movement of goods and services.

So what might a post-Brexit Customs Union between the UK and the EU look like?

In certain respects, the Labour Party’s proposal would take the UK back to its early membership of the EEC. When the UK joined the EEC in 1973 it became part of the Customs Union which had been completed among the six founding states in July 1968. Under transitional arrangements, the UK, Ireland and Denmark adopted the EEC’s Common Customs Tariff and progressively eliminated any remaining customs duties. The Single Market as we know it now was still in its early development. While rulings of the Court of Justice were being used to remove non-tariff barriers on a case by case basis, it wasn’t until the Internal Market programme of the mid-1980s – a programme backed by the UK – that major steps were taken to advance EU harmonization efforts to converge the regulatory policies of EU Member States. But the “1992” programme was largely focused on trade in goods, with non-tariff barriers in services being slow to change. Labour mobility was also relatively low. In other words, a Customs Union without a Single Market would turn the clock back to the 1970s with the limits on cross-border market access arising not from customs but from pervasive non-tariff barriers in both goods and services markets.

Of course, the crucial difference between then and now is that the progress which has been achieved in eliminating non-tariff barriers does not automatically disappear as soon as the UK leaves the EU. Indeed, from a domestic regulatory perspective, the European Union (Withdrawal) Bill aims to domesticate all existing EU regulatory requirements as a matter of UK law. But two things are not clear from Labour’s proposals today. Firstly, how will the current system of rules be made to operate if the UK is not part of the wider European administrative and judicial landscape which makes existing Single Market rules actually work in practice? Secondly, to what extent can or will UK regulatory policy diverge under a Labour Government?

In his speech, Jeremy Corbyn referred to “staying close” to the EU and to continue to support EU agencies with regulatory tasks including the European Food Safety Authority and the European Chemicals Agency. But even the three European Free Trade Association (EFTA) states that join in the Single Market through the European Economic Area agreement have limited direct participation in the work of European agencies. Their representatives do not form part of the management boards of the agencies. The UK could hardly get a better deal on EU agencies while staying outside the Single Market than Norway which participates in the Single Market.

The Labour leader was also keen to assert that his proposals on a Customs Union would not see a hard border on the island of Ireland. However, it is regulatory alignment that is as much an issue for the border in Ireland as the elimination of tariffs. Arguably there is more reason to have a frontier control to ensure the physical security of the European market than there is to ensure the collection of tariffs on the import of goods onto the island of Ireland. Again, it is unclear why Labour is focusing on a Customs Union at the expense of the continued elimination of non-tariff barriers to trade through the Single Market.

If we step back from the specifics of Brexit and look at the wider international landscape, the vast majority of regional trade agreements that are notified to the World Trade Organization are regional Free Trade deals rather than Customs Unions. These Free Trade arrangements do the same work in eliminating tariffs in trade in goods between participating members but leave those states free to control their trade policies with non-members. As tariffs are reduced, it becomes more and more obvious that the big issues are around regulatory alignment and regulatory cooperation. Pursuit of a Customs Union on its own is simply not a strategy pursued by the world’s major trading nations.

In the end it is difficult to see how a Labour Government can credibly pursue a UK-EU Customs Union without at the same time having an arrangement with the EU on alignment of UK regulatory policy. After all, there is little point giving non-UK/EU goods the benefit of free circulation in a UK/EU market if in practice, non-tariff barriers impede their cross-border movement. Indeed, the success of the EU’s external trade policy – the free trade agreements with which a Labour Government would be aligned in a UK-EU Customs Union – is wholly predicated on the capacity of those goods to move freely in the market once they comply with common EU regulatory norms.

Today’s speech is more about trying to define a Labour Brexit that is different from a Conservative Brexit. In that respect there is a clear divide between a UK in a Customs Union and a UK that pursues a Free Trade model. But neither approach solves the border issues on the island of Ireland. And a Customs Union without barrier-free movements of goods and services is just a description of what a Labour Government under Harold Wilson inherited in 1974.  If Labour is to avoid accusations that it is trying to turn back time while lip-syncing its way through difficult discussions about the Single Market it is going to have to do more than pin its hopes on a UK-EU Customs Union.