Friday 26 January 2018

The quiet before the Phase Two storm

People could be forgiven for thinking that little has been happening with Brexit recently, and for that matter for feeling relieved that other matters have dominated the news. But whilst it’s true that substantive political negotiations won’t begin again until March, beneath the surface there is a great deal happening which will shape what happens then. In particular, as Ian Dunt has written on, the EU-27 are busily agreeing and framing what will become the Commission’s negotiating mandate for Michel Barnier for the phase 2 talks.

As the leaked text shows, this mandate, as with that for phase one, will be tightly drawn and will set the agenda not just for Barnier but for the talks and for their likely outcome, including the way that any transitional period is configured. There are reasons for this, as there were for what happened in phase one. On the one hand, the very fact of the timeframe of Article 50 and the relative negotiating power of the EU-27 would in any circumstances put the UK in a fairly tight corner because of the ever-present danger of a no deal crash and burn. That will be even more true for phase two, because the issues involved are more complex and the time frame that much tighter. On the other hand, and there is nothing inevitable about this, the British government is still flailing around unable to agree its own position or even, apparently, to understand what a viable position would look like. That creates a vacuum which magnifies the already extensive power of the EU-27 to shape what happens.

In effect, what is happening is that Britain is still engaged in debating the meaning, nature and consequences of Brexit. Indeed in many ways we are only now having the kind of debates we should have had before the Referendum. In the absence of clarity, we are almost back to the days of ‘Brexit means Brexit’ in which it’s necessary to engage in ‘Kremlinology’ to try to work out what, if anything, is going on beneath the surface. As far as can be made out, the current biggest fault line in the government is about whether to seek a customs treaty with the EU, and if so how extensive a one (it is a persistent misnomer that the UK could ‘stay in the customs union’ whilst not being a member of the EU: the issue is what kind of treaty, if any, to have).

The CBI made a high profile intervention this week in favour of a customs treaty that effectively replicates the current customs union. The timing of this was no accident – it reflects something that I have been writing on this blog for some time months now: we are now getting very close to the point where companies will have to start finalising investment and location plans in preparation for March 2019. The CBI initiative was a cue for the predictable, full-throated, fury of the Brexit Ultras, not least because such a customs treaty would preclude their shibboleth of being able to make independent trade deals. Indeed, it is striking how it is this rather than immigration which has now become totemic for Brexit politicians. It is doubtful if the same is true for many who voted leave.

In any case it is something which has little obvious economic merit since being in the EU does not preclude trading with rest of the world, in part through EU free trade agreements, and any new agreements the UK signs would be unlikely to compensate for the trade lost by leaving the single market. David Davis’ insistence today that Britain should be able to conduct trade talks during any transition period is especially empty since, even if the EU agreed, no country is going to enter into substantive trade talks until the future terms of UK-EU trade are settled. The real issues for trade posed by the EU’s phase two guidelines are, first, what will happen to British access to the EU’s third country agreements – they do not automatically continue for the UK, and whether or not they do will depend in part on those third countries – and, second, that the proposed end to the transition period of December 2020 makes it too short. But these practicalities are ignored in favour of the purely symbolic demand for an independent trade policy.

Equally impractical is the objection that a comprehensive customs treaty would mean the whole of UK business being bound by EU ‘red tape’ when most British firms do not trade with the EU or anyone else. Alas, such a view fails to understand that far more red tape is involved in having two sets of regulations, one for those which trade with the EU and one for those who do not, and the far greater red tape entailed in trading with the EU from outside the single market and customs union. Meanwhile, the Brexit vote continues to take a steady toll on business, with Jaguar Land Rover announcing cuts in production in part as a result of Brexit.

But the days when the Tory Party was the party of business seem as remote as when the Church of England was the Tory Party at prayer. Symbolism is, indeed, now the Brexiters’ stock in trade. Rather than propose any remotely workable plan for Brexit they obsess about the colour of passports or, this week, the crucial issue of whether Big Ben will ring out the bells of freedom on Brexit day. That’s all so much easier than boring things like Rules of Origin, or what Most Favoured Nation actually means (hint: the clue, for once, isn’t in the name). It’s a deep irony that many of those who most ferociously denounce ‘identity politics’ are currently its most enthusiastic proponents.

Insofar as the Brexiters do have a discernible position, it seems to be stuck at cakeism, hence their great joy at the (mis)reports that President Macron had held out the possibility of a ‘bespoke deal’ for Britain. For Brexiters, that’s code for cake. Unfortunately for them Macron didn’t actually say this, and the position he set out was no different to what the EU has been saying since long before the referendum, and which is in any case logically entailed by the nature of the single market. You can either be in it or out of it. If you’re out of it, you have less good terms of trade, especially for services and most especially for financial services. That circle can’t be squared, any more can the one that says that if there to be a transition period whilst still in the single market and customs union that means being in with all that is entailed in terms of freedom of movement, ECJ, Common Commercial Policy.

So far as can be seen, the government are inching towards accepting all of this, both as regards a transition period and what can realistically come afterwards (and certainly bullish talk of no deal being better than a bad deal seems to have become very muted). But, if so, then they can’t say it for the same old reason: their Ultras won’t accept it, as their cheerleader Jacob Rees-Mogg – now the leader of the ERG party within a party, the two previous leaders having been promoted to Ministerial roles - has this week made clear from his apparently permanent seat in the BBC’s studios. This sets the stage for, either, a massive political crisis when the realities of phase two happen; or a damp squib, as happened with phase one, with the Ultras accepting anything to get them over the line in March 2019 without the government imploding.

Meanwhile, to the extent that the Tory leadership is softer on Brexit than its rank and file, Labour is still stuck in the opposite position where its leadership is taking a harder line than its membership, voters and MPs. Again, that’s a position which is unlikely to survive for many more months and depending on if, when and how it changes the entire domestic politics of Brexit could also change.

Thus it’s conceivable, at least, that if the Tory rank and file force their leadership to harden and the Labour rank and file cause their leadership to soften then the stage will be set for a major parliamentary crisis, with a further election and even a referendum by no means out of the question. At all events, these quiet days at the beginning of 2018 will not be typical of the year to come.

Finally, although there is little light relief to be found in Britain’s Brexit tribulations, there was one moment of amusement this week. David Cameron was recorded saying that Brexit was “not a disaster” but was a “mistake”. It is easy to see why he would not want to own to it being a disaster, of course, given his dismal role in creating it (and to see that had he said otherwise, he would have been lambasted for ‘talking the country down’). But it is truly bizarre to see the glee with which Brexiters greeted this news, as if “it’s not a disaster, just a mistake” was a ringing endorsement of Brexit. Perhaps they should have put it in the side of a bus.

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