The events of the last week are an almost textbook illustration of the point I made a couple of posts ago that “governments are constrained in ways that thinktanks aren’t, and even the most ardently ideological libertarian SpAD quickly finds that political reality is very different to the world of position papers and whiteboards”. If what has happened differs from the textbook it is because a normal government would take note of these constraints before going public with its policies. But this isn’t a normal government. Even its ferociously ideological but already bitterly divided Cabinet doesn’t get much of a say – it wasn’t consulted on the abolition of the 45p tax rate, for example – whilst the civil service and other institutions are ignored or derided as ‘the declinist Establishment’.
The result is that the operation of the constraints upon this government is being played out in public, adding reputational damage which in turn makes it even more constrained. The first, and probably administration-defining, instalment of it came with the market crash that followed the ‘mini-budget’, which I discussed in my previous post. Crucially and very much in line with my discussion, what it revealed to the world were exactly the reality-denying characteristics that make it a distinctively Brexit government. “Denial of what every investor can see to be true is a poor strategy for winning hearts and minds”, as the Wall Street Journal put it, whilst in the Financial Times the government was described as “mad, bad and dangerous”, composed of “zealots [convinced] that reality must adapt to their desires”.
As so often, law and policy commentator and blogger David Allen Green summed things up well by pointing out that what’s distinctive about this administration “is not that it has an ideology, but that it has nothing else. There is no engagement with the real world as it is, and no understanding that there is a real world outside with which to engage”. Meanwhile, another distinguished blogger, economist Simon Wren-Lewis, explained how this grows not coincidentally but directly from the evidence-denying, fantasy-based world Brexiters.
It’s only now becoming clear just how close the UK came to financial catastrophe last week, and that this was unquestionably as a direct result of a UK specific, ideological denial of reality rather than, as the government has dishonestly tried to claim, ‘global conditions’.
When reality bites back
Of course such criticism would be denounced by the government and its supporters as no more than would be expected of ‘the Establishment’, ‘declinists’ and ‘remoaners’. But here’s the rub: after a week of unequivocal insistence that there would be no backtracking on any of its provisions, an insistence defended by hapless ministers and roared on by many pro-Tory, pro-Brexit commentators (£), reality won out.
Announcing that fell to Kwasi Kwarteng, initially during a series of gritted-teeth media interviews on Monday morning, during which his studied Etonian arrogance was barely able to conceal that which is all his own. In these interviews, and his subsequent conference speech, he revealed the dropping of the 45p tax rate abolition measure on the grounds that it was proving a “distraction”, though this hardly suggested he understood exactly what the problem was and, in itself, only began to address that problem.
In the process, he was obliged to make positive references to the importance of the OBR, BoE and other institutions that had been sidelined or disparaged the week before, and which the libertarian Brexit cabal regard with such contempt. Very soon afterwards it seemed to be announced that publication of the full ‘medium-term fiscal plan’ would be brought forward from its scheduled date of 23 November, then that it wouldn’t and finally that indeed it would be, perhaps to later this month, and this time with an OBR assessment.
So that was three ‘U-turns’ in one fell swoop, or was it four or five? There’s an argument that criticism of governments for ‘U-turns’ is overdone, and that it’s actually a mark of maturity and good judgement to own up to and reverse poor decisions. We heard much of that from Tory MPs this week, including Brexiters who, strangely, always refused to countenance the idea that the poorest decision of them all, Brexit, could ever be re-considered. But in this case it’s not that we have a government that generally has sound judgement, but gets the odd decision wrong and has the character to admit it, it is that poor judgement is built into its very fabric by virtue of the Brexit-derived bunker ideology and arrogance I described last week. Nor was this a mid-stream blip: it was the government’s flagship policy and its first major act.
This also means that these U-turns don’t do much to fix its problems, beyond taking the immediate political heat off. It’s true that sterling recovered its value, but that doesn’t represent a vote of confidence in the government’s plans so much as expectation that it will have to continue to modify them. Nor does it prevent mortgage rates rising by more than would otherwise have been the case. What is especially important is that, although in the past rates have often been higher, the proportion of household incomes taken up by mortgage payments has shot up to the level of the late 1980s, just before the housing market crash.
It’s also true that the gilt markets rallied (i.e. prices rose and yields fell), but not to the levels they were before the mini-budget, so government borrowing will still be more expensive. So there is no sense in which the government’s reputation has improved or that it is now seen as trustworthy by the markets; the legacy of the mini-budget is a “credibility crisis” for the government (£) according to Sky News Economics Editor Ed Conway.
This won’t have been helped by Truss’s conference speech. Not that it was either a disaster or a triumph – it was quite dull, predictable in content, mundane in delivery – but because, like Kwarteng, she clearly doesn’t understand why the mini-budget got the market reaction it did and certainly doesn’t acknowledge any responsibility for it. That was shown in particular by her spiteful references to having to face down an ‘anti-growth coalition’ comprised of trade unionists, environmentalists, opposition parties, Brexit deniers, North Londoners, vested interests dressed up as thinktanks, liberal podcasters and so on.
At one level this was just entry-level populism, a recitation of enemies of the people, albeit an incoherent one in including almost no one who is actually ‘anti-growth’ whilst being so widely drawn as to include many traditional or potential Tory voters. At another level, it implied precisely the denial of reality which is the root cause of all her problems. For it wasn’t just that she depicted this coalition as the enemies of growth, but also as implacable opponents of her rejection of ‘the status quo’. By that, she meant precisely the supposedly revolutionary, anti-Establishment thinking of, well, the ‘vested interests dressed up as thinktanks’ that openly boast of owning her government.
But when this thinking was put into practice in the mini-budget it wasn’t these imagined enemies of growth who caused the markets to crash, it was cold-eyed traders who saw that it was completely unrealistic. The reason for that is entirely straightforward. The libertarian thinktanks she relies upon peddle theories, most obviously the Laffer Curve, which are untrue and have been repeatedly discredited. It’s that which she plainly doesn’t understand. It may be no coincidence that during her speech on Wednesday sterling and UK gilt prices both fell, and gilts continued to do so yesterday.
Can the fiscal plan be made convincing?
The events of the last week mean there is now no possibility that the government’s original plan of boosting growth through a combination of tax cuts and regulatory ‘reforms’, but without substantial immediate spending cuts, can survive, and it is spending cuts to which attention is now turning. But just as the mini-budget fiasco weakened the government’s market reputation, so too has it weakened even further than before its control of the parliamentary party.
Having seen the adamant insistence on the 45p rate crumble, literally overnight, Tory backbenchers are emboldened to oppose spending cuts, with the possibility of not upgrading welfare payments in line with inflation being the emergent battleground within a Tory Party now at total war with itself. It won’t be the only battle, because after years of spending cuts there is very little scope for new ones, and many Tory MPs are mindful that they were not elected on a manifesto of cuts and fear the electoral consequences. Truss has made what during the leadership campaign I called the ‘unleadable’ Tory Party even less leadable by her incompetence.
The same is going to be true of the deregulatory or ‘supply-side reforms’ in which the government places such faith to make its fiscal plan convincing, and which are central to its ideological dogma in their own right. We still don’t have much in the way of detail, but there is an expectation these reforms will include a more relaxed immigration policy, despite Home Secretary Suella Braverman’s almost psychotic insistence this week that net migration must and will fall. As her speech shows, if immigration is now allowed to rise this will open up the profound fissures within the Brexiter coalition, with Farage also already sounding a warning note.
It’s true that, under Boris Johnson, post-Brexit immigration controls were laxer than many leave voters will have expected or wanted – and for good economic reasons, which demonstrate one of the many fallacies of Brexit – but that happened very quietly. Truss seems set to relax them further, and much more publicly. Tory MPs who dislike that, or think their constituents will dislike it, will resist it, partly through fear of the revival of a Faragist Party. After all, it was the deep desire to see off Farage’s threat that drove Cameron to call the referendum in the first place. But if Truss now doesn’t make substantial relaxations to immigration policy then, as a supply-side reform supposed to promote growth, it won’t have any credibility, further damaging that of the fiscal plan.
Another major plank of supply-side reform is expected to be relaxation of planning laws and rules, perhaps generally or perhaps just in what are likely to be large numbers of new ‘Investment Zones’, as well as in the already announced Freeports. But that, too, is likely to be strongly resisted by many Tory MPs whose inboxes are already reported to be full of angry emails from constituents about it (£). One of the key reasons for the Tories losing the Chesham and Amersham byelection to the LibDems, just last year, was voters’ opposition to liberalising planning law, leading the then Housing Secretary Michael Gove to pause or abandon some of the changes, including those for what were then called ‘growth zones’.
So it is very likely that Truss will face strong opposition to her plans in this area, too, and it’s of note that it was Gove who spearheaded backbenchers’ public opposition to the ‘mini-budget’. There is already such opposition to the revival of plans for fracking, hence Jacob Rees-Mogg snuffling around for a way to get them through without too much scrutiny.
A farewell to EU retained law? Don’t bet on it
Much of this has nothing directly to do with Brexit (apart from the obvious fact that UK immigration control policies apply now to EU nationals), but another major part of the government’s supply-side agenda is to “review, replace or repeal” the entirety of retained EU Law by the end of 2023. In principle, it ought to be easier to get political support within the Tory Party for this, and repeating the pledge during his conference speech earned Kwarteng a cheer. But it’s highly likely that “repeal” was the word that excited them, and if the years since 2016 have shown anything, it is how much easier it is to get Brexiter cheers for slogans than it is to deliver what their content implies.
For despite what some imagine, and others fear, it is not going to be quick or easy to deliver on this promise even though the government is arrogating to itself enormous powers to act by ministerial decree, thus avoiding extensive parliamentary scrutiny. In practice, it’s likely that much of EU retained law will continue to be retained, either temporarily or permanently, rather than be allowed to expire under sunset clauses. That’s because, often, repealing without replacing would lead to immediate chaos, with cliff edges over which businesses will drop overnight. True, that might not deter this government, which may be too arrogant to consult in order to understand the consequences, or too reckless to care, and simply go ahead on the basis of its ideological convictions. Indeed, the mini-budget shows us exactly that possibility. But it also shows us how quickly the government can then be forced to backtrack.
Of course, there may be particular issues Truss selects to stand firm and fight on, and which these are will become clear in due course. But given the volume of law in question, and the timescale of making decisions by the end of 2023 that is anticipated, there aren’t likely to be many such cases. That’s partly because each one will encounter political opposition from both inside and outside the Tory Party. But there also issues of administrative bandwidth, especially when the government also wants to cut the civil service, and these apply not just to ‘repealing’ retained EU law but to ‘replacing’ it or, indeed, simply ‘reviewing’ it as a prelude to either of these.
Those elusive Brexit freedoms
There are already good examples* of how complex and time-consuming replacing EU regulations is, most obviously that of REACH, the EU’s chemicals regulation system, now effectively reproduced as REACH UK but with many features still subject to long transition periods. It is also expensive, and fundamentally pointless, certainly from a free-market, deregulatory perspective, since it creates a double regulatory system for those firms which operate in both the UK and the EU, increasing their costs, whilst also being protectionist in at least potentially discouraging non-UK firms from serving the UK market, reducing customer choice.
A not dissimilar example is the attempt to replace the EU’s CE conformity assessment marking regime with the UKCA mark, which has persistently been delayed and now appears to be in limbo. Again, the main criticism is that it simply creates a double regulatory system, disadvantaging UK firms and potentially UK customers. As to what is going to happen now, it’s not clear. As things stand, goods without the UKCA mark (or the UKNI mark, another complication, as I discussed last August) will not be legal on the Great Britain market from the end of this year. Since that deadline is less than four months away, it must be at least questionable whether it will be met.
The UKCA case is particularly instructive as it shows three related issues coming together. One is that the way it has been endlessly postponed shows the problem of lack of administrative bandwidth (and, for that matter, the capacity of businesses). Another is that only after it had already been set in train did Brexiters, in this case Jacob Rees-Mogg (£), actually realise what was obvious to anyone not obsessed with Brexit deregulation, namely how inefficient it would be. And, thirdly, perhaps due to a combination of these things, it shows how easily the Brexiters lose interest in things they used to be so excited about, like children who have begged for months for a new toy for Christmas, only to discard it as dull and disappointing on Boxing Day.
In fact, Brexit is already littered with half-finished projects, a current example being the delay in the planned switch-off of the CHIEF customs system on 1 October. Like discarded presents, they still cost money though, unlike such presents, they can’t really be discarded and have to be made to work, somehow, even if the Brexiters themselves have moved on to some shiny new attraction.
Why reforming Solvency II just got harder
One such attraction expected to feature prominently as part of the ‘supply side reforms’ looks set to be replacement of EU GDPR with a domestic data protection regime, which has long been in a Brexiter ambition. If so, the problems posed will inevitably be very similar to REACH UK and UKCA. A more interesting example is the replacement of the Solvency II directive, governing how much capital insurance companies must hold as reserves, to protect against insolvency, versus how much they can invest to gain a return for policyholders. Again, this has long been in the Brexiters’ sights and is a prime candidate for Truss’s growth agenda as, potentially, it would unlock really substantial amounts of investment funding.
As I discussed in a post in February this is another highly complex and technical area, but it is also one where the Brexiters actually have a reasonable case for reform (for that matter, the EU has also been considering similar reform). That’s partly because Solvency II is arguably over-cautious but also because, given the size of the UK insurance industry, it’s not absurd, as it is in most sectors, to envisage a UK-specific regulatory approach or even such an approach becoming one that other jurisdictions might follow.
Be that as it may, the fundamental dilemma is the balance of reward (unlocking investment funds) and risk (insolvency of insurance firms), and it is one which splits opinion in the financial community. And here the Truss government may pay a particular price for the damage of the mini-budget. On the one hand, the market instability it caused showed the potential fragility of even the largest pension funds, and possibly more to the point that of banks, and also led to several UK property-focussed investment funds restricting redemptions this week (i.e. limiting how much investors can withdraw), a more minor but not dissimilar reminder that solvency matters. Might that then tip the calculation of risk and reward against relaxing Solvency II regulations?
On the other hand, as I and many others have repeatedly stressed, the mini-budget revealed an evidence-averse, fantasy-based Brexit government. As such it has contempt for financial institutions and seems to treat all risks as something to be dismissed as ‘Project Fear’. So would such a government be trusted by financial actors to have undertaken a serious assessment of the balance of risks and rewards in the case of Solvency II? It’s a neat illustration of how the libertarians’ Brexit Britain can’t simultaneously embody a spirit of iconoclastic revolutionary ardour, at war with the global Establishment, yet also expect to be a trusted, stable pillar of the global order.
The general picture on post-Brexit deregulation
So, coming back to the more general point, the so-called Brexit Benefits Bill to sunset EU retained law, and in the process to deliver some of the supply-side reforms to make the fiscal plan credible, is not going to work in anything like the way that the government appears to imagine. Either there will be yet more chaos, with regulatory systems simply falling into disuse, unreplaced. Or there will be botched regulatory change because there wasn’t time to create functioning new systems. In either case, there will be further political damage to the government, not to mention the economic damage. Alternatively, there will be endless reviews in which it is decided to retain EU regulations or at least to postpone their replacement or their repeal. This will also cause political damage because it will infuriate those Brexiter MPs and commentators who have been complaining for months about what they saw as lack of progress under Johnson and which they expected Truss to rectify.
Throughout all this, the government’s claimed and defining objective of economic growth will be seriously undermined because regulatory uncertainty and/or chaos is a profound disincentive to business investment (£). As with the rush to ‘get Brexit done’, leading to the premature triggering of Article 50 and the refusal to extend the transition period, this latest rush to drop retained EU law is a recipe for incompetent delivery.
Ironically, were the Brexiters to slowly, calmly and pragmatically work through a prioritised list of realistic and worthwhile regulatory changes then they might have more success. But, then, if they had the facility to do that they probably wouldn’t have been Brexiters in the first place.
Northern Ireland: a glimmer of pragmatism
It’s possible that, apart from dropping the top-rate tax proposal, another way the reaction to the mini-budget has forced a change in the government’s thinking is by adding weight to the pre-existing case that it would be crazy to add a major row with the EU over the Northern Ireland Protocol to all its other woes. Whatever the reason, some movement in its position is suggested by the astonishing comments made by Steve Baker, the most hardline of Brexiters and now Minister of State for Northern Ireland, during the party conference and repeated in a subsequent interview in Irish media. In them, he offered an apology to the EU and to Ireland for some of the UK’s, and his own personal, conduct during the Brexit process, and expressed a desire for a harmonious agreement from the Protocol negotiations, in which the UK “needed to show humility”.
Subsequently, a spokesman for Truss confirmed that Baker “does speak for the government” (although in an interview, as well as saying that, she also said that Baker “speaks for himself”). That apparent ambivalence isn’t the only reason for caution. Baker also spoke of his support for the provisions in the Northern Ireland Protocol Bill which, if insisted upon, would preclude a negotiated solution, and other ministers, including Rees-Mogg, made much less conciliatory remarks during the conference.
Even so, there is generally a palpable sense of an improved mood, and Baker’s remarks were warmly welcomed by the Irish Taoiseach. It’s a sense compounded by the resumption of ‘technical talks’ about the Protocol yesterday, as well as by Truss’s participation in the inaugural meeting of the ‘European Political Community’. That is a positive and potentially important development in its own right, at least in implying a recognition that UK interests are bound up with those of the continent it is a part of, urgently as regards energy security, and perhaps a sliver of hope for the future after years of Brexiters revelling in the most grotesquely insulting behaviour (many examples other than that linked to could have been chosen).
It's certainly possible to read Baker’s comments not just as preparing the ground for a deal with the EU but as ‘pitch-rolling’ to acclimatise the ERG to such a deal being struck. If so, a key question will be how they react. Truss’s evident political weakness is an incentive for them to rebel, whilst the fanaticism of at least some of them means that even someone with Baker’s impeccable Brexiter credentials may simply be denounced as a turncoat. Unsurprisingly, Kate Hoey has already dismissed what he said (£), as of course has the DUP.
Predictions are difficult because, as has always been the case, the British government has no coherent, realistic or consistent position on the Protocol, ultimately because Brexiters have never faced up to the realities of what Brexit means for Northern Ireland. So it is always a matter of reading the runes to try to work out what its intentions are. It could be that all that is happening is preparation for the UK to announce that, despite all its efforts to be conciliatory, ‘the EU refused to cooperate’.
Still, it does seem more likely at the moment that the government is set to be more pragmatic than at any point since Johnson and Frost started agitating against the Protocol they themselves had negotiated and agreed. Whether that reflects a genuine change of heart or the pressure of other events is impossible to know. In the short-run that may not matter if a deal can be reached. In the long-run it does because, as happened with the Protocol itself, it is always possible that anything agreed now will later be disowned by the Brexiters as having been ‘forced upon them’.
The mixed blessings of having a hopeless government
Much that is in this post reflects a point I’ve made repeatedly over recent weeks, which is that the political constraints facing the Truss government in delivering an unpopular, unmandated agenda explicitly derived from libertarian thinktanks are formidable. Even Jacob Rees-Mogg, in his trademark faux-aristocratic drawl, as if he learned English by listening to language school records from the 1930s, recognised that this is so when he explained to disappointed Tory delegates that leaving the European Convention on Human Rights (ECHR) is not politically viable. Although, as with immigration policy, there is a contradiction because, at the same time, Suella Braverman is supposedly going to legislate so that no ‘European judge’ can intervene in UK deportation decisions. But such legislation would be meaningless for as long as the UK is an ECHR member.
Such contradictions abound because there is a constant tension between the extreme measures that many of the government would undoubtedly like to take and the constraints, whether of politics or practical deliverability, on adopting them. Indeed the increasingly erratic Rees-Mogg reportedly had his proposals for a “bonfire of employment rights”, including the Brexiter favourite of abolishing the 48-hour limit derived from the European Working Time directive, “quashed” by Truss for being “half-baked”. It’s quite something to think that even the Prime Minister isn’t quite as mad as the Business Secretary, although on other issues it seems that the polarity is reversed (£).
We should be grateful for small mercies and, of course, these political constraints don’t mean that this government will not do huge damage the longer its stays in office. There is much to be depressed and anxious about in having a government so woefully incompetent. It will leave a gargantuan mess to be cleared in the years that follow its departure.
Yet that might have some consequences that Brexiters don’t like. If, as some of them fear, the failure of this government will derail or discredit Brexit then its very incompetence may well contribute to their fear coming to pass. Truss has identified the ‘Brexit deniers’ – meaning, presumably, those who deny it was a good idea since no one can deny Brexit has happened – as amongst her opponents. So if by her actions she provides further evidence of its folly their numbers can only increase. Ironically, as well as being deeply depressing, the most hopeful thing about this government is how utterly hopeless at governing it is proving itself to be.
*For a wealth of detail on the progress or otherwise of UK divergence from EU regulations, see the UKICE tracker.
There will be no blog next week.
Showing posts with label Sterling. Show all posts
Showing posts with label Sterling. Show all posts
Friday, 7 October 2022
Friday, 30 September 2022
The week the wheels came off the Brexit Britain bus
The political ambitions of the libertarian wing of the Brexit Ultras have always been ambivalent. On the one hand, they have largely preferred to complain of betrayal from the sidelines rather than take any responsibility or, if accepting ministerial office, to quickly resign rather than engage with the pragmatic realities of Brexit. On the other hand, they have hankered to be in charge not just so as to create ‘true Brexit’, but the ‘real Conservatism’ of which Brexit was a part and to which it was a gateway.
With the advent of Truss’s premiership, they have eschewed the sidelines in favour of governing and, with a rapidity that even their sternest critics would have thought it cruel to predict, have been exposed as utterly incompetent, both politically and economically, and in the most basic of ways. It is deeply ironic that this has happened at the hand of ‘the markets’ which they so slavishly fetishize.
Anatomy of a crisis
The occasion, of course, was last Friday’s tax-cutting ‘mini-budget’. “At last! A true Tory Budget”, the Daily Mail drooled, whilst Nigel Farage simpered about “the best Conservative Budget since 1986”. Yet, whether despite or because of this fidelity to Conservatism, and as anticipated in my previous post, there was an immediate crisis in the currency and bond markets, with the value of the pound falling to its lowest ever level on Monday, and the cost of government borrowing in the form of gilts or bonds rising very sharply. Amongst numerous knock-on effects, pension funds, which invest heavily in such bonds, came within hours of mass insolvency on Wednesday afternoon, threatening a major breakdown of the financial system and requiring major emergency temporary action from the Bank of England. This, in combination, with a clear signal from the Bank that interest rates will rise in due course, which eased pressure on the pound, has effected a degree of stabilization, but markets remain jittery and it’s by no means clear that this crisis has run its course, especially as regards gilts.
These weren’t routine or trivial market movements, but an overwhelming and brutal vote of no confidence in the government’s plans. Specifically, they were a vote of no confidence in the decision to cut taxes, or not implement previously planned tax rises, and to fund this through borrowing. Again as anticipated in my last post, the government’s refusal to allow its plans to be scrutinised independently by the Office for Budget Responsibility added to market alarm. So, too, did Chancellor Kwasi Kwarteng’s casual reaction over the weekend, even suggesting further tax cuts to come. The rout continued on Monday when, as Paul Donovan, Chief Economist at UBS Global Wealth Management, put it, “investors seem to regard the UK Conservative Party as a doomsday cult”.
Throughout the week, the absence of public statements from Truss or Kwarteng compounded this impression, and when Truss did emerge on Thursday morning it was to re-confirm the government’s policy and downplay the market reaction, as well as denying it had anything much to do with the mini-budget. To the extent she admitted any connection it is the false one that markets didn’t like the costs of the energy bill support part of the budget, when in fact it was the tax cuts. It has since emerged that this and the equally false claim that what is happening in the markets is a global event due to the Ukraine War rather than something specifically affecting the UK are to be the government’s lines of defence.
Amongst the most significant events was when, on Tuesday, the International Monetary Fund (IMF) issued what BBC Economics Editor Faisal Islam described as a “stinging and unusual rebuke” to the UK. What made it so unusual was that such IMF warnings are usually made to emerging markets, not leading global economies. I mentioned in my previous post that aspects of the economic situation resemble those which occasioned the IMF’s 1976 bailout of the UK, and its statement this week that it is “closely monitoring” developments in the UK carried echoes of that. It was also, like the comments of other international players and the decisions taken by traders, a reminder that, no matter what Brexiter ‘sovereignty’ fantasists may think, the UK can never be ‘independent’ of the wider world within which it is a relatively small player. Most fundamentally, the Brexiters’ belief that they can create their own reality, and that all opposition can be swept aside as ‘Project Fear’ or ‘remainer sabotage’, was tested almost to the point of destruction.
These events have been widely reported and there’s no point in me adding more to that. Instead, I want to tease out more about the Brexit aspects and implications.
The Brexit mini-budget
At one level, the mini-budget had very little to do with Brexit in that, so far as I can see, the only provision within it that wouldn’t have been possible whilst a member of the EU is the planned removal of the cap on bankers’ bonuses. That isn’t unimportant, politically, but it’s not what spooked the markets. However, it is the budget of the Brexit Ultras and it is intimately bound up with Brexit. In case anyone doubts that, it was underlined by Farage’s endorsement. Even more explicitly (£), John Longworth, one of the most immoderate of the Ultras, regards it as part of Truss’s battle “for the future of Brexit Britain”. It’s a sentiment widely shared in Brexiter circles, with the Bruges Group tweeting that “remain media are talking up market panic … to derail Brexit”.
So, given that the Brexiters themselves regard the mini-budget as integral to Brexit, it’s reasonable to say, as Robert Shrimsley of the Financial Times did (£), that “Brexit ideology lies behind the UK’s market rout”. It’s abundantly clear to even the feeblest intelligence that those Brexiters now include Truss, for all the fury of Dominic Cummings’s denials (directed at me!) on the inane grounds that she supported remain in 2016. As I pointed out during the campaign, she is now a ‘born again Ultra’, perhaps the more fanatical for being so, and was extravagantly endorsed by the leading Ultras, making the fact that she was once a remainer the most tedious and least relevant thing to say about her.
As so often before, Brexiter responses to the crisis they created have been confused and contradictory. Some in the government prissily said they could not comment on market events, as if some new Trappist ordinance of political propriety has been invented. Others downplayed what has happened, suggesting that the market reaction is either trivial or transient, or even that it has little or nothing to do with the budget but is simply a result of a strengthening dollar (which doesn’t explain why the pound fell against all major currencies, or what happened in the bond market). Outrageously, some, like Crispin Odey, hedge fund manager, Tory and Vote Leave donor, and sometime employer of Kwarteng, blamed “remainers”. Peak insanity was reached by Daniel Hannan, who blamed the crash not on the mini-budget, but market fears of a Labour government!
In addition, or instead, some Brexiters blamed the Bank of England (BoE) for having failed to increase interest rates by enough, early enough, or to have reacted immediately to the crisis so as to support sterling and control inflation. That argument is more complicated than their others. There is a case that last week’s pre-budget interest rate rise should have been larger, although it’s not a straightforward one because doing so would also have been likely to impact on the cost-of-living crisis by pushing up mortgage rates.
Nevertheless, it was the government’s mini-budget, not the BoE, that caused this crisis and there is something bizarre about a government simultaneously taking inflationary measures it says will boost economic growth, whilst relying on the BoE to take measures to reduce inflation and choke off growth. Indeed, part of the reason for market nervousness is that the institutions of financial and economic governance are not acting in a consistent and coordinated way, something flagged up by Mark Carney, the former BoE Governor whose actions did much to preserve a degree of economic stability after the Brexit referendum vote. Perhaps the BoE could have acted earlier, though had it done so it's easy to predict that then it would have been accused of overreaction and of trying to undermine government policy. In any case, what is even more bizarre is the spectacle of Brexiters, with their disdain for experts, technocrats and unelected bureaucrats, positioning the BoE as having responsibility to save the government from itself. Or perhaps it is not bizarre, so much as a reflection of the Brexiters’ reflex refusal ever to take responsibility for anything even when in government.
Government by cultists
That refusal has as its counterpart the distinctively Brexity idea, now taken over wholesale by this Brexit government, that they are beleaguered revolutionaries of true Conservativism fighting the (presumably false) conservatism of ‘the Establishment’. The notion of Brexit as an anti-Establishment insurgency has been a ludicrous one ever since the 2016 referendum was won, and Brexit became adopted as the central policy and national strategy. It is even more so now that the Brexit Ultras are unequivocally in charge of government, though of course it is a standard populist trope, familiar from the Trump presidency.
What we have seen this week is that the Brexiters have added ‘the markets’ to the increasingly long and diverse list – encompassing the ‘Woke’ Blob, the civil service in general and the Treasury in particular, the BoE, remainers, rejoiners, the National Trust, the BBC – of enemy forces they must confront in the name of revolutionary purity.
Longworth explicitly included the City in this list, whilst unnamed government figures suggested that traders were enacting “a plot by the left” which will have come as a surprise to them. Similarly, the Daily Mail reported that senior Tories blame “City Boys” for “sparking economic chaos” with traders “trying to make money out of bad news”. Well colour me shocked. Haven’t these free-market ideologues worked out that ‘trying to make money’ is what traders always do, indeed it’s all that they do? Do they think that ‘City Boys’ care about making government policy look good? And aren’t these the same ‘City Boys’ who, according to Kwarteng, are the brightest and the best who must be encouraged to come to London by uncapped bonuses? Aren’t they, for that matter, good ol’ City Boys like Crispin Odey?
The IMF, which has long been on the Brexiters’ list of enemies, also came under attack for its comments. For example, Brexiter economist Andrew Lilico was outraged by its “left-wing” intervention, to the point that he advocated the UK should “withhold its IMF contributions”. It is a strange world in which the IMF is considered ‘left-wing’ (or even, as Brexit Party ex-MEP Lance Forman had it, “socialist” and under the influence of the EU), and the idea of withholding contributions seems to conjure up a vision where Brexit is the gateway to exiting any and every international institution, in a permanent revolution of endless Brexits.
Also triggered by the IMF, David Frost opined, contradictorily, that its comments were “somewhat eccentric” yet reflected its “highly conventional approach”. This is indicative of the fact that what is at stake is more than Brexiter whinging about the enemies that beset them. This government, and its semi-intellectual underlabourers in think tanks and the media, are convinced that they are the custodians of a new truth. The markets and their economists are “attached to the old way of doing things” as Patrick Minford put it, to the extent that “there is no sterling crisis except in the minds of idiots” (£). Similarly the BoE has “not got the memo” about the “economic consensus crumbling” according to Paul Marshall (£), investment manager and Vote Leave donor. Thus arch-Brexiter journalist Allister Heath insists (£) Liz Truss must “hold her nerve” and defy the “orthodoxy” of “the elites”.
Their problem is that, as the market reaction shows, the ‘old ways’ still hold and the ‘economic consensus’ remains. Calling it an “orthodoxy” is accurate, but that very accuracy shows why decisions to “defy” it are foolish. That’s why investors regard the Tory government as a ‘doomsday cult’, and responding that investors are ‘idiots’, ‘conventional’ or even ‘socialists’ makes no difference, except perhaps to re-enforce them in that view.
As I put it in my last blog, traders simply don’t care about the theories of Patrick Minford, or of the broader IEA-derived analysis of the cultist government. Indeed, one of the few semi-amusing features of Brexit is the spectacle of all these free-trade, free-market economists going into contortions to explain how erecting trade barriers doesn’t damage trade and, now, why markets don’t understand how to price currencies or debt. It’s this stupidity that accounts for the fact that, apparently, market traders talk of the demand for a “moron risk premium” in order to hold sterling assets and fund UK debt.
But is there a cunning plan?
However, there is a different interpretation of all this doing the rounds on social media*, in which, far from being utterly incompetent, the Brexit government has a skilful, if malevolent, plan. It is an interpretation which comes in two variants.
One version is that the government deliberately crashed the markets, secretly giving hedge fund traders and others – with whom the current government has strong links of networks and party funding – advance notice so that, as indeed happened, they could short the markets and make fortunes. It doesn’t really make sense, though, because no such secret information would need to be passed – it was obvious even to me, and widely predicted, what was going to happen if the mini-budget pursued the policies Truss had openly advocated during the leadership campaign. Indeed that’s why the pound was beginning to fall once it became clear she was almost certain to win.
It also doesn’t make sense given the huge political price of the crisis. Some suggest that the government is so fanatical that it does not care about winning elections, or already thinks the next election is lost, and will inflict any amount of damage in order to pave the way for disaster capitalists to swoop in. Even, some say, the government ministers devising this scenario are doing so in expectation of lucrative employment with hedge funds and the like. But I’ve never met or heard of a politician who having devoted years to a political career has so cavalier an interest in its continuing success, and it seems extremely improbable that it would characterise an entire government.
And if it really does, then why provide energy bill support, so plainly at odds with small state, libertarian ideology? Indeed that seemed to be Truss’s position early in the leadership contest, when she spoke against giving people “handouts”, only to change tack when it became clear what the political consequences would be. The same applies to the theory of a deliberately engineered market crash.
The second variant of the ‘cunning plan’ interpretation is that the market reaction was anticipated by the government with the intention of providing a justification for a subsequent full budget including massive public spending cuts, as well as ‘supply side’ deregulation of labour rights, planning, and environmental standards, in order to ‘satisfy the markets’. On this account, the government manufactured the current crisis as a step to that pre-existing end goal.
In reality, it is highly unlikely that any government would deliberately create such a crisis, again because of the political consequences. Whatever any government’s agenda may be, it can only deliver it if it is in power and able to exercise power. That remains true even if the agenda is a secret one to enact some Ayn Rand-like laying waste to society and the state or, at least, a massive rolling back of the state. It still requires being in power, and being in power for a considerable amount of time, and with very little opposition or constraint. Yet some, such as Guardian journalist Polly Toynbee, think this week’s crisis will put the Conservatives out of power for a generation and many Tory MPs fear just that. But if the analysis that the government wouldn’t want a crisis because of the political consequences isn’t accepted, then why would it feel the need to provoke a crisis to justify spending cuts, rather than simply make the cuts and face the political consequences of doing so?
I suppose that those who believe the ‘cunning plan’ theory, in either variant, will never be persuaded otherwise, despite its inherent implausibility. One thing about such theories is that (ironically, rather like those of the Brexiters) they constantly twist the available evidence to ‘prove’ themselves. For example, until very recently Rishi Sunak appeared in such theories as the arch-libertarian, product of Goldman Sachs, former hedge fund partner and, supposedly, masterminding the introduction of ‘Charter Cities’ into the UK. Surely if the plan to deliberately crash the markets existed then he would be part of the government delivering it, perhaps even leading that government? And if he had been then, inevitably, that would have been cited as ‘proof’ of this secret plan. Yet, in fact, it was he who, during the leadership campaign, repeatedly denounced the “fairy tale” of Trussonomics, anticipating exactly the effects it would have on currency and bond markets and rejecting it as irresponsible.
No, just incompetence
So my own view is that, in their arrogance and delusion, this Brexit government, and its cheerleaders, really do believe it has found a new ‘unconventional’ economic model and did not expect the market reaction, and that although a full November budget was certainly planned, including the announcement of the deregulatory ‘supply side reforms’ that will supposedly deliver the growth to pay for tax cuts, it was not going to include significant spending cuts which, instead, were anticipated for after Truss had won the election on the back of what they expected to be a growing economy. Then, with the legitimacy of a fresh mandate and a compliant parliamentary majority, she would declare it was time to shrink public spending but without coupling that with the tax cuts that would already be in place.
If my interpretation is right, the government’s plan is now in tatters, and the expectation is that the November budget will feature huge spending cuts (£) (and perhaps reversing the tax cuts, as some Tory MPs want, which can’t be ruled out though it seems unlikely at the moment). That may seem to be the same outcome as version two of the ‘cunning plan’ that I’ve rejected, but my point is that the government would not, from choice, have initiated spending cuts before the election but afterwards, because of the political unpopularity of such cuts. Otherwise, why not just have held a normal budget this Autumn, featuring both tax and spending cuts, avoiding a market crisis altogether, taking a political hit, no doubt, but nothing compared to that which they now face.
For this government was already politically weak, and as a result of this crisis is now much weaker. Although the libertarian cabal has taken control of the government, both it and Truss have many opponents amongst MPs and, as I remarked in a post during the leadership campaign, the current Tory Party is so riven by factions as to be unleadable, with rebellions an ever-present possibility. This week’s crisis has laid that bare, with, almost astonishingly given how new her premiership is, reports of letters of no confidence in Truss being submitted by some MPs and threats of backbench revolts.
Crucially, the latest opinion poll, published yesterday evening, shows a massive 33% Labour lead, an increase of 16% since the mini-budget. That may not last, but it’s very possible that the government will not recover from this crisis, rather as happened after Black Wednesday in 1992 when the immediate fall in the polls was actually smaller.
It’s not just a matter of the electorate reacting fearfully to headlines of market turmoil and the sense that the government has lost control, it’s the impact on prices, most obviously petrol, and on mortgages, with several major lenders withdrawing fixed-rate offers this week and rates certain to increase, as well as predicted significant falls in house prices, perhaps by as much as 15%. This comes on top of the acute existing energy and general inflationary problems voters face, and their negative reaction can only be compounded if this crisis is immediately followed by, and seen to be the cause of, a new round of deeply unpopular ‘austerity’ spending cuts. The consequence is that Truss is now much less likely to win the next election and, possibly, won’t even survive until then.
Ultimately, the key point as regards the competence of this government by cult is that actually it’s irrelevant whether the crisis was the unexpected consequence of last Friday’s mini-budget decisions or was indeed ‘the plan’. Either the government was too incompetent to anticipate the scale of market reaction, or too incompetent to anticipate the scale of the political consequences of that reaction.
The dangers of cultism
The question about design versus incompetence has a wider significance. Throughout the Brexit process there have always been some, mainly remainers, who are adamant that it is driven by Machiavellian master strategists who conceal themselves behind a façade of stupidity and incompetence. To my mind, it is an absurd notion: not only did the Brexiters never have a single, unified, strategy but also everything I have seen or heard about them suggests that they really are just as incompetent in private as in public.
So now that we have a government of the libertarian Brexiters, it genuinely believes – egged on by its think tank advisors – that it is in possession of a new truth, one despised and ignored by the ‘experts’ whom they see as financially and intellectually invested in the ‘old way’ of doing things. That truth informs the fantasy economics of this ‘budget for growth’ but encompasses the entirety of the Brexit project, including the persistent, hubristic delusion of the UK’s power to dictate terms to the world around it and the fantasy which accompanies it about what ‘sovereignty’ means.
It rests upon a fanaticism, completely at odds with reality, shored up by the impregnable arrogance and mulish stubbornness of mediocrity. The most dangerous thing about it is not that these fanatics refuse to listen to any warnings, whoever they come from, it is that the more they hear those warnings the more convinced they are of their own rightness. This is the Brexiter logic I have written about so many times before (I think the first time was May 2017) in which every piece of evidence that proves their claims wrong is re-interpreted as proof that they are right.
That perverse logic is compounded in government by the creation of a groupthink bunker from which all dissent is banned, external constraints regarded as sabotage, and everything outside regarded as the treacherous machinations of the enemy. Some of the responses from the Brexiters to what has happened this week show the virtual insanity that is required in order to sustain this view of the world.
The bigger picture
This is an utterly disastrous approach to running the country, and it was brutally exposed as such by what happened this week. This, I think, was about much more than the government’s plans to increase debt. For one thing, it’s just the latest example of how the pound has ebbed and flowed since Brexit, always dropping when it seemed as the most extreme Brexiters would prevail (e.g. in getting ‘no deal Brexit’) and rising when it seemed that some degree of relative pragmatism was in the offing, though overall the general trend was always downwards.
Much more importantly, whilst the Donovan comment about a ‘doomsday cult’ being in charge of the UK was at one level a specific reference to Truss’s government it surely reflects a wider view of the UK since Brexit. That view isn’t simply to do with this or that budget, or even anything specific or measurable. It’s the more general reputational and cumulative effect of seeing a country which for six years has taken bizarre decisions, picked needless fights with its allies, showcased political instability, been cavalier about institutional probity, constitutional propriety and the rule of law, and all the other pathologies of Brexit and its aftermath. Throughout all of this has been the underlying presence and power of, indeed, a doomsday cult of Brexit Ultras, impregnable to evidence and reason. We are now seen, rightly, as a country which has become less reliable, less stable and less trustworthy, and, in some fundamental way, detached from reality.
So the market chaos this week and the economic crisis it has caused are contextualised by the general lack of confidence in such a country as well as providing an example of Brexiter fantasies, and specifically those of the budget, being found out by reality. In that sense, the current crisis is a crisis of Brexit.
A nation’s currency isn’t necessarily a reliable measure of its standing, and if it is then it’s a crude one and certainly not only one, and it is affected by many things. But it tells us something. Consider, then, that since the day before the referendum, when it was worth $1.49, to the pound’s lowest point of $1.03 this week – just six short years, though how long they seem – sterling has lost an astonishing one third of its value. It’s as good a measure as any of what Brexit has cost us economically, whilst symbolizing far, far more than our economic losses.
*I usually provide links when discussing the claims and arguments of others so that readers can judge whether I am representing them accurately and fairly. In this case I haven’t found any public figure making this argument which instead comes from numerous small social media accounts and it would be unfair to identify them. But the argument is being made by a significant number of such accounts, so is clearly widespread, which is why I am discussing it.
With the advent of Truss’s premiership, they have eschewed the sidelines in favour of governing and, with a rapidity that even their sternest critics would have thought it cruel to predict, have been exposed as utterly incompetent, both politically and economically, and in the most basic of ways. It is deeply ironic that this has happened at the hand of ‘the markets’ which they so slavishly fetishize.
Anatomy of a crisis
The occasion, of course, was last Friday’s tax-cutting ‘mini-budget’. “At last! A true Tory Budget”, the Daily Mail drooled, whilst Nigel Farage simpered about “the best Conservative Budget since 1986”. Yet, whether despite or because of this fidelity to Conservatism, and as anticipated in my previous post, there was an immediate crisis in the currency and bond markets, with the value of the pound falling to its lowest ever level on Monday, and the cost of government borrowing in the form of gilts or bonds rising very sharply. Amongst numerous knock-on effects, pension funds, which invest heavily in such bonds, came within hours of mass insolvency on Wednesday afternoon, threatening a major breakdown of the financial system and requiring major emergency temporary action from the Bank of England. This, in combination, with a clear signal from the Bank that interest rates will rise in due course, which eased pressure on the pound, has effected a degree of stabilization, but markets remain jittery and it’s by no means clear that this crisis has run its course, especially as regards gilts.
These weren’t routine or trivial market movements, but an overwhelming and brutal vote of no confidence in the government’s plans. Specifically, they were a vote of no confidence in the decision to cut taxes, or not implement previously planned tax rises, and to fund this through borrowing. Again as anticipated in my last post, the government’s refusal to allow its plans to be scrutinised independently by the Office for Budget Responsibility added to market alarm. So, too, did Chancellor Kwasi Kwarteng’s casual reaction over the weekend, even suggesting further tax cuts to come. The rout continued on Monday when, as Paul Donovan, Chief Economist at UBS Global Wealth Management, put it, “investors seem to regard the UK Conservative Party as a doomsday cult”.
Throughout the week, the absence of public statements from Truss or Kwarteng compounded this impression, and when Truss did emerge on Thursday morning it was to re-confirm the government’s policy and downplay the market reaction, as well as denying it had anything much to do with the mini-budget. To the extent she admitted any connection it is the false one that markets didn’t like the costs of the energy bill support part of the budget, when in fact it was the tax cuts. It has since emerged that this and the equally false claim that what is happening in the markets is a global event due to the Ukraine War rather than something specifically affecting the UK are to be the government’s lines of defence.
Amongst the most significant events was when, on Tuesday, the International Monetary Fund (IMF) issued what BBC Economics Editor Faisal Islam described as a “stinging and unusual rebuke” to the UK. What made it so unusual was that such IMF warnings are usually made to emerging markets, not leading global economies. I mentioned in my previous post that aspects of the economic situation resemble those which occasioned the IMF’s 1976 bailout of the UK, and its statement this week that it is “closely monitoring” developments in the UK carried echoes of that. It was also, like the comments of other international players and the decisions taken by traders, a reminder that, no matter what Brexiter ‘sovereignty’ fantasists may think, the UK can never be ‘independent’ of the wider world within which it is a relatively small player. Most fundamentally, the Brexiters’ belief that they can create their own reality, and that all opposition can be swept aside as ‘Project Fear’ or ‘remainer sabotage’, was tested almost to the point of destruction.
These events have been widely reported and there’s no point in me adding more to that. Instead, I want to tease out more about the Brexit aspects and implications.
The Brexit mini-budget
At one level, the mini-budget had very little to do with Brexit in that, so far as I can see, the only provision within it that wouldn’t have been possible whilst a member of the EU is the planned removal of the cap on bankers’ bonuses. That isn’t unimportant, politically, but it’s not what spooked the markets. However, it is the budget of the Brexit Ultras and it is intimately bound up with Brexit. In case anyone doubts that, it was underlined by Farage’s endorsement. Even more explicitly (£), John Longworth, one of the most immoderate of the Ultras, regards it as part of Truss’s battle “for the future of Brexit Britain”. It’s a sentiment widely shared in Brexiter circles, with the Bruges Group tweeting that “remain media are talking up market panic … to derail Brexit”.
So, given that the Brexiters themselves regard the mini-budget as integral to Brexit, it’s reasonable to say, as Robert Shrimsley of the Financial Times did (£), that “Brexit ideology lies behind the UK’s market rout”. It’s abundantly clear to even the feeblest intelligence that those Brexiters now include Truss, for all the fury of Dominic Cummings’s denials (directed at me!) on the inane grounds that she supported remain in 2016. As I pointed out during the campaign, she is now a ‘born again Ultra’, perhaps the more fanatical for being so, and was extravagantly endorsed by the leading Ultras, making the fact that she was once a remainer the most tedious and least relevant thing to say about her.
As so often before, Brexiter responses to the crisis they created have been confused and contradictory. Some in the government prissily said they could not comment on market events, as if some new Trappist ordinance of political propriety has been invented. Others downplayed what has happened, suggesting that the market reaction is either trivial or transient, or even that it has little or nothing to do with the budget but is simply a result of a strengthening dollar (which doesn’t explain why the pound fell against all major currencies, or what happened in the bond market). Outrageously, some, like Crispin Odey, hedge fund manager, Tory and Vote Leave donor, and sometime employer of Kwarteng, blamed “remainers”. Peak insanity was reached by Daniel Hannan, who blamed the crash not on the mini-budget, but market fears of a Labour government!
In addition, or instead, some Brexiters blamed the Bank of England (BoE) for having failed to increase interest rates by enough, early enough, or to have reacted immediately to the crisis so as to support sterling and control inflation. That argument is more complicated than their others. There is a case that last week’s pre-budget interest rate rise should have been larger, although it’s not a straightforward one because doing so would also have been likely to impact on the cost-of-living crisis by pushing up mortgage rates.
Nevertheless, it was the government’s mini-budget, not the BoE, that caused this crisis and there is something bizarre about a government simultaneously taking inflationary measures it says will boost economic growth, whilst relying on the BoE to take measures to reduce inflation and choke off growth. Indeed, part of the reason for market nervousness is that the institutions of financial and economic governance are not acting in a consistent and coordinated way, something flagged up by Mark Carney, the former BoE Governor whose actions did much to preserve a degree of economic stability after the Brexit referendum vote. Perhaps the BoE could have acted earlier, though had it done so it's easy to predict that then it would have been accused of overreaction and of trying to undermine government policy. In any case, what is even more bizarre is the spectacle of Brexiters, with their disdain for experts, technocrats and unelected bureaucrats, positioning the BoE as having responsibility to save the government from itself. Or perhaps it is not bizarre, so much as a reflection of the Brexiters’ reflex refusal ever to take responsibility for anything even when in government.
Government by cultists
That refusal has as its counterpart the distinctively Brexity idea, now taken over wholesale by this Brexit government, that they are beleaguered revolutionaries of true Conservativism fighting the (presumably false) conservatism of ‘the Establishment’. The notion of Brexit as an anti-Establishment insurgency has been a ludicrous one ever since the 2016 referendum was won, and Brexit became adopted as the central policy and national strategy. It is even more so now that the Brexit Ultras are unequivocally in charge of government, though of course it is a standard populist trope, familiar from the Trump presidency.
What we have seen this week is that the Brexiters have added ‘the markets’ to the increasingly long and diverse list – encompassing the ‘Woke’ Blob, the civil service in general and the Treasury in particular, the BoE, remainers, rejoiners, the National Trust, the BBC – of enemy forces they must confront in the name of revolutionary purity.
Longworth explicitly included the City in this list, whilst unnamed government figures suggested that traders were enacting “a plot by the left” which will have come as a surprise to them. Similarly, the Daily Mail reported that senior Tories blame “City Boys” for “sparking economic chaos” with traders “trying to make money out of bad news”. Well colour me shocked. Haven’t these free-market ideologues worked out that ‘trying to make money’ is what traders always do, indeed it’s all that they do? Do they think that ‘City Boys’ care about making government policy look good? And aren’t these the same ‘City Boys’ who, according to Kwarteng, are the brightest and the best who must be encouraged to come to London by uncapped bonuses? Aren’t they, for that matter, good ol’ City Boys like Crispin Odey?
The IMF, which has long been on the Brexiters’ list of enemies, also came under attack for its comments. For example, Brexiter economist Andrew Lilico was outraged by its “left-wing” intervention, to the point that he advocated the UK should “withhold its IMF contributions”. It is a strange world in which the IMF is considered ‘left-wing’ (or even, as Brexit Party ex-MEP Lance Forman had it, “socialist” and under the influence of the EU), and the idea of withholding contributions seems to conjure up a vision where Brexit is the gateway to exiting any and every international institution, in a permanent revolution of endless Brexits.
Also triggered by the IMF, David Frost opined, contradictorily, that its comments were “somewhat eccentric” yet reflected its “highly conventional approach”. This is indicative of the fact that what is at stake is more than Brexiter whinging about the enemies that beset them. This government, and its semi-intellectual underlabourers in think tanks and the media, are convinced that they are the custodians of a new truth. The markets and their economists are “attached to the old way of doing things” as Patrick Minford put it, to the extent that “there is no sterling crisis except in the minds of idiots” (£). Similarly the BoE has “not got the memo” about the “economic consensus crumbling” according to Paul Marshall (£), investment manager and Vote Leave donor. Thus arch-Brexiter journalist Allister Heath insists (£) Liz Truss must “hold her nerve” and defy the “orthodoxy” of “the elites”.
Their problem is that, as the market reaction shows, the ‘old ways’ still hold and the ‘economic consensus’ remains. Calling it an “orthodoxy” is accurate, but that very accuracy shows why decisions to “defy” it are foolish. That’s why investors regard the Tory government as a ‘doomsday cult’, and responding that investors are ‘idiots’, ‘conventional’ or even ‘socialists’ makes no difference, except perhaps to re-enforce them in that view.
As I put it in my last blog, traders simply don’t care about the theories of Patrick Minford, or of the broader IEA-derived analysis of the cultist government. Indeed, one of the few semi-amusing features of Brexit is the spectacle of all these free-trade, free-market economists going into contortions to explain how erecting trade barriers doesn’t damage trade and, now, why markets don’t understand how to price currencies or debt. It’s this stupidity that accounts for the fact that, apparently, market traders talk of the demand for a “moron risk premium” in order to hold sterling assets and fund UK debt.
But is there a cunning plan?
However, there is a different interpretation of all this doing the rounds on social media*, in which, far from being utterly incompetent, the Brexit government has a skilful, if malevolent, plan. It is an interpretation which comes in two variants.
One version is that the government deliberately crashed the markets, secretly giving hedge fund traders and others – with whom the current government has strong links of networks and party funding – advance notice so that, as indeed happened, they could short the markets and make fortunes. It doesn’t really make sense, though, because no such secret information would need to be passed – it was obvious even to me, and widely predicted, what was going to happen if the mini-budget pursued the policies Truss had openly advocated during the leadership campaign. Indeed that’s why the pound was beginning to fall once it became clear she was almost certain to win.
It also doesn’t make sense given the huge political price of the crisis. Some suggest that the government is so fanatical that it does not care about winning elections, or already thinks the next election is lost, and will inflict any amount of damage in order to pave the way for disaster capitalists to swoop in. Even, some say, the government ministers devising this scenario are doing so in expectation of lucrative employment with hedge funds and the like. But I’ve never met or heard of a politician who having devoted years to a political career has so cavalier an interest in its continuing success, and it seems extremely improbable that it would characterise an entire government.
And if it really does, then why provide energy bill support, so plainly at odds with small state, libertarian ideology? Indeed that seemed to be Truss’s position early in the leadership contest, when she spoke against giving people “handouts”, only to change tack when it became clear what the political consequences would be. The same applies to the theory of a deliberately engineered market crash.
The second variant of the ‘cunning plan’ interpretation is that the market reaction was anticipated by the government with the intention of providing a justification for a subsequent full budget including massive public spending cuts, as well as ‘supply side’ deregulation of labour rights, planning, and environmental standards, in order to ‘satisfy the markets’. On this account, the government manufactured the current crisis as a step to that pre-existing end goal.
In reality, it is highly unlikely that any government would deliberately create such a crisis, again because of the political consequences. Whatever any government’s agenda may be, it can only deliver it if it is in power and able to exercise power. That remains true even if the agenda is a secret one to enact some Ayn Rand-like laying waste to society and the state or, at least, a massive rolling back of the state. It still requires being in power, and being in power for a considerable amount of time, and with very little opposition or constraint. Yet some, such as Guardian journalist Polly Toynbee, think this week’s crisis will put the Conservatives out of power for a generation and many Tory MPs fear just that. But if the analysis that the government wouldn’t want a crisis because of the political consequences isn’t accepted, then why would it feel the need to provoke a crisis to justify spending cuts, rather than simply make the cuts and face the political consequences of doing so?
I suppose that those who believe the ‘cunning plan’ theory, in either variant, will never be persuaded otherwise, despite its inherent implausibility. One thing about such theories is that (ironically, rather like those of the Brexiters) they constantly twist the available evidence to ‘prove’ themselves. For example, until very recently Rishi Sunak appeared in such theories as the arch-libertarian, product of Goldman Sachs, former hedge fund partner and, supposedly, masterminding the introduction of ‘Charter Cities’ into the UK. Surely if the plan to deliberately crash the markets existed then he would be part of the government delivering it, perhaps even leading that government? And if he had been then, inevitably, that would have been cited as ‘proof’ of this secret plan. Yet, in fact, it was he who, during the leadership campaign, repeatedly denounced the “fairy tale” of Trussonomics, anticipating exactly the effects it would have on currency and bond markets and rejecting it as irresponsible.
No, just incompetence
So my own view is that, in their arrogance and delusion, this Brexit government, and its cheerleaders, really do believe it has found a new ‘unconventional’ economic model and did not expect the market reaction, and that although a full November budget was certainly planned, including the announcement of the deregulatory ‘supply side reforms’ that will supposedly deliver the growth to pay for tax cuts, it was not going to include significant spending cuts which, instead, were anticipated for after Truss had won the election on the back of what they expected to be a growing economy. Then, with the legitimacy of a fresh mandate and a compliant parliamentary majority, she would declare it was time to shrink public spending but without coupling that with the tax cuts that would already be in place.
If my interpretation is right, the government’s plan is now in tatters, and the expectation is that the November budget will feature huge spending cuts (£) (and perhaps reversing the tax cuts, as some Tory MPs want, which can’t be ruled out though it seems unlikely at the moment). That may seem to be the same outcome as version two of the ‘cunning plan’ that I’ve rejected, but my point is that the government would not, from choice, have initiated spending cuts before the election but afterwards, because of the political unpopularity of such cuts. Otherwise, why not just have held a normal budget this Autumn, featuring both tax and spending cuts, avoiding a market crisis altogether, taking a political hit, no doubt, but nothing compared to that which they now face.
For this government was already politically weak, and as a result of this crisis is now much weaker. Although the libertarian cabal has taken control of the government, both it and Truss have many opponents amongst MPs and, as I remarked in a post during the leadership campaign, the current Tory Party is so riven by factions as to be unleadable, with rebellions an ever-present possibility. This week’s crisis has laid that bare, with, almost astonishingly given how new her premiership is, reports of letters of no confidence in Truss being submitted by some MPs and threats of backbench revolts.
Crucially, the latest opinion poll, published yesterday evening, shows a massive 33% Labour lead, an increase of 16% since the mini-budget. That may not last, but it’s very possible that the government will not recover from this crisis, rather as happened after Black Wednesday in 1992 when the immediate fall in the polls was actually smaller.
It’s not just a matter of the electorate reacting fearfully to headlines of market turmoil and the sense that the government has lost control, it’s the impact on prices, most obviously petrol, and on mortgages, with several major lenders withdrawing fixed-rate offers this week and rates certain to increase, as well as predicted significant falls in house prices, perhaps by as much as 15%. This comes on top of the acute existing energy and general inflationary problems voters face, and their negative reaction can only be compounded if this crisis is immediately followed by, and seen to be the cause of, a new round of deeply unpopular ‘austerity’ spending cuts. The consequence is that Truss is now much less likely to win the next election and, possibly, won’t even survive until then.
Ultimately, the key point as regards the competence of this government by cult is that actually it’s irrelevant whether the crisis was the unexpected consequence of last Friday’s mini-budget decisions or was indeed ‘the plan’. Either the government was too incompetent to anticipate the scale of market reaction, or too incompetent to anticipate the scale of the political consequences of that reaction.
The dangers of cultism
The question about design versus incompetence has a wider significance. Throughout the Brexit process there have always been some, mainly remainers, who are adamant that it is driven by Machiavellian master strategists who conceal themselves behind a façade of stupidity and incompetence. To my mind, it is an absurd notion: not only did the Brexiters never have a single, unified, strategy but also everything I have seen or heard about them suggests that they really are just as incompetent in private as in public.
So now that we have a government of the libertarian Brexiters, it genuinely believes – egged on by its think tank advisors – that it is in possession of a new truth, one despised and ignored by the ‘experts’ whom they see as financially and intellectually invested in the ‘old way’ of doing things. That truth informs the fantasy economics of this ‘budget for growth’ but encompasses the entirety of the Brexit project, including the persistent, hubristic delusion of the UK’s power to dictate terms to the world around it and the fantasy which accompanies it about what ‘sovereignty’ means.
It rests upon a fanaticism, completely at odds with reality, shored up by the impregnable arrogance and mulish stubbornness of mediocrity. The most dangerous thing about it is not that these fanatics refuse to listen to any warnings, whoever they come from, it is that the more they hear those warnings the more convinced they are of their own rightness. This is the Brexiter logic I have written about so many times before (I think the first time was May 2017) in which every piece of evidence that proves their claims wrong is re-interpreted as proof that they are right.
That perverse logic is compounded in government by the creation of a groupthink bunker from which all dissent is banned, external constraints regarded as sabotage, and everything outside regarded as the treacherous machinations of the enemy. Some of the responses from the Brexiters to what has happened this week show the virtual insanity that is required in order to sustain this view of the world.
The bigger picture
This is an utterly disastrous approach to running the country, and it was brutally exposed as such by what happened this week. This, I think, was about much more than the government’s plans to increase debt. For one thing, it’s just the latest example of how the pound has ebbed and flowed since Brexit, always dropping when it seemed as the most extreme Brexiters would prevail (e.g. in getting ‘no deal Brexit’) and rising when it seemed that some degree of relative pragmatism was in the offing, though overall the general trend was always downwards.
Much more importantly, whilst the Donovan comment about a ‘doomsday cult’ being in charge of the UK was at one level a specific reference to Truss’s government it surely reflects a wider view of the UK since Brexit. That view isn’t simply to do with this or that budget, or even anything specific or measurable. It’s the more general reputational and cumulative effect of seeing a country which for six years has taken bizarre decisions, picked needless fights with its allies, showcased political instability, been cavalier about institutional probity, constitutional propriety and the rule of law, and all the other pathologies of Brexit and its aftermath. Throughout all of this has been the underlying presence and power of, indeed, a doomsday cult of Brexit Ultras, impregnable to evidence and reason. We are now seen, rightly, as a country which has become less reliable, less stable and less trustworthy, and, in some fundamental way, detached from reality.
So the market chaos this week and the economic crisis it has caused are contextualised by the general lack of confidence in such a country as well as providing an example of Brexiter fantasies, and specifically those of the budget, being found out by reality. In that sense, the current crisis is a crisis of Brexit.
A nation’s currency isn’t necessarily a reliable measure of its standing, and if it is then it’s a crude one and certainly not only one, and it is affected by many things. But it tells us something. Consider, then, that since the day before the referendum, when it was worth $1.49, to the pound’s lowest point of $1.03 this week – just six short years, though how long they seem – sterling has lost an astonishing one third of its value. It’s as good a measure as any of what Brexit has cost us economically, whilst symbolizing far, far more than our economic losses.
*I usually provide links when discussing the claims and arguments of others so that readers can judge whether I am representing them accurately and fairly. In this case I haven’t found any public figure making this argument which instead comes from numerous small social media accounts and it would be unfair to identify them. But the argument is being made by a significant number of such accounts, so is clearly widespread, which is why I am discussing it.
Friday, 12 June 2020
Brexit Britain risks heading to international pariahdom
The irritation in Michel Barnier’s press statement at the end of last week’s negotiations was palpable. “Things cannot go on like this”, he despairingly warned, and his particular concern was the UK “backtracking on the Political Declaration”. It was a strong indication that any remaining trust in the negotiations has all but disappeared, and that hasn’t just happened in the last few weeks. Rather, it has been in the making for years.
If not earlier, it perhaps began when the Brexiters, including Boris Johnson, denied the legitimacy of any financial settlement – something I will come back to. It became entrenched when David Davis and Theresa May immediately disowned the backstop they had agreed to end of the phase 1 of the Article 50 negotiations in December 2017. Many other examples could be given.
Distrust is now endemic
Under Johnson’s premiership that lack of trust has become endemic. That’s partly because EU leaders recall the long years of lies he told whilst a Telegraph columnist, and have disdain for his role in the Referendum. It’s not difficult to imagine that he is one of those whom Donald Tusk was referring to as warranting a “special place in hell” for having advocated Brexit with no plan. But it is more because of the way in which, since coming to power, Johnson has seemed to resile from what he agreed, especially as regards Northern Ireland.
In a post last month, following the Frost letter, I lamented that the bitter truth is that the UK can no longer be trusted. Yet the Brexit ‘patriots’ feel no shame and, worse, no realism. Their response to Barnier’s press statement was to crow that he was ‘rattled’ by Britain’s ‘tough stance’ – yet apparently not so cowed as to stop him being ‘rude’ and ‘insulting’! The more ‘cerebral’ and, indeed, the official response was to point out, echoing Davis’ comments about the phase 1 agreement, that the Political Declaration (PD) is not legally binding.
The Political Declaration isn’t irrelevant
That is perfectly true, but it is a very long and dangerous jump from that to treating it as totally irrelevant. It was signed by Boris Johnson as a commitment of ‘good faith’ to the agreed framework for the future. As Simon Usherwood, Professor of Politics at Surrey University, points out reneging on it has damaging reputational consequences. It’s not just dishonest but, perhaps worse, naïve, for Johnson to treat as if it were one of his throwaway newspaper columns. You simply can’t conduct international relations that way and expect it just to be laughed off, or forgiven and forgotten, by other countries.
It’s clearly the case that, as a framework, it does not address the detailed provisions of the future agreement. Equally clearly, within negotiation there will legitimately be ‘maximalist’ and ‘minimalist’ interpretations of how to operationalize the framework. But that is not at all the same as simply treating it as totally irrelevant (as, indeed, Brexiters used to realise).
For example, on one of the key areas of contention referred to by Barnier, Level Playing Field (LPF) provisions, paragraph 77 of the PD is very explicit about how economic interdependence and geographical proximity mean there must be robust commitments on state aid, competition law and so on. So, yes, there is legitimate negotiation space around what ‘robust’ means in practical terms, but it is simply dishonest for Brexiters, including Johnson, to pretend that these issues have been newly introduced by the EU (£)*. If Johnson objected, the time to do so was before signing the document off.
Ominous signs
But more ominous than the ongoing disavowal of the PD was a report in the Brexiters’ house journal, The Express, that the government regards the Withdrawal Agreement (WA) as having “unfair defects” that must be remedied. That marks a significant escalation because it is not based on any claim that it is legally non-binding: there is no dispute that the WA was signed as a legally binding international treaty. Reneging on it would go beyond reputational damage.
The justification for this stance is telling. On the one hand, the report refers to an unnamed ‘government source’ (does that mean Dominic Cummings?) as linking the ‘defects’ to what was agreed by Theresa May and Olly Robbins, and the constraints of the May parliament. This reflects something which has been swirling around Brexiter circles for months now – a sense that, despite Johnson signing it, it was in some way not legitimate because of those antecedents including what they regard as a ‘remainer’ parliament. It is dangerous nonsense for whilst, as they are wont to say, no parliament can bind its successor, that does not mean that international treaties negotiated during one parliament become irrelevant afterwards. International relations would scarcely be possible if that were so. And, in any case, it’s an absurdity as Johnson didn’t sign the WA and PD until January 2020 - after the election. He owns them.
This relates to the other aspect of the supposed justification for re-opening the WA, namely that the government did not have time to deal with all the “defects” of May’s deal, just to replace the Northern Ireland backstop. But not only is the government now resiling from the frontstop that replaced it, it was the government that insisted – against much warning – that the whole thing had to be rushed through with scarcely any scrutiny to meet the deadline of 31 January. Moreover, we now know – courtesy of Steve Baker – that the ERG hardliners were persuaded by Dominic Cummings to support the WA, without needing to read it, on the basis that Michael Gove said it could be changed later.
As with Brexit in general, the easiest way to understand the outrageousness of this is to think about it the other way round, and imagine how the UK, and Brexiters especially, would react if the EU said that with Juncker, Tusk et al now gone, the EU no longer felt bound by the WA and PD. Or if the states and MEPs who had voted to ratify the WA now said that they had done so without bothering to read it as they had been told it could all be re-written afterwards. The shrieks of anger would be deafening, and the opprobrium heaped on the EU vitriolic.
The deal formerly known as ‘oven-ready’
Of course it’s not just the trust of the EU which is being betrayed by this deepening farrago of lies. It’s also the British electorate. For don’t forget that this near-discarded PD and this ‘defective’ WA used to go under a very different name: together, they were the “oven-ready deal” that Johnson promised would “get Brexit done” during the 2019 General Election campaign. This was “the great new deal”, not in any way to be confused with May’s despised efforts. In vain did I and countless others warn that it would just be the beginning of a new process of negotiation. Still, at least it might have been assumed that those negotiations would go forward on the basis of the WA and PD, not backwards to try to re-write them.
Such an assumption was always going to be naïve, though. And this goes to the heart of why the EU is right to distrust Johnson. Again and again as Prime Minister (never mind about beforehand) he has shown not just dishonesty but a palpable scorn for law and the normal political process. The doyen of law and policy commentators, David Allen Green, who invariably uses words with great precision, last year wrote of Johnson “going rogue” (£) over the question of whether he would obey the law requiring him to seek an extension to the Article 50 period. It was, Green said, “unprecedented” for a Prime Minister even to be contemplating not doing so. This was also in the context of the illegal prorogation of parliament and these and other examples provide ample evidence of the subfusc authoritarianism that Johnson’s jokey persona increasingly fails to cloak. No doubt it is echoed, amplified, and incited by Cummings’ infamous contempt for ‘playing by the rules’.
This makes Johnson a difficult character for the EU to deal with, but that character is only one manifestation of the problem. As noted above, the UK government’s behaviour since Brexit has been repeatedly untrustworthy, even under the leadership of May, whose character was very different. The underlying issue is neither of them, but the now near comprehensive ‘ERG-ification’ of the Tory Party and, hence, government. Perhaps because the old familiar trappings of the political spectacle persist, it’s easy to miss how hollowed-out Britain’s political institutions have become during these Brexit years.
Government by cult
Indeed, the EU’s bewilderment – like that of many commentators including, at times, myself – stems from a failure to appreciate quite how far and deep that process has gone. The ERG is rather like the Terminator which “can’t be bargained with, it can’t be reasoned with, it doesn’t feel pity or remorse or fear and it absolutely will not stop ever …”. So the hope that, at some point, rationality will assert itself – for example over the damage of no deal or extending the transition period – keeps being dashed. Similarly, the idea that some ‘compromise’ from the EU would unlock things, even if such compromise was possible, is flawed. Really, one could imagine that if the EU conceded on every single UK demand the Brexit Ultras would still denounce it as insultingly inadequate.
We’ve arrived here step by step because every demand made by the Ultras has been conceded – the Referendum, then the row about the question to be asked, then the franchise. And each demand met has led to a still harder one, from ‘we just want to be like Norway’ right up to the point that we are just about at which is that any deal and any form of relationship with the EU is intolerable. That’s totally unrealistic, of course, since the EU will still be there (although the hardcore of the Ultras always believes it will collapse) but realism isn’t part of the story here. Indeed, realistically, it’s far more likely that Brexit will lead to the break up of the United Kingdom.
That an entire government should be in hock to an effectively nihilistic cult is partly to do with the internal history of the modern Conservative Party, the ruthlessness of the ERG, and their parliamentary numbers which are enough to pose a threat even when the government has a large majority. But it requires that those who are far from membership of the cult – and, still, there are plenty of Tory MPs in that category – for one reason or another go along with it. At the present moment, that means buying into the narrative that all that is happening is a tough negotiating stance which will yield an eleventh hour ‘blink’ from the EU and, for this reason, no transition extension should be sought.
Beyond that, it requires a much larger number of people within the electorate to accept the situation – either being themselves cultists, or buying in to the strategy as described or, and here the numbers are probably very large, thinking that it is all a lot of noise and that in the end ‘they’ (whoever that might be) will ‘sort things out’. There is much danger in that. It rests upon the complacent assumption that ‘things are bound to go on much as always’. Yet few realise the complex web of systems and regulations that create what they take for granted, and they may very well not forgive the ‘disruptors’ for ripping those systems up.
The idea floating around that any damage from there being no trade deal will be ascribed to the wider coronavirus crisis is unlikely to be correct when specific consequences – food shortages being the most obvious, but Bloomberg have compiled an extensive and alarming list – kick in overnight, making causation very obvious. If anything, coming on top of all the pain of coronavirus, public tolerance is likely to be less forthcoming, and much of the disruption will occur even with a trade deal.
So far, with the exception of the immediate sharp fall in sterling after the Referendum, Brexiters have been able to provide alibis for the damaging effects of Brexit (what one might call the ‘diesel decoy’). I’m not sure that will be so as people begin to experience what Tom Hayes calls ‘the Brexit of small things’, the things that affect their daily lives. On the other hand, that currency collapse of 2016, which would in any other context have led to a political crisis, was almost shrugged off - so who knows?
The road to pariahdom
But even if the government ride out the domestic economic and political consequences of no deal, the damage to Britain’s international reputation will be substantial. That will matter in relation to the EU and also in relation to other countries, who will see Britain as untrustworthy and irrational but also as desperate to do trade deals on any terms it is given.
For example, it’s already the case that Japan regards Brexit as a betrayal of the trust upon which basis its companies invested so heavily in the UK, and already the case that it is set to make tough demands in trade talks, which have just begun. Their outcome, says Michito Tsuruoka of Keio University writing in the Japan Times, is crucially bound up with the progress and outcome of the UK-EU talks. Indeed, he says, “no country wants to conclude a definitive trade deal with the UK without knowing the final shape of the EU-UK partnership”.
More generally, writing about the ‘original’ no deal scenario, Dr Nicholas Westcott of SOAS argued starkly that it would be “a heavy international defeat for Britain … we would have proven unable to negotiate – with our nearest friends – a deal that protected our economic interests. And the world will see this. They – the US, China, India, Russia, the Gulf States, African and Latin American countries, Spain, Mauritius, Argentina - all will say to themselves that Britain is now weak, it needs our support, and we can ask for whatever we want”. In short, no deal with the EU has a much wider import: it, or any other outcome of the negotiations, will directly impact upon the UK’s global standing and upon global relationships as well as those with our nearest neighbours.
And the thing about no deal is that that won’t be an end to the matter. That’s not simply because – as Tom Hayes, again, points out and as I did , in a different way, last week – all the unresolved issues will still be in need of resolution. It’s also because of the implications of the analysis of the ERG, above. For if it is correct that whatever they get they always want more, then what ‘more’ would they ask for having achieved the no trade deal scenario that many of them advocate?
The answer to that is already clear, even before it has happened, in what is already being said about the defects in the WA. That claim will intensify, because the Ultras have never accepted the idea of a financial settlement being made in the absence of a trade deal, and have always argued that any such settlement should be contingent upon a trade deal. Indeed Johnson, during his leadership campaign, threatened just that, whether in order to pander them or from conviction hardly matters.
So if there is no trade deal come next January they will unquestionably try to force the government to break the WA by reneging on the financial settlement and, very likely, as the signs are already there, the Northern Ireland Protocol, with all that will mean for relations with both Ireland and the US, though probably not, I think and hope, the Citizens’ Rights agreement. We will then be well beyond the current damage to trust and reputation, and headed down the road to pariahdom. We’re not quite on that road yet, but we’ve had glimpses recently of the signposts to it and if, as seems increasingly likely, there is no deal it’s the one the Ultras will be urging us down.
If so, it’s worth recalling that they haven’t, so far, failed to get their own way.
*Actually, on social media at least, it is more common to see Brexiters claim that the EU has reneged not so much on the PD but on the Barnier staircase. On this account, that staircase promised a Canada deal, denoted by the Canadian flag. However, apart from the ludicrousness of regarding a signed agreement as non-binding but a PowerPoint slide as a promise, and as a promise of a deal on the same terms as Canada (when more stringent LPF conditions had been set in more formal documents), it is a misreading of that slide. What actually appears are the Canadian and South Korean flags – an indication of the general category of such a deal (FTA) and also of the fact that within that category there are different variants: not all FTAs are the same.
If not earlier, it perhaps began when the Brexiters, including Boris Johnson, denied the legitimacy of any financial settlement – something I will come back to. It became entrenched when David Davis and Theresa May immediately disowned the backstop they had agreed to end of the phase 1 of the Article 50 negotiations in December 2017. Many other examples could be given.
Distrust is now endemic
Under Johnson’s premiership that lack of trust has become endemic. That’s partly because EU leaders recall the long years of lies he told whilst a Telegraph columnist, and have disdain for his role in the Referendum. It’s not difficult to imagine that he is one of those whom Donald Tusk was referring to as warranting a “special place in hell” for having advocated Brexit with no plan. But it is more because of the way in which, since coming to power, Johnson has seemed to resile from what he agreed, especially as regards Northern Ireland.
In a post last month, following the Frost letter, I lamented that the bitter truth is that the UK can no longer be trusted. Yet the Brexit ‘patriots’ feel no shame and, worse, no realism. Their response to Barnier’s press statement was to crow that he was ‘rattled’ by Britain’s ‘tough stance’ – yet apparently not so cowed as to stop him being ‘rude’ and ‘insulting’! The more ‘cerebral’ and, indeed, the official response was to point out, echoing Davis’ comments about the phase 1 agreement, that the Political Declaration (PD) is not legally binding.
The Political Declaration isn’t irrelevant
That is perfectly true, but it is a very long and dangerous jump from that to treating it as totally irrelevant. It was signed by Boris Johnson as a commitment of ‘good faith’ to the agreed framework for the future. As Simon Usherwood, Professor of Politics at Surrey University, points out reneging on it has damaging reputational consequences. It’s not just dishonest but, perhaps worse, naïve, for Johnson to treat as if it were one of his throwaway newspaper columns. You simply can’t conduct international relations that way and expect it just to be laughed off, or forgiven and forgotten, by other countries.
It’s clearly the case that, as a framework, it does not address the detailed provisions of the future agreement. Equally clearly, within negotiation there will legitimately be ‘maximalist’ and ‘minimalist’ interpretations of how to operationalize the framework. But that is not at all the same as simply treating it as totally irrelevant (as, indeed, Brexiters used to realise).
For example, on one of the key areas of contention referred to by Barnier, Level Playing Field (LPF) provisions, paragraph 77 of the PD is very explicit about how economic interdependence and geographical proximity mean there must be robust commitments on state aid, competition law and so on. So, yes, there is legitimate negotiation space around what ‘robust’ means in practical terms, but it is simply dishonest for Brexiters, including Johnson, to pretend that these issues have been newly introduced by the EU (£)*. If Johnson objected, the time to do so was before signing the document off.
Ominous signs
But more ominous than the ongoing disavowal of the PD was a report in the Brexiters’ house journal, The Express, that the government regards the Withdrawal Agreement (WA) as having “unfair defects” that must be remedied. That marks a significant escalation because it is not based on any claim that it is legally non-binding: there is no dispute that the WA was signed as a legally binding international treaty. Reneging on it would go beyond reputational damage.
The justification for this stance is telling. On the one hand, the report refers to an unnamed ‘government source’ (does that mean Dominic Cummings?) as linking the ‘defects’ to what was agreed by Theresa May and Olly Robbins, and the constraints of the May parliament. This reflects something which has been swirling around Brexiter circles for months now – a sense that, despite Johnson signing it, it was in some way not legitimate because of those antecedents including what they regard as a ‘remainer’ parliament. It is dangerous nonsense for whilst, as they are wont to say, no parliament can bind its successor, that does not mean that international treaties negotiated during one parliament become irrelevant afterwards. International relations would scarcely be possible if that were so. And, in any case, it’s an absurdity as Johnson didn’t sign the WA and PD until January 2020 - after the election. He owns them.
This relates to the other aspect of the supposed justification for re-opening the WA, namely that the government did not have time to deal with all the “defects” of May’s deal, just to replace the Northern Ireland backstop. But not only is the government now resiling from the frontstop that replaced it, it was the government that insisted – against much warning – that the whole thing had to be rushed through with scarcely any scrutiny to meet the deadline of 31 January. Moreover, we now know – courtesy of Steve Baker – that the ERG hardliners were persuaded by Dominic Cummings to support the WA, without needing to read it, on the basis that Michael Gove said it could be changed later.
As with Brexit in general, the easiest way to understand the outrageousness of this is to think about it the other way round, and imagine how the UK, and Brexiters especially, would react if the EU said that with Juncker, Tusk et al now gone, the EU no longer felt bound by the WA and PD. Or if the states and MEPs who had voted to ratify the WA now said that they had done so without bothering to read it as they had been told it could all be re-written afterwards. The shrieks of anger would be deafening, and the opprobrium heaped on the EU vitriolic.
The deal formerly known as ‘oven-ready’
Of course it’s not just the trust of the EU which is being betrayed by this deepening farrago of lies. It’s also the British electorate. For don’t forget that this near-discarded PD and this ‘defective’ WA used to go under a very different name: together, they were the “oven-ready deal” that Johnson promised would “get Brexit done” during the 2019 General Election campaign. This was “the great new deal”, not in any way to be confused with May’s despised efforts. In vain did I and countless others warn that it would just be the beginning of a new process of negotiation. Still, at least it might have been assumed that those negotiations would go forward on the basis of the WA and PD, not backwards to try to re-write them.
Such an assumption was always going to be naïve, though. And this goes to the heart of why the EU is right to distrust Johnson. Again and again as Prime Minister (never mind about beforehand) he has shown not just dishonesty but a palpable scorn for law and the normal political process. The doyen of law and policy commentators, David Allen Green, who invariably uses words with great precision, last year wrote of Johnson “going rogue” (£) over the question of whether he would obey the law requiring him to seek an extension to the Article 50 period. It was, Green said, “unprecedented” for a Prime Minister even to be contemplating not doing so. This was also in the context of the illegal prorogation of parliament and these and other examples provide ample evidence of the subfusc authoritarianism that Johnson’s jokey persona increasingly fails to cloak. No doubt it is echoed, amplified, and incited by Cummings’ infamous contempt for ‘playing by the rules’.
This makes Johnson a difficult character for the EU to deal with, but that character is only one manifestation of the problem. As noted above, the UK government’s behaviour since Brexit has been repeatedly untrustworthy, even under the leadership of May, whose character was very different. The underlying issue is neither of them, but the now near comprehensive ‘ERG-ification’ of the Tory Party and, hence, government. Perhaps because the old familiar trappings of the political spectacle persist, it’s easy to miss how hollowed-out Britain’s political institutions have become during these Brexit years.
Government by cult
Indeed, the EU’s bewilderment – like that of many commentators including, at times, myself – stems from a failure to appreciate quite how far and deep that process has gone. The ERG is rather like the Terminator which “can’t be bargained with, it can’t be reasoned with, it doesn’t feel pity or remorse or fear and it absolutely will not stop ever …”. So the hope that, at some point, rationality will assert itself – for example over the damage of no deal or extending the transition period – keeps being dashed. Similarly, the idea that some ‘compromise’ from the EU would unlock things, even if such compromise was possible, is flawed. Really, one could imagine that if the EU conceded on every single UK demand the Brexit Ultras would still denounce it as insultingly inadequate.
We’ve arrived here step by step because every demand made by the Ultras has been conceded – the Referendum, then the row about the question to be asked, then the franchise. And each demand met has led to a still harder one, from ‘we just want to be like Norway’ right up to the point that we are just about at which is that any deal and any form of relationship with the EU is intolerable. That’s totally unrealistic, of course, since the EU will still be there (although the hardcore of the Ultras always believes it will collapse) but realism isn’t part of the story here. Indeed, realistically, it’s far more likely that Brexit will lead to the break up of the United Kingdom.
That an entire government should be in hock to an effectively nihilistic cult is partly to do with the internal history of the modern Conservative Party, the ruthlessness of the ERG, and their parliamentary numbers which are enough to pose a threat even when the government has a large majority. But it requires that those who are far from membership of the cult – and, still, there are plenty of Tory MPs in that category – for one reason or another go along with it. At the present moment, that means buying into the narrative that all that is happening is a tough negotiating stance which will yield an eleventh hour ‘blink’ from the EU and, for this reason, no transition extension should be sought.
Beyond that, it requires a much larger number of people within the electorate to accept the situation – either being themselves cultists, or buying in to the strategy as described or, and here the numbers are probably very large, thinking that it is all a lot of noise and that in the end ‘they’ (whoever that might be) will ‘sort things out’. There is much danger in that. It rests upon the complacent assumption that ‘things are bound to go on much as always’. Yet few realise the complex web of systems and regulations that create what they take for granted, and they may very well not forgive the ‘disruptors’ for ripping those systems up.
The idea floating around that any damage from there being no trade deal will be ascribed to the wider coronavirus crisis is unlikely to be correct when specific consequences – food shortages being the most obvious, but Bloomberg have compiled an extensive and alarming list – kick in overnight, making causation very obvious. If anything, coming on top of all the pain of coronavirus, public tolerance is likely to be less forthcoming, and much of the disruption will occur even with a trade deal.
So far, with the exception of the immediate sharp fall in sterling after the Referendum, Brexiters have been able to provide alibis for the damaging effects of Brexit (what one might call the ‘diesel decoy’). I’m not sure that will be so as people begin to experience what Tom Hayes calls ‘the Brexit of small things’, the things that affect their daily lives. On the other hand, that currency collapse of 2016, which would in any other context have led to a political crisis, was almost shrugged off - so who knows?
The road to pariahdom
But even if the government ride out the domestic economic and political consequences of no deal, the damage to Britain’s international reputation will be substantial. That will matter in relation to the EU and also in relation to other countries, who will see Britain as untrustworthy and irrational but also as desperate to do trade deals on any terms it is given.
For example, it’s already the case that Japan regards Brexit as a betrayal of the trust upon which basis its companies invested so heavily in the UK, and already the case that it is set to make tough demands in trade talks, which have just begun. Their outcome, says Michito Tsuruoka of Keio University writing in the Japan Times, is crucially bound up with the progress and outcome of the UK-EU talks. Indeed, he says, “no country wants to conclude a definitive trade deal with the UK without knowing the final shape of the EU-UK partnership”.
More generally, writing about the ‘original’ no deal scenario, Dr Nicholas Westcott of SOAS argued starkly that it would be “a heavy international defeat for Britain … we would have proven unable to negotiate – with our nearest friends – a deal that protected our economic interests. And the world will see this. They – the US, China, India, Russia, the Gulf States, African and Latin American countries, Spain, Mauritius, Argentina - all will say to themselves that Britain is now weak, it needs our support, and we can ask for whatever we want”. In short, no deal with the EU has a much wider import: it, or any other outcome of the negotiations, will directly impact upon the UK’s global standing and upon global relationships as well as those with our nearest neighbours.
And the thing about no deal is that that won’t be an end to the matter. That’s not simply because – as Tom Hayes, again, points out and as I did , in a different way, last week – all the unresolved issues will still be in need of resolution. It’s also because of the implications of the analysis of the ERG, above. For if it is correct that whatever they get they always want more, then what ‘more’ would they ask for having achieved the no trade deal scenario that many of them advocate?
The answer to that is already clear, even before it has happened, in what is already being said about the defects in the WA. That claim will intensify, because the Ultras have never accepted the idea of a financial settlement being made in the absence of a trade deal, and have always argued that any such settlement should be contingent upon a trade deal. Indeed Johnson, during his leadership campaign, threatened just that, whether in order to pander them or from conviction hardly matters.
So if there is no trade deal come next January they will unquestionably try to force the government to break the WA by reneging on the financial settlement and, very likely, as the signs are already there, the Northern Ireland Protocol, with all that will mean for relations with both Ireland and the US, though probably not, I think and hope, the Citizens’ Rights agreement. We will then be well beyond the current damage to trust and reputation, and headed down the road to pariahdom. We’re not quite on that road yet, but we’ve had glimpses recently of the signposts to it and if, as seems increasingly likely, there is no deal it’s the one the Ultras will be urging us down.
If so, it’s worth recalling that they haven’t, so far, failed to get their own way.
*Actually, on social media at least, it is more common to see Brexiters claim that the EU has reneged not so much on the PD but on the Barnier staircase. On this account, that staircase promised a Canada deal, denoted by the Canadian flag. However, apart from the ludicrousness of regarding a signed agreement as non-binding but a PowerPoint slide as a promise, and as a promise of a deal on the same terms as Canada (when more stringent LPF conditions had been set in more formal documents), it is a misreading of that slide. What actually appears are the Canadian and South Korean flags – an indication of the general category of such a deal (FTA) and also of the fact that within that category there are different variants: not all FTAs are the same.
Friday, 20 March 2020
Extending the transition period: Johnson’s chance to lead
As foreshadowed in my post two weeks ago and amplified in last week’s post (most of which remains relevant, although last week feels almost a lifetime ago) the key, pressing and now really sole Brexit issue is whether the coronavirus pandemic is going to lead to an extension of the transition period. If so, that is going to have to be applied for by the end of June. Hence it really is a pressing issue in the context of the near certainty that all of the current coronavirus restrictions - if not even more stringent ones - in both the UK and EU countries will still be in place by then. Attempts to run this week’s scheduled negotiations remotely foundered, and they were cancelled. Subsequently, Michel Barnier tested positive for the virus.
In any logical world an extension would be a no-brainer (£), and clearly in the interests of both the UK and the EU. Yet, as a very good discussion of the issue by Luke McGee of CNN shows, it presents a massive political dilemma for Boris Johnson. This flows directly from his own insistence that there will be no extension but, beneath that, from the implacable opposition to it from within his own party. The Brexit Ultras do not work on normal logic, and could punish any backsliding on the date. As has been the case throughout the Brexit saga – but with consequences which are now more dramatic than ever - these diehards have a hold on the fate of the whole country which is quite disproportionate to their numbers.
Brexit still matters
For as long as the current timetable remains in place, it is both legitimate and necessary to go on talking about Brexit. It is becoming increasingly common to hear it said that, in the face of coronavirus, Brexit is unimportant and neither it nor the extension question should be discussed. That is an inane proposition unless or until the government pause and postpone. For without that happening Brexit will still be underway and decisions being made that will affect us for a very long time. It’s entirely asinine to say simultaneously that Brexit must go ahead despite coronavirus but that we shouldn’t discuss it because of coronavirus.
In any case, it’s perfectly reasonable to recall that Brexit is making coronavirus more difficult for the UK to handle. The number of nurses from the EU who have been put off working in Britain since the Referendum is one obvious example. The potential delays it will cause access to a future vaccine, mentioned in my last post and analysed in more detail by Professor Martin McKee and others this week, is another. The reluctance of the government to avail itself of the EU’s accelerated procurement process (£) for ventilators and testing kits is a third (even if it is dropped, that reluctance is telling).
The latter example, in particular, bespeaks of the continuation – despite coronavirus – of the Brexiter’s enthrallment with their culture war. Witness the glee with which Nigel Farage and others greeted the UK being exempted from the US’s European travel ban. It was mistaken in its own right (the initial ban was on Schengen area countries, not EU countries per se) but in any case the ban was rapidly extended to include the UK. But the point – as with all the articles suggesting that coronavirus somehow justifies Brexit (£) – is that, once again, Brexiters cannot stop making bogus claims as if they are still campaigning for Brexit, rather than accepting its real consequences.
Extension isn’t about stopping Brexit
Stuck in that culture war groove, many Brexiters are wrongly treating the growing calls for an extension as some kind of remainer rearguard action against Brexit. That’s total, paranoid nonsense. As of 31 January that battle was over. The issue is how Brexit is done and the need for a common sense recognition that coronavirus has massively reshaped the political and economic landscape. Even before its economic effects have fed through into official data the UK economy was at a virtual standstill and manufacturing exports at a three year low (£). There is only so much damage that can be absorbed in such a short period – this week’s dramatic sterling falls show how coronavirus and Brexit are interacting to inflict further damage - and ending the transition, whether with a deal or without, at the end of the year will increase it totally unnecessarily.
I suppose it is possible that, in the end, the magnitude of government economic intervention to mitigate the effects of coronavirus may also cushion the additional Brexit damage. But, even if so, the effects of post-Brexit terms of trade will matter for many years. Equally importantly, so will the long-term effects of all the other arrangements for regulation and cooperation (or otherwise) over security, education, energy and so on.
Nor is the issue just about mitigating the simultaneous economic effects of coronavirus and the end of the transition period. It is also about the lack of governmental capacity to undertake the negotiations at the present time, as civil servants, rightly, prioritise work on coronavirus. As is widely remarked upon, the coronavirus measures are the biggest set of social restrictions since the Second World War. It just can’t make sense to try to undertake at the same time the biggest re-configuration of international economic and political relations since the same date. For that matter, governmental capacity within the EU is also heavily circumscribed by the coronavirus crisis (and, note, the EU also has the right to apply for transition extension, seeking UK agreement).
The same is true for businesses. They now face all of the damage and disruption of coronavirus whilst also having to prepare for whatever the end of the transition period may bring (here’s Professor Anand Menon, giving Select Committee evidence to that effect this week). It’s not even just a matter of dealing with two independent events, but of the trade-offs between them. As one business leader, quoted by the Daily Telegraph’s Europe Editor, Peter Foster, pithily put it “am I supposed to be making ventilators or hiring customs agents?”
Beyond the capacity of the British economy and polity to deal with Brexit and coronavirus simultaneously lies another important consideration. The magnitude of the virus crisis is such that there is really no way of knowing what the British, European and global landscape is going to look like once it is over. In the absence of that knowledge, the kind of relationship that Britain is going to need with the EU, and vice versa, is also unknowable. Even if it could be done, any deal struck this year may be completely unsuited to those future needs. Why rush into it blind?
There’s nothing magical about 31 December
Overall, the key point is that there is absolutely nothing magical about the date of 31 December 2020. It has been made talismanic by Johnson and the Brexiters, but it can be unmade. Yes, it is ‘enshrined in law’ (by the Withdrawal Agreement Act), but that could be re-legislated. In any case it only arises as the legacy of May’s deal, and, at that time, was linked to the original departure date of 29 March 2019 which would have allowed for a much longer transition period. It also arises from synchronizing with the EU budget cycle, but it would seem strange if Brexiters regarded that as sacrosanct.
As things stand, there are now numerous well-sourced reports that the UK will seek an extension. Yet this continues to be publicly denied by Boris Johnson and other ministers. The government is pushing on with the Trade Bill (though a straw in the wind may be that it does not give a date for the end of the transition period). Indeed according to the Foreign Secretary Dominic Raab this week the coronavirus crisis strengthens the case for sticking to the current timetable. This amounts, as the MP Ben Bradshaw put it, to “reckless insanity”. And David Davis (£) – the former Brexit Secretary who is invariably wrong about Brexit – after repeating the usual nonsense about the deal that Donald Tusk supposedly promised proposes that since coronavirus will depress cross-border trade it will make it easier to handle customs delays. About the best that can be said of that is that it shows that he has finally grasped that the UK is not going to have the “exact same benefits” as an EU member.
The sheer wart-hog obstinacy of the likes of Raab and Davis is beyond belief. I get that they want to leave the EU, and they’ve got their way. But faced with this unprecedented crisis, with an entire country and continent in or close to lock down, how can they not even concede the existence of the case for delaying the settlement of future terms? Of all the mad and irresponsible stances the Ultras have taken in recent years, this is surely the worst and most dangerous.
When not if?
Even so, I agree with the many commentators who think it almost certain that an extension will be applied for and agreed, perhaps badged in terms of ‘Britain’s Special Status’ or similar, which will appeal to some voters. It will most likely be announced when the coronavirus outbreak is at its height, so as to attract less attention and also to mute Ultras’ objections. If so, the key issue to watch will be whether a one-year or two-year extension is sought. Either is possible under the terms of the Withdrawal Agreement but – at least in principle – the decision can’t then be changed. That is, one year can’t later be upgraded to two (though I wonder if it came to it whether it would really be impossible to find a way), although two years could be truncated were a deal to be reached.
If the UK only seeks a one-year extension, it is unlikely to be enough (especially as we have no way of knowing how long the coronavirus crisis will last) and the inference will be that it has been kept to a minimum to, once again, try to placate the Ultras. If so, it will be folly. Much better, if there is a political hit to be taken for extending, to extract the maximum ‘reward’ for it in terms of time for manoeuvre (not that even two years gives much breathing space). But, more likely, the supposedly easier route will be taken and, before we know it, that new deadline will be looming.
Not, of course, that there is absolute certainty that there will be an extension. Despite, as stated above, its obvious logic, if these Brexit years have taught us anything it is that normal logic no longer applies. But perhaps that should be refined a little. Whilst Brexit Ultras may not work on normal logic, they do have a logic of their own in which expectation of betrayal is central. Thus they fear that, even now, Brexit might somehow be reversed and that an extension to the transition period might allow that.
I do not think they are right, and my reasons for advocating an extension are not animated by an expectation that it will have that outcome. In any case, reversal would presumably have to mean an application to rejoin – there is no other mechanism now that the UK has left. Even so, it’s not inconceivable that post-coronavirus the world will look so different that Brexit is very widely seen by the electorate as a terrible mistake and rejoining gains popular support. Yet that is just as likely – possibly even more likely – to be so if a botched deal (or no deal) is rushed through as it is if an extension occurs. Indeed Brexiters should be very wary about this. For whilst there is currently little public clamour for an extension, if we begin to emerge from the coronavirus crisis only to immediately face a fresh Brexit crisis toward the end of the year the backlash would be substantial.
Johnson’s chance to lead?
Given this and the near inevitability of extension, Boris Johnson actually has an opportunity – and also a need – to make a virtue of that necessity. Rather than have it forced on him by events in a few weeks’ time, he could advocate it now. In the process he could throw down the gauntlet to the ERG and, in the circumstances, very likely face them down. Thereby, he would have a reasonable claim to have transcended the gulf between leavers and remainers and be governing in the interests of the whole country.
More than anything, his biggest challenge now, which will likely define his political legacy, is to gain public trust and to repay it. Whilst he is remembered as the man who repeatedly fronted the £350M Brexit bus lie, despite the corrections of the UK Statistics Authority, his pronouncements about “sending the virus packing in twelve weeks” come across as more dodgy sloganeering and appeals to “follow the science” ring hollow. But if he were to tell the truth about the need for an extension, he might finally move beyond being the Brexit campaign leader to being the ‘nation in crisis’ leader he clearly craves to be seen as.
In any logical world an extension would be a no-brainer (£), and clearly in the interests of both the UK and the EU. Yet, as a very good discussion of the issue by Luke McGee of CNN shows, it presents a massive political dilemma for Boris Johnson. This flows directly from his own insistence that there will be no extension but, beneath that, from the implacable opposition to it from within his own party. The Brexit Ultras do not work on normal logic, and could punish any backsliding on the date. As has been the case throughout the Brexit saga – but with consequences which are now more dramatic than ever - these diehards have a hold on the fate of the whole country which is quite disproportionate to their numbers.
Brexit still matters
For as long as the current timetable remains in place, it is both legitimate and necessary to go on talking about Brexit. It is becoming increasingly common to hear it said that, in the face of coronavirus, Brexit is unimportant and neither it nor the extension question should be discussed. That is an inane proposition unless or until the government pause and postpone. For without that happening Brexit will still be underway and decisions being made that will affect us for a very long time. It’s entirely asinine to say simultaneously that Brexit must go ahead despite coronavirus but that we shouldn’t discuss it because of coronavirus.
In any case, it’s perfectly reasonable to recall that Brexit is making coronavirus more difficult for the UK to handle. The number of nurses from the EU who have been put off working in Britain since the Referendum is one obvious example. The potential delays it will cause access to a future vaccine, mentioned in my last post and analysed in more detail by Professor Martin McKee and others this week, is another. The reluctance of the government to avail itself of the EU’s accelerated procurement process (£) for ventilators and testing kits is a third (even if it is dropped, that reluctance is telling).
The latter example, in particular, bespeaks of the continuation – despite coronavirus – of the Brexiter’s enthrallment with their culture war. Witness the glee with which Nigel Farage and others greeted the UK being exempted from the US’s European travel ban. It was mistaken in its own right (the initial ban was on Schengen area countries, not EU countries per se) but in any case the ban was rapidly extended to include the UK. But the point – as with all the articles suggesting that coronavirus somehow justifies Brexit (£) – is that, once again, Brexiters cannot stop making bogus claims as if they are still campaigning for Brexit, rather than accepting its real consequences.
Extension isn’t about stopping Brexit
Stuck in that culture war groove, many Brexiters are wrongly treating the growing calls for an extension as some kind of remainer rearguard action against Brexit. That’s total, paranoid nonsense. As of 31 January that battle was over. The issue is how Brexit is done and the need for a common sense recognition that coronavirus has massively reshaped the political and economic landscape. Even before its economic effects have fed through into official data the UK economy was at a virtual standstill and manufacturing exports at a three year low (£). There is only so much damage that can be absorbed in such a short period – this week’s dramatic sterling falls show how coronavirus and Brexit are interacting to inflict further damage - and ending the transition, whether with a deal or without, at the end of the year will increase it totally unnecessarily.
I suppose it is possible that, in the end, the magnitude of government economic intervention to mitigate the effects of coronavirus may also cushion the additional Brexit damage. But, even if so, the effects of post-Brexit terms of trade will matter for many years. Equally importantly, so will the long-term effects of all the other arrangements for regulation and cooperation (or otherwise) over security, education, energy and so on.
Nor is the issue just about mitigating the simultaneous economic effects of coronavirus and the end of the transition period. It is also about the lack of governmental capacity to undertake the negotiations at the present time, as civil servants, rightly, prioritise work on coronavirus. As is widely remarked upon, the coronavirus measures are the biggest set of social restrictions since the Second World War. It just can’t make sense to try to undertake at the same time the biggest re-configuration of international economic and political relations since the same date. For that matter, governmental capacity within the EU is also heavily circumscribed by the coronavirus crisis (and, note, the EU also has the right to apply for transition extension, seeking UK agreement).
The same is true for businesses. They now face all of the damage and disruption of coronavirus whilst also having to prepare for whatever the end of the transition period may bring (here’s Professor Anand Menon, giving Select Committee evidence to that effect this week). It’s not even just a matter of dealing with two independent events, but of the trade-offs between them. As one business leader, quoted by the Daily Telegraph’s Europe Editor, Peter Foster, pithily put it “am I supposed to be making ventilators or hiring customs agents?”
Beyond the capacity of the British economy and polity to deal with Brexit and coronavirus simultaneously lies another important consideration. The magnitude of the virus crisis is such that there is really no way of knowing what the British, European and global landscape is going to look like once it is over. In the absence of that knowledge, the kind of relationship that Britain is going to need with the EU, and vice versa, is also unknowable. Even if it could be done, any deal struck this year may be completely unsuited to those future needs. Why rush into it blind?
There’s nothing magical about 31 December
Overall, the key point is that there is absolutely nothing magical about the date of 31 December 2020. It has been made talismanic by Johnson and the Brexiters, but it can be unmade. Yes, it is ‘enshrined in law’ (by the Withdrawal Agreement Act), but that could be re-legislated. In any case it only arises as the legacy of May’s deal, and, at that time, was linked to the original departure date of 29 March 2019 which would have allowed for a much longer transition period. It also arises from synchronizing with the EU budget cycle, but it would seem strange if Brexiters regarded that as sacrosanct.
As things stand, there are now numerous well-sourced reports that the UK will seek an extension. Yet this continues to be publicly denied by Boris Johnson and other ministers. The government is pushing on with the Trade Bill (though a straw in the wind may be that it does not give a date for the end of the transition period). Indeed according to the Foreign Secretary Dominic Raab this week the coronavirus crisis strengthens the case for sticking to the current timetable. This amounts, as the MP Ben Bradshaw put it, to “reckless insanity”. And David Davis (£) – the former Brexit Secretary who is invariably wrong about Brexit – after repeating the usual nonsense about the deal that Donald Tusk supposedly promised proposes that since coronavirus will depress cross-border trade it will make it easier to handle customs delays. About the best that can be said of that is that it shows that he has finally grasped that the UK is not going to have the “exact same benefits” as an EU member.
The sheer wart-hog obstinacy of the likes of Raab and Davis is beyond belief. I get that they want to leave the EU, and they’ve got their way. But faced with this unprecedented crisis, with an entire country and continent in or close to lock down, how can they not even concede the existence of the case for delaying the settlement of future terms? Of all the mad and irresponsible stances the Ultras have taken in recent years, this is surely the worst and most dangerous.
When not if?
Even so, I agree with the many commentators who think it almost certain that an extension will be applied for and agreed, perhaps badged in terms of ‘Britain’s Special Status’ or similar, which will appeal to some voters. It will most likely be announced when the coronavirus outbreak is at its height, so as to attract less attention and also to mute Ultras’ objections. If so, the key issue to watch will be whether a one-year or two-year extension is sought. Either is possible under the terms of the Withdrawal Agreement but – at least in principle – the decision can’t then be changed. That is, one year can’t later be upgraded to two (though I wonder if it came to it whether it would really be impossible to find a way), although two years could be truncated were a deal to be reached.
If the UK only seeks a one-year extension, it is unlikely to be enough (especially as we have no way of knowing how long the coronavirus crisis will last) and the inference will be that it has been kept to a minimum to, once again, try to placate the Ultras. If so, it will be folly. Much better, if there is a political hit to be taken for extending, to extract the maximum ‘reward’ for it in terms of time for manoeuvre (not that even two years gives much breathing space). But, more likely, the supposedly easier route will be taken and, before we know it, that new deadline will be looming.
Not, of course, that there is absolute certainty that there will be an extension. Despite, as stated above, its obvious logic, if these Brexit years have taught us anything it is that normal logic no longer applies. But perhaps that should be refined a little. Whilst Brexit Ultras may not work on normal logic, they do have a logic of their own in which expectation of betrayal is central. Thus they fear that, even now, Brexit might somehow be reversed and that an extension to the transition period might allow that.
I do not think they are right, and my reasons for advocating an extension are not animated by an expectation that it will have that outcome. In any case, reversal would presumably have to mean an application to rejoin – there is no other mechanism now that the UK has left. Even so, it’s not inconceivable that post-coronavirus the world will look so different that Brexit is very widely seen by the electorate as a terrible mistake and rejoining gains popular support. Yet that is just as likely – possibly even more likely – to be so if a botched deal (or no deal) is rushed through as it is if an extension occurs. Indeed Brexiters should be very wary about this. For whilst there is currently little public clamour for an extension, if we begin to emerge from the coronavirus crisis only to immediately face a fresh Brexit crisis toward the end of the year the backlash would be substantial.
Johnson’s chance to lead?
Given this and the near inevitability of extension, Boris Johnson actually has an opportunity – and also a need – to make a virtue of that necessity. Rather than have it forced on him by events in a few weeks’ time, he could advocate it now. In the process he could throw down the gauntlet to the ERG and, in the circumstances, very likely face them down. Thereby, he would have a reasonable claim to have transcended the gulf between leavers and remainers and be governing in the interests of the whole country.
More than anything, his biggest challenge now, which will likely define his political legacy, is to gain public trust and to repay it. Whilst he is remembered as the man who repeatedly fronted the £350M Brexit bus lie, despite the corrections of the UK Statistics Authority, his pronouncements about “sending the virus packing in twelve weeks” come across as more dodgy sloganeering and appeals to “follow the science” ring hollow. But if he were to tell the truth about the need for an extension, he might finally move beyond being the Brexit campaign leader to being the ‘nation in crisis’ leader he clearly craves to be seen as.
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