London, 05/10. Theresa May’s speech at the Conservative Party Conference in Birmingham on Wednesday was full of typically British self-sarcastic humour. There was no general mutiny and no open challenge to her leadership, although a number of Conservatives Members of Parliament are making clear that they will not support her Brexit plan. She is still the leader but she is not in charge.
To bolster support Theresa May proclaimed austerity over. That was a promise to those who were “left behind” and voted leave so that the UK would not “send money to Brussels.” However, that is a promise she may be unable to keep.
Moreover, she expressed confidence in her Chequers plan, despite its flat rejection from EU leaders. That too is a promise she is unable to keep.
By Thursday evening the President of the European Council Donald Tusk undermined her narrative further. He offered the UK a Canada plus deal. The hardline Leave opposition took to Twitter with some triumphalism arguing that this is a “done deal” and May’s plan is finally dead in the water.
In sum, Theresa May survived but she cannot take charge of Brexit. Her position is untenable, economically and politically.
The loss of economic credibility
The economic climate in the UK has known better days.
Over the last eight years, Conservative governments have cut spending by £45bn a year. And the debt has been on a downward trajectory. That may well have been a good time to pronounce austerity over.
The British prime minister promised more spending that should please the “left behind,” that is, the electoral base of the Leave vote. She promised to spend more on the National Health Service (NHS), to freeze fuel taxes; she also promised to tax foreign investors in the UK’s real estate sector, who drive housing prices up. Finally, she promised to allow councils to borrow more for social housing programmes.
But, because of Brexit, such promises cannot be taken seriously.
In May 2018, the National Institute for Economic and Social Research downgraded its growth forecast from 1,9% to 1,4% of GDP. Hammond must find fiscal room for a £20bn hike in NHS spending by 2023. There are also demands for increased defence spending. In the meantime, the government needs to step up spending in “take back control” infrastructure of the UK’s borders.
If there is no deal, the Governor of the Bank of England Mark Carney has projected a shock of the economy that could see real estate values diving by 35%, especially in London. The banking sector has been withstanding stress tests but such an environment will be unpredictable.
And even if Brexit is orderly, there is still a hefty divorce bill to pay.
The UK is committed to paying liabilities for debt assumed by the EU during its membership. That includes pensions for EU personnel and structural fund commitments. The cost of that divorce bill was originally estimated at £39bn but, in a report published on Thursday by the European Court of Auditors, the figure was upwardly revised.
This is the wrong time to make promises of ending austerity.
Loss of political credibility
The British prime minister cannot count on her party to stand behind her in parliament.
During his speech on Tuesday, Boris Johnson made clear that he carries a significant part of the party behind him. We know that there are at least 48 MPs willing to challenge May’s leadership that will not sign a deal with the EU based on Chequers.
His narrative was now bolstered with help from Brussels. EU leaders did warn Theresa May at the EU Summit in Salzburg that they could not accept a deal that undermines the Single Market.
And irrespectively of who prevails in the undeclared war for the loyalty of the Conservative Party, Boris Johnson or Theresa May, Ireland remains an impossible challenge.
Theresa May offers a “combined” customs agreement, in which the UK will adhere “voluntarily” to an EU rulebook on goods and deviate on services. In addition, British courts will follow European Court of Justice case law. The EU seems not to prefer a neat Canada-style agreement to this unworkable half-way measure, which suggests access to the Single Market without contributions to the budgets or freedom of movement.
The Irish Prime Minister Leo Varadkar was visiting Brussels on Thursday for consultations with the President of the European Council, Donald Tusk, and the European Commissions’ chief Brexit negotiator, Michel Barnier. Apparently, these consultations did not result in a nod to Theresa May.
Dublin wants to hold the UK to its signature, moving the Customs border to the Irish Sea in the event of no deal.
In her Birmingham speech, Theresa May made clear that the UK would not accept a different Customs regime between Northern Ireland and the rest of the UK. Although the European Commission has signalled that it would be possible to have “light touch” Customs controls between Northern Ireland and the rest of the UK, this is a red line for the Democratic Unionist Party (DUP), on whose parliamentary support Theresa May depends. In sum, a clash may be inevitable.