Bracing for Brexit: “Virtually All the Work Is Still Ahead”

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Theresa May © Frederic Legrand – COMEO

As the UK prepares to negotiate terms for leaving the EU, it is facing a shaky political base, an uninspiring economy and a lack of bargaining power.

British Prime Minister Theresa May recently set the precise moment that the United Kingdom would leave the European Union — March 29, 2019, at 11:00 pm — the two-year cutoff date after March of this year, when the British government officially conveyed its Brexit decision to the EU.

But as the UK becomes increasingly mired in the difficult issues surrounding its exit from the European economic and monetary union, to many, May’s 16-month timeline is starting to look overly optimistic. (Indeed, May faced pressure from her own party to scrap the exit date shortly after proposing it.)

Three critical questions remain to be resolved before the next stage of the negotiations, according to Brendan O’Leary, professor of political science at the University of Pennsylvania. One has to do with protecting the rights of British citizens living in the European Union and EU citizens who reside in the UK. The second is to adhere to the Good Friday Agreement between Northern Ireland and the Republic of Ireland, and prevent a hard border dividing from them after Brexit. Leadership in Northern Ireland want to find a way to remain in the EU single market and the Customs Union; the majority of voters there cast ballots in favor of staying in the EU during the June 2016 Brexit referendum. The UK has resisted the authority of the European Union’s Court of Justice in resolving disputes, and said that it will subject itself only to British law after it leaves the EU.

“Thirdly, there’s the price of the divorce, and we were talking roughly of a gap between 20 billion and 60 billion [euros],” or between $24 and $70 billion, said O’Leary. The EU wants the UK to pay that yet-to-be-finalized settlement amount to honor obligations it has signed to finance five-year projects within the union. The UK has made a case that it would no longer benefit from those projects after Brexit, and disputed that bill. Some thawing on that emerged on November 15, and “May is close to offering a deal on money that would unlock the Brexit negotiations,” The Guardian newspaper reported.

“The greatest obstacles are the UK’s goodbye payment, given its previous commitments, and the future trade deal,” said Mauro Guillen, Wharton professor of management and director of The Lauder Institute.

May is clearly responding to mounting pressure. Last week, the EU’s chief negotiator, Michel Barnier, gave 10 Downing Street a two-week deadline to provide clarity on withdrawal issues, including its financial settlement as it leaves the union. Barnier also said that contingency plans exist should the Brexit talks with the EU collapse.

Barnier’s comments reflect growing concern over the slow progress the May government has achieved thus far in finding solutions to the issues dogging Brexit. “I think we’re in the latest episode of Groundhog Day,” an American movie in which a weatherman inexplicably lives the same day over and over again, said O’Leary. “Things are moving incredibly slowly; for those of you who don’t know that movie, it’s about constant repetition.” According to Wharton Finance Professor Joao Gomes, “virtually all the work is still ahead.”

“The lack of progress is perhaps what is pushing the EU negotiators, who are now concerned about the collapse of the talks,” added Michelle Egan, professor at American University’s School of International Service. “They’re looking at what effectively from outside the British government looks confused, floundering and ineffective.”

O’Leary and Egan discussed the likely directions the Brexit talks could take on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111.

Weakness All Around?

Egan noted that while Europe is witnessing an economic recovery, Britain is grappling with rising inflation and falling real wages, even though unemployment rates are low. “We’re really in a slowdown and possibly a recession,” she said of the UK. “And we have business uncertainty, particularly for the City of London about what any deal will mean for financial services.”

On November 15, UK government data for the July-September quarter seemed to confirm fears that the days of an employment boom are over. The government’s Office for National Statistics said 14,000 fewer people were at work, bringing down the total number of employed people to about 32 million as of the end of September. The latest unemployment rate at 4.3% was unchanged from the previous quarter, but lower than the 4.8% of a year ago. UK retail sales fell 0.3% in October, year-on-year, marking the first such drop since 2013, although they grew 0.3% from September, according to government data.

The EU’s relatively stronger economy could give it an upper hand over the UK. “It seems clear to me that in the end, the terms of the negotiations are bound to be more favorable to the party whose economy seems less vulnerable to Brexit,” said Gomes. He noted that the UK is losing out in other areas as its economic fortunes lag those of the EU. “It has strengthened the union’s resolve to stick with its demands and made it more difficult for the UK negotiators to risk a hard Brexit.”

O’Leary expected major companies, including those in the financial services sector, to decide on relocating from the UK after Christmas. Businesses were hoping to have had some clarity by now about the likely final shape of the Brexit agreement, and cannot afford to put off their decisions, he said. “The loss of foreign direct investment on top of a falling pound and on top of inflation might concentrate the mind.” In the past year and a half, the pound has lost more than 22% against the euro.

Politically Shaky

To be sure, nobody expected the going to be smooth, given the thorny issues involved. “Brexit negotiations are difficult because there is no precedent and because neither party is really convinced that Brexit should happen,” said Guillen. Egan added: “We always expected this process to be difficult. This is a negotiation.” All the same, Europe is running out of patience, she suggested. “Europe is also moving on; they’ve got other issues that they want to deal with beyond Brexit.”

It does not help that May’s government is on “very weak” ground, as Guillen noted. “The Conservative Party is divided, and a resurgent Labour Party under [Jeremy] Corbyn is using the Brexit crisis as a way to boost its electoral chances. Moreover, May has agreed to have a vote in Parliament about any deal.” In the snap elections that Prime Minister May had called in June, the Conservative Party fell short of a majority, while the Labour Party significantly improved its tally.

The May government has been shaky also because it recently lost two ministers and may lose more because of unrelated scandals. Damian Green, the first secretary of state, faces a probe after police allegedly found pornography on his work computer during a raid in 2008. Green has denied the allegations and termed them “unscrupulous character assassination,” but it has shaken the government. “Theresa May does not look like she’s in control of the process and so the crisis of governance is part of the problem,” said Egan. O’Leary added: “She’s a dead woman walking. The only question is when she falls. She’s very lucky. Her conspirators are totally incompetent.”

Questions over Credibility

O’Leary felt the Conservative Party is overconfident as well. “We’re dealing with a world in which Conservative fantasies about their bargaining power have yet to be fully confronted with reality,” he said. He expected a turning point at the next round of talks with the EU in December. He said the EU could insist on a settlement hammered out by the fall of next year, in good time before the European parliamentary elections in May 2019. “Time is very much running out for the Conservatives.”

Alongside battling those domestic troubles, May’s government does not seem to have a winning strategy for the Brexit negotiations. “Are the negotiations going to lead to the UK fully leaving the Customs Union and the single market, and refusing to accept jurisdiction [of] the Court of Justice of the European Union?” O’Leary asked. “If that’s the case, then there isn’t going to be any successful settlement of any kind.”

O’Leary said the UK has difficulty striking a credible treaty with the EU-27 (the remaining members in the union) because its own credentials are questionable. “The UK … has the ability to repudiate treaties,” he said. “If a treaty is made with the EU-27, what is the credible commitment that the UK can make that it will abide by that treaty?” In the light of that, he said it is “absolutely vital” that the United Kingdom agrees to adjudication by the Court of Justice of the European Union, because that ensures the UK would suffer “a significant penalty, were it to break its treaty obligations.”

Likely Outcomes of Brexit

O’Leary saw two possible outcomes. “One is the UK simply leaves the EU on the appointed hour without any agreement at all, and without paying its bills,” he said. That outcome could create “serious difficulties for the UK and Ireland, but less so for the EU-27 who could absorb the shock quite easily,” he added.

The second likelihood, O’Leary said, is of a “last minute transitional deal which keeps the UK inside the single market and the Customs Union, while they agree to continue negotiating.” That outcome could prove to be “a sticky position” for the Conservative government to be in, “because they wouldn’t really be out — they’d be pretending to be out,” he added. In that scenario, the UK would have no say over the regulatory structure in the period ahead and it will not be able to negotiate trade deals with other countries, he pointed out.

“The fantasy of the UK is also that they going to get what we call a bespoke deal — like pick-and-mix sweets,” said Egan. However, the European side wants it to be a clear-cut deal — “It’s either you’re in it or you’re out,” she noted. Europe’s concerns are also that Britain’s exit might trigger “a real regulatory race to the bottom,” where the UK might strike more favorable trade deals with countries outside the EU.

With so much uncertainty, “it is nearly impossible to predict what might happen,” said Guillen. “Any outcome is possible: from a reasonable deal for Brexit all the way to the UK cancelling Brexit and remaining in the EU.”

*[This article was originally published by Knowledge@Wharton, a partner institution of Fair Observer.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

Photo Credit: Frederic Legrand – COMEO / Shutterstock.com

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