The Brexit this week presents the choice between “no deal” or a “fudged deal..” Markets prefer a fudged deal, which comes with the benefit of a transition period. The prevailing political mood is different. Over and beyond wishing for the best, London and EU capitals are preparing for the political blame-game of a “no deal” scenario.
The slim case of a fudged deal
The pound began to regain a bit of lost ground against the euro and the US dollar on Wednesday, upon news that Germany and London have reached a key compromising deal over Brexit.
Bloomberg reported that both Germany and the UK were ready to accept a “less detailed agreement” on the U.K.’s future economic and trade ties with the EU, to avoid a disorderly Brexit in March 2019. That “key compromise” amounted to kicking the can down the road.
Brexit is supposed to take place in two successive waves: first comes the separation agreement, then comes the future trade accord. Bloomberg’s report suggested that negotiators were willing to sign a political framework agreement that did not include a detailed trade agreement. In some, it was recommended that a few things could be agreed before everything was agreed.
The story was based on anonymous sources “familiar” with the negotiation in London and, presumably, Germany. There was no mention of European Commission sources.
The UK’s Brexit Secretary Dominic Raab confirmed in testimony to the UK parliament on Wednesday that more negotiations will ensue following the UK’s departure. He still insisted that the final destination/outlook of the agreement will not be altogether “nebulous and unclear.”
So, London signals that there will be agreement on fundamentals, which presents the challenge of ratification in both the European and the UK parliament.
A fudged deal is better than no deal
The question in this context is what is the level of “fundamental” detail the two sides are willing to pen down.
According to every single report and statement by almost everyone in Berlin, Germany rejects the idea of “cherry picking” of elements of the Single Market.
That means that there is little room for accepting a “unique” Customs Partnership that the UK calls “combined.” And it goes without saying that the EU cannot offer a compromise without solid guarantees for the Irish border.
Theresa May’s so-called Brexit plan requires the UK being able to strike its own global trade deals, having no European Court of Justice jurisdiction, while voluntarily abiding by a common regulatory rulebook for goods (but not services).
In this scheme, the UK will be collecting taxes and VAT for products heading to the EU via the UK. Hence, there will be a “combined” rather than “common” customs area.
Bloomberg’s report says little on whether or how this deadlock has been addressed. Instead, what is suggested is that partners are no focusing on the so-called “backstop” agreement for Ireland. The report indicates that May is willing to formalise in writing the principle of no border in Ireland on the basis that this clause will never have to be triggered.
EU: no deal is better than an Anglo-German deal
Hours following the Bloomberg report, both London and Berlin denied there was any breakthrough in the negotiations. The BBC quoted numerous markets analysts and official government statements in London washing out the story as “rumours.”
For the EU that was a necessary response.
No one in Berlin would be willing to concede on the record that Berlin calls the shots on Brexit. Negotiating with Berlin would portray the EU as nothing more than a German sphere of influence. Neither Berlin nor Brussels would be willing to support that narrative.
To the contrary, the German Chancellor stated on Wednesday that Germany is preparing for all scenarios, including a “no deal,” which also means no transition period. “If we do not get to an agreement – a scenario we don’t want – there will not be a transition phase,” the Chancellor’s spokeswoman Ulrike Demmer is quoted by Reuters as saying.
Berlin, once again, confirmed faith in Michel Barnier as the single and only negotiator.
An “Anglo-German deal” narrative would inflame Euroscepticism, on which the UK invests to break the ranks of the EU 27. That is not going to happen.
The Austrian foreign minister Karin Kneissl told BBC’s Newsnight that Brexit is perhaps “the only topic” in which the EU 27 are cohesive in their response. And that is in a country that has is experiencing a surging wave of Euroscepticism and is sympathetic to the pleas of former prime minister David Cameron for ending “benefit tourism.” But, from the Netherlands to the Baltic States, no one wants the UK to gain Single Market access that is better than membership. The ranks remain closed.
Only Poland’s foreign minister, Jacek Czaputowizc, is keen to be the advocate for openness to the UK’s positions. Poland is said to be reflecting the broader views of the Visegrad Four (Poland, Hungary, Czech Republic, Slovakia); however, that is an assumption.
UK: no deal is better than a failed negotiation
As welcoming as London may be to Warsaw’s support, Theresa May cannot hint the government is nearing a deal. Her government’s majority depends on unionist (DUP) support in parliament.
No backstop agreement for Ireland would be acceptable.
For conservative backbenchers paying the divorce bill without a clear commitment to Single Market access would not be acceptable. Accepting ECJ case law is unacceptable. Even “voluntary compliance” with a common rulebook is barely tolerable. In sum, the point of departure for this negotiation is unacceptable to half the Conservative Party, members of parliament, and cabinet. That is the definition of a “non starter.”
And no “framework agreement” means no transition period, which for certain life-long Leave campaigners constitutes a welcome and irreversible clean break, including Jacob Rees-Mogg and Boris Johnson.
Meanwhile, public opinion is now shifting, but not impressively. A poll by NatCen suggests that 59% of Britons would now vote to remain in the EU, Reuters reports. In June 2016 52% voted to Leave. But, because of the sampling methodology, the actual preference to Remain maybe in the region of 54%. Across all polls, Remain appears to have a small margin of preference, but without an actual vote in sight, this means little. Besides, the overwhelming majority of Conservative voters are Leave supporters. A motivated core of party activists is, in fact, pushing for a clean break in a “fight them on the beaches” spirit.