Brexit Becomes More Unhinged as Tory Cage Match Intensifies While May Tries (Again) to Blame EU

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As the Tory party descends into open warfare, Theresa May is attempting to pull off a bizarre face saving exercise. In a speech scheduled for 3:30 PM today, the Prime Minister will attempt to shift blame in advance of the widely anticipated refusal of the EU to approve having Brexit negotiations start to address trade-related matters. In Brexit-speak, that phase is referred to as “the future relationship”.

Why is it so important to May to try to get control of media spin? Aside from the fact that she’s been unable to tamp down infighting (more on that shortly), this week Brexit negotiations resume, with the EU to decide formally whether enough progress has been made for them to move on the “future relationship”. Recall that this was an ambitious timetable given the complexity of the issues already at hand, assuming something resembling actual negotiations were actually happening. Press reports suggest that the only topic on which meaningful headway has been made is on the legal transition issues, such as the role ECJ decisions will play post Brexit.

May’s speechwriters have grabbed onto a fetching cliche, which many of the press barons have dutifully picked up: that the ball is (supposedly) in the EU’s court.

The reality, as anyone who has dimly paid attention knows, is that the Tories have lost the ball and are too busy squabbling even to go looking for it.

The intensified bickering, and the continued lack of agreement as to what sort of Brexit even the Tories want, gives vivid confirmation to a major EU complaint: they have no one to negotiate with.

Worse, May’s team is flogging a new canard: that the Brits are making realistic plans for Brexit. This is laughable, but even worse, the Government may actually believe this new garbage barge they are trying to foist on the soon-to-be-suffering public (save the top rich and technocrats, who will find a way to save their hides and maybe even prosper). :

In the meantime, Dominic Raab, a minister at the Department of Justice, claimed that the UK was making more extensive plans than previously understood to prepare for the possibility it might leave the EU in March 2019 without agreement on a future relationship.

Such an outcome could require the country to set up customs posts, air traffic control systems and other new, independent institutions far more quickly than if a deal is reached for an orderly transition.

A full year ago, we caught the significance of how the UK looked to be in trouble regarding an overdue, major upgrade of its Customs system. It would be daunting to get the project done in 2019 even in a no-Brexit scenario, and getting the needed coding done for vastly increased border requirements is an impossible task. Nothing has changed since then to ameliorate the situation. Indeed, a full nine months after we flagged the issue, the National Audit Office was making the same warnings. From our October 2016 post:

The UK’s present system for handling non-EU-related trade is almost 25 years old and was set for replacement. The new system, called CDS for Customs Declaration System, to be ready by 2018 and to have the capacity to handle 100 million transactions,. At double the current level of 50 million, that would have seemed to be ample headroom.

Reading between the lines of the Financial Time story, there seems to be some doubt as to whether the original spec could have been pulled off in time. But now with Brexit, the project suddenly has a major spec change: it has to handle 350 million transactions.

And what the story does not mention, but seems likely to be the case, is that there are tons of other spec changes that have yet to be identified and documented related to EU and UK tariffs on specific goods. And if the system tracks things like port of embarkation and disembarkation, more data fields need to be added for all the EU ports and air cargo locations. And of course, the Euro currency data field needs to go in too.

In addition, since the negotiations will be in progress, the levels, and potentially even some of the categories are likely to be in flux. Given that olives are a very important export good for the EU, how will olives be treated versus olive oil versus products made from olives, like olive paste? Will green olives be treated differently than ripe ones? How all this sorts out affects the coding.

Recall that Lambert broke the story of the Obamacare exchange systems disaster by noticing that spec changes were being made six months prior to launch (the reality turned out to be even worse, changes were being made weeks before the start date). He recognized how disastrous that was for a systems rollout. And these were modifications to what was presumably an otherwise largely settled development plan. If my surmise about how many things will be up for grabs in a Brexit negotiation (start with will they try to negotiate a WTO and an EU deal in parallel, since there’s no assurance the UK will get timely approval from either set of counterparties), it’s hard to see how any meaningful coding on the EU system can get rolling.

And this is only one of a myriad of hard Brexit tasks the UK needs to be able to manage, and looks utterly incapable of pulling off.1

At least there was some good gallows humor in the Financial Times’ comment section, such as:

jfkfc

May to Europe: “better start negotiating, or we’ll ship you more jobs.”

Dress Sense

In this movie the EU is the cop sent to talk the U.K. jumper down from the roof….

While British readers can fill in more details, the short version of the leadership catfight is that after May got shellacked in her misguided snap election, Treasury Secretary Phillip Hammond, who is a proponent of a soft Brexit, was on his way to steering the direction of the Brexit talks.

Even though the snap election results were widely seen as a repudiation of the hard Brexit camp, that wing of the Tories has refused to cede ground. Boris Johnson continues to issue leadership challenges to May and she is too damaged to put them completely to rest. And now the hard Brexiters are having a go at Hammond. :

Philip Hammond’s Treasury has come under fire from a leading Conservative leave campaigner, who said that the gloomy outlook and “Brexit in name only” approach of the department risked scuppering the UK’s EU exit.

Bernard Jenkin’s highly critical intervention came while other Tory MPs urged Theresa May to sack the chancellor, as those on the right of the party flexed their muscles following days of criticism of Boris Johnson and speculation about an autumn cabinet reshuffle.

Even wilder, as May has allegedly quietly threatening to depose Boris Johnson as Foreign Secretary, Johnson is saying he won’t go. The run at Hammond, even though the Guardian later effectively reports in the story quoted above, that the attack on Hammond is more backbencher kvetching than a serious threat, is clearly timed to make Johnson’s threat look serious. First from the Independent, :

The Foreign Secretary will apparently just refuse any attempts by the Prime Minister to demote him, who indicated that he could be moved into another Cabinet role in a reshuffle.

Allies of Mr Johnson have warned that doing so would undermine Brexit and destabilise the Government…

Ms May has been adamant that she will not “hide from a challenge” when dealing with the former Mayor of London, according to the Sunday Times.

The remarks led to one Tory minister saying there was a “stench of death” coming from Downing Street and that Ms May lacks the authority to demote Mr Johnson.

While it is not unreasonable to point out that Cabinet changes would be yet another political fracas and would divert attention from Brexit, I gasped out loud when May appointed Johnson as Foreign Secretary. That in and of itself was clearly a poke in the EU’s eye. It is hard to see how the UK can negotiate, as opposed to posture, with Johnson in his current post.

For what it is worth, New Statesman argues that May can indeed demote or oust Johnson, :

“A change of nuisance,” David Lloyd George once quipped, “is as good as a vacation”. Theresa May might be inclined to agree. The collapse of Grant Shapps’ plot to remove her has strengthened her hand as she contemplates a reshuffle….

The thing about sacking Johnson is that it only makes sense if the PM plans to use it to inject a note of sense into the Brexit talks, perhaps by reminding the frothier members of her parliamentary party that removing oneself from a four-decade membership of a trade bloc is difficult regardless of whether or not Treasury mandarins break into a rendition of “Everything is Awesome” every morning at 8am sharp. Or if, instead of pledging money to prepare for “no deal”, concede that “no deal” is a fantasy that can’t be achieved.

That, as the Times reports, she is instead planning to tell the EU27 that the ball is in their court shows that regardless of whom she sacks, come the crunch, the PM will always side with the loudest voices in her party – that is to say, she will always opt for a Brexit as hard and as damaging as possible.

And while May has looked like a dead woman walking since her snap election backfire, it’s hard to see the party lining up between Johnson or any of the other leadership contenders. So as much as I thought she’d be gone quickly, her coalition with the DUP, as tenuous a hold on power as it represents, has enabled her to stay in place, in large measure due to the lack of any viable successor. At this rate, predictions that she’ll be gone by Christmas may prove to be premature.

As Richard Smith put it, the issue isn’t that May is a dead woman walking, it is that the Tories are a dead party walking. Ironically, May is the least crippled leadership candidate they have. So she may hang on until the coalition with the DUP cracks up.

The other possible force that may change the game board is businesses showing they are serious about moving operations. However, it’s surprising that they haven’t already applied more pressure to the leaders of both major parties, as well as doing a better job of getting press coverage. So it may not be until first or second quarter 2018, when more and more production shifts and job relocation are announced, that enough reality penetrates the Brexit bubble to shift the political dynamic. That is an awfully long way away.

Having said all of this, :

Even as government infighting risks disconcerting EU negotiators, there are signs May might be able to deliver some progress: EU diplomats say leaders may be forced to give ground to the U.K. before the end of the year to prevent splits opening up between the other 27 governments.

Unfortunately for the UK, this may mean less than it appears to. The UK has very few allies in the EU, with the biggest begin Poland. EU rules require unanimous approval of a Brexit.

An immediate jogjam is over the refusal of the UK to discuss the so-called Brexit tab, which is actually a settlement of outstanding obligations. The EU has floated its highest estimates, presumably to condition the UK to see something much lower as a deal. And the EU has already come up with a framework, which presumably is also open for discussion, as to the firmness of the UK’s various treaty obligations. So the negotiations would presumably start with the framework and then the items with the framework, which would largely determine the total figure. Note that quite a few are expected to be conditional on future events. Then the two sides would wrangle over how much over time the UK could stretch the non-conditional amounts due.

Recall that as of the end of last week, the Financial Times reported, , that Germany, with some unnamed countries backing it, as well as France, were not budging on the UK settling its departure bill before talking trade.

As we pointed out, when Germany and France agree on anything, the rest of the EU falls into line. Moreover, even with Merkel damaged at the polls, German industry is backing her tough stand on Brexit. So Merkel has no domestic incentives to give way. Smaller countries could be muscled into line, but not Germany. Admittedly, Article 50 does not require unanimity but a “qualified majority”. But a few countries objecting isn’t enough to impact the negotiations.

So even if there is some grumbling in the EU ranks, I’d need more evidence than this outlier Bloomberg report, which contradicts the results coming out of a major policy debate, to think that the EU will do more than make conciliatory gestures that make only a marginal difference in substance, like this crumb described by the pink paper:

As a gesture to recognise progress, the EU is considering starting an internal “scoping” exercise on a transition deal, where the EU27 would prepare for talks with the UK at a later stage. While an advance of sorts, this falls well short of London’s hopes that talks would begin after the summit in October.

Another major stumbling block is what to do over the Irish border, where there does not appear to be any clever solution. So again, it’s hard to see meaningful concessions coming from the EU in the absence of any UK progress by as soon as year end.

I really wish there was a way to envision less than disastrous scenarios for the UK. But I’m at a loss to come up with any, and the threadbare PR coming from Government leaders only confirms how bad bad might wind up being.

___

1 And I will still claim that tariffs are the easy bit. The hard bit (and your customs IT system needs to deal with that, and a lot of complexity comes from that) is the NTBs. I keep saying Mutual Recognition Agreements (MRA) over and over – but it really is important, and even a number of Brexiters (the ones not blinded by power, history, or whatever) even reconigsed it and were saying as easly as Feb this year WTO is not an option (even assuming can opener – i.e. full and proper WTO membership on day one).

The country of origin rules are massively complex, and what Yves describe (tarrifs based on that) is one potential. What happens is that the tarifs are based on the “last substantial value add”. So if you import chinese stuff, and just package it and sell to EU, the tariffs will be the same as if it come straight from China.

On the other hand, if you incorporate a part into a whole that is substantially more valuable (and how do you decided that is part of the fun) than the other parts, the tariffs are now based on the country where that last ad-valorem happened.

There are other rules, but I’m not going to turn this into a specialist post (especially since I haven’t read the WTO rules in full yet) – but you get the idea.

Now though, it get even more complicated. On the top of being able to determine whether or not a tariffs applies, any goods imported must meet the standards of the importing country. And EU has lots of them (even if it DOES NOT have a standard for how curved bananas shoud be, as the british press told us).

This can be fundamentally met only in two ways. Either via MRA (where you recongise each others standards setting bodies, standards, rules and regulations etc.. Remember – this is not just a snapshot in time, but also takes into account that the bodies/standards etc. evolve with time, so extra layer of complexity there).

Or, that you take a sample from each shippment, and test it. Of course, the owner of the samples (importer) pays the cost of the testing, and it also pays the cost of storing the freight while it’s being tested. So it costs the importer time and money.

TBH, I can’t see how could you possibly trade something complex like cars or plane parts (where safety is involved) w/o an MRA.

And your customs IT system has to support all of that!

Oh, but you say “well, let’s set tariffs to zero for everything!”. Well, that may sort out your customs IT problems – around the tariffs. Unless you want to throw out of the window all YOUR standards, that means you still need to establish the compliance. And I can assure you that if you do throw out all your standards, getting an MRA with somoene else is going to be a nightmare.

So your exporters rather get going on implementing the MRA-less trading processes right now, and hope to get there in time. A friend of mine runs a small caliber ammo manufacturer (very highly policed stuff), and based on what I heard, I doubt he would be able to get their processes and systems in place in two years, and that’s knowing what needs to be done and how.

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50 comments

  1. vlade

    The sad thing is that the UK public (majority of it) will eat it up – as in will take as given that it’s EU’s fault, and that the UK politicians are doing the best they can. That is what the polls show right now (IIRC 60% of “UK gov’t does a good job negotiating with the EU” or something like that).

    It seems to me that the UK public is so conditioned to blame everything on the EU, that if we were 100 years ago, they would be likely ramping up for a war to “show those continentals”.

    1. windsock

      We are a divided country. There are some Tories who believe they lost ground in the General Election because they were not pushing enough for a hard Brexit. Bonkers.

      They seem to have forgotten the majority they had in the referendum was soooooo slim. But that is typical of the Tories – Cameron was so sure he would win the referendum that in his arrogance, he didn’t stipulate the result had to represent a percentage of the electorate, or any majority differential.

      Those who wish to remain in the EU are constantly referred to as “Remoaners”, despite the fact that in a supposed democracy, we are allowed to state our opinions. (Ask UKIP.) Not all of us blame the EU for everything – we were consenting partners to everything that happened and we nabbed plenty of opt-outs.

      If you want to see how completely crazy some Brexiteers are, read below the line comments at The Spectator. EVERYTHING they say comes down to “Brexit NOW!” or “IMMIGRATION!”.

      And finally, a stupid little story that kind of encapsulates this poor country:

      1. Colonel Smithers

        Thank you, Windsock.

        I heard from a Tory activist and a journalist that, the week-end before the vote, Cameron thought remain would win at least two thirds of the vote and turned down the offers of Juncker and Schaeuble to pipe up in his favour, if not jet in and lay down the law to British voters. Cameron was sensible to turn down the offer of help.

        1. windsock

          Thank you Colonel.

          But hahahahahahaha! “…the offers of Juncker and Schaeuble to pipe up in his favour,” It’s almost as if the EU WANTED us to vote out.

          Sometimes I think this is all some charade, a game being played between UK and EU elites and they’re all in it together, while laughing at us, not noticing what they are stashing in their handbags/briefcases.

      2. Maff

        Windsock. I take your point about the margin being thin and, to some extent your point about being branded a remoaner, but how much consideration do you think leavers opinions would have been given if the result had been 48:52 the other way? Absolutely none whatsoever! Of course that was the point of the referendum – a remain vote could have been used to say, “shut the *** up, forever” to leave voters. Unfortunately for you, the vote went the other way…

        1. paul

          That would have been the perfect outcome for the interested parties, no great dislocation and a lightning rod rod to distract from their homegrown depravities.
          De pfell Johnson,for instance, would have emerged as defeated, yet a man of principle, with crazy but loyal base to achieve premiership.
          The beauty of the EU was that it would do all the hard work and leave these deadbeats to pursue their own petty malice in their provinces.

        2. vlade

          Do you really think Farage & co would just shut up and take their tent elsewhere if there was any result as close as 48/52? See Scotland for a good example, where a “generation” took as long as it took Salmond to step down after the referendum.

          Moreover, your implication about it being symetrical is entirely false. One vote perserves status quo – which could be challenged again and again and again (as has been shown number of times). The other imposes change, which is hard to change once executed, especially with pressure claiming that the decision was made and can’t me unmade.

          Given the above (status qou can be challenged with relative ease, change can’t be unmade), the case for change should have had much harder bar than status quo (and that holds not just for this, but say in Ireland should have held for the treaty referendums too, just to be clear).

          1. paul

            That is exactly the point I make.
            Farage was a scarecrow, made a living out of EU and BBC handouts. Easy for the journalists, easy for the players.
            It’s all getting a bit messed up, but they all made their bones and they will be paid.
            Our flesh will be on the fire*,keeping them warm.

            *this relates to the rape of the commons as outlined in the

            The ignorance and hatred in that document is something to appreciate.

            1. Clive

              Yes, I agree, the “can’t we just kiss and make up?” option wouldn’t solve a single thing. The only way to settle the matter, once and for all, was to go through Brexit and see how it pans out. It wouldn’t be as bad as it is if we had a vaguely capable and competent government. But we don’t.

              Do I like saying this? No. Do I wish there were better options or compromises available? Yes. Will me wanting better or different fact-sets magically bring them into existence? It’s just like me, or any of us, stomping our feet and haranguing the other side and saying “I want a pony” / “I want an Oompah Loompa” (delete as applicable) (and we want one now…)

              1. H. Alexander Ivey

                Dang it Clive. I have been saying all along that the UK’s only hope was to say, ala Gilda Radner’s Roseanne Roseannadanna character: “Never mind.”. But now I must admit you are right. None of the UK elites/leaders want to /will be able to do that. It must be seen through. Good luck and good night.

  2. paul

    I’m sure the CDS contractors will throw in a complimentary parker pen (in luxurious plastic gift case) in exchange for the blank cheque they will demand.
    The NAO may as well close down for the next decade at this rate.
    It’s an ill wind that blows no good.

    1. Anonymous2

      It would be interesting to know who the diplomats are who are the source for the Bloomberg story. As Denmark and the Netherlands are mentioned elsewhere in the text there must be some suspicion it is them. Having cracks in the EU 27 will have limited impact where unanimity is required. Where QMV applies the countries who really matter are those with the most votes. That, I think, means Germany, France, Italy and Spain. I can’t see any of these weakening. For the first two I think the integrity of the European project is at stake. Italy exports relatively little to the UK and Spain will be desperate to give the UK a bad time to discourage Catalan separatists. If these 4 stick together then the other EU states will stay in line IMO though some may grumble on the sidelines.

      1. PlutoniumKun

        The Guardian mentions that Denmark has in support of a better deal for the UK. It would be unsurprising if it is Denmark and the Netherlands as they have both tended to be allied with the UK within the EU. The problem with Denmark is that it has always been one of the awkward squad in the EU and so like the UK has a weak position because of this. I doubt if Merkel would be inclinded to pay the slightest attention to anything the Danes say.

        If unanimity does break up its as likely to damage the UK as help it. There is a lot of resentment in eastern European countries over the treatment of their citizens as pawns by Brexiteers, I could well see one or more vetoing anything but a very hard line by the EU. They have much less to lose through trade and potentially a lot to gain, not least from a shift of auto manufacturing out of the UK. I’m pretty sure you are right that the internal dynamic of a weakening concensus in the EU pushes for a harder, not a softer line on the UK.

        1. Colonel Smithers

          Thank you, PK.

          May be Stavros was asked to have a word with his cousin Margrethe. He could have a word with his other cousin, Sofia, too. All are Schleswig-Holstein-Sonderburg-Gluecksburg. Glueck is German for luck. Stavros’ adopted homeland certainly needs it.

        2. paul

          It reminds me of the Mayweather/McGregor bout and it’s not too hard to pick which one is which.
          At least they both understood the arrangement, the tories do not.

        3. Frenchguy

          Auto manufacturing but also finance back-office functions (see the link below for exemple) and, why not, a bit of tourist spending (spending the weekend in London will get much less attractive if you have to get a visa even with the pound in the gutter, Prague on the other hand…).

          I haven’t any real insight into this but you’re probably right, eastern Europeans countries are not going to play nice with the UK.

          1. vlade

            Especially since Prague becomes much more interesting to family turists once all the British stag dos and similar evaporate together with the pound

        4. Anonymous2

          Having sat in the conference chambers in Brussels I can confirm that, if a country like Denmark pipes up on its own, it gets ignored by everyone, not just the Germans. Large countries get a hearing if they are on their own, but even they need allies if they are to be considered seriously. A lot of small countries would have to form a gang to make an impression. If you do not have a prospect of forming a blocking minority you are going to have to come into line anyway so anything said is probably for domestic consumption (‘I said what you wanted me to say but we got nowhere’).

          For those unfamiliar with the system, if you think it is unfair that large countries dominate the small, the voting power represents the population of the individual member states. So Germany, having the largest population, gets the most votes. It is really pretty democratic when you look at it that way.

          1. Sid Finster

            Poland has a sizable population, but noone in the EU cares what Poland has to say.

            It’s not population, it’s finances that matter in Brussels.

            1. vlade

              Poland ranks behind Germany, France, Italy and Spain in terms of population. Neither of these is its natural ally. In fact, Poland does not have a natural ally in the EU (apart from sort of love-hate relationship with Germans). Visegrad was sort of a club, but it’s not really much..

        5. rusti

          Thanks for this, PK. I was wondering about this in the context of Yves’ comment:

          Moreover, even with Merkel damaged at the polls, German industry is backing her tough stand on Brexit. So Merkel has no domestic incentives to give way.

          How many other countries might side with Denmark and The Netherlands in this regard? I can imagine that here in Sweden there are a number of companies (my employer included) who would hate to have a chaotic Brexit put a dent in quarterly results and supply chains. And how firm or tenuous is Merkel’s backing from German industry? If they can be considered a unified voice…

          1. PlutoniumKun

            I think the huge problem for the UK is that the dynamic of this sort of negotiation is that there are many reasons to say ‘no’, but fewer reasons to say ‘yes’. Denmark and the Netherlands are very keen on a gentler exit, but thats because they have a lot of export trade to the UK (food and flowers in particular). Its much less so with other countries, and many see significant potential advantages in a hard line, whether thats in getting a chunk of British industry, or in reducing their contribution to EU finances (the latter being a good reason why there is no chance of the UK getting a good deal on its parting contribution).

            If a compromise deal, featuring some sort of transition arrangements and favourable consideration for a customs/travel union is presented to the member states then there are bound to be features of the deal that are disliked by some countries for all sorts of reasons. Getting a deal agreed would inevitably involve a lot of arm-twisting. Countries like Denmark and the Netherlands just don’t have the political muscle for this.

  3. Mark

    the EU is entirely responsible for the structural log jam in the negotiations due to their efforts to use the process to leverage their rather crude financial shakedown

    as DeAnne Julius says
    “…some of the (preconditions) are win-lose, not win-win, and that’s not how you start a successful negotiation, you don’t start with the win-lose issues….”

    Secondly because the Irish border issue can’t be resolved before the trade arrangements are known

    1. Yves Smith Post author

      I suggest you bone up on the underlying treaties before making fact-challenged assertions.

      We also require readers to have read posts before commenting. You clearly have not. That is a violation of our written Policies. I am approving your comment solely for the purpose of making an object lesson of you. If you again fail to read a post before commenting, I will not release your comment. This is not a chat board.

      You are operating under the wrong premises here.

      First, in case you missed it, the UK decided all on its own to trigger Brexit by invoking Article 50. There is no requirement in Article 50 as to how to negotiate. As you ought to know, Brexit happens on a date certain if no agreement is reached before the 24 month drop dead date. Since the EU is under no obligation regarding process, it is similarly under no obligation to be nice about it.

      Second, as we pointed out, the UK appointed Boris Johnson as Foreign Minister even before it triggered Article 50. That was tantamount to giving the EU an upraised middle finger and saying they had no intention of acting in good faith. The EU got the memo. And now you whinge at the consequences of the UK being so dumb as further alienate the EU (after years of high-handed behavior in Brussels) and not realize the EU held not just one but a bunch of trump cards?

      Third, the EU leaders and its negotiating team have been completely consistent about their positions and have reiterated them repeatedly. The UK has been all over the map. That is considered to be bad faith dealing, which is fatal to negotiations, yet you give the UK a free pass for that.

      Fourth, despite being under no obligation regarding the process, the EU has tried to go about it in a very serious and professional manner, with extensive preparation and publishing position papers in advance. The UK has been disorganized and even May has embarrassed herself by showing how ignorant she is of basic issues.

      Fifth, the EU has made some free concessions to the UK, most importantly being willing to entertain general discussions about the “future relationship”. Had the UK bothered to look at its own treaty with the EU, it should have noticed that it is prohibited from negotiating trade deals on its own until it has left the EU.

      Finally, I challenge you to identify a win-win issue. This is a divorce. Win-win is not a feature of divorce. They are arguments about how to divvy things up. Even couples I know who wanted to divorce amicably found they could not do so due to the inherently adversarial nature of the process (although they were able to patch things up a bit after the fact).

      1. Synoia

        Yes, May, and her Government, should have made detailed plans before triggering Article 50.

        Doubled any IT estimate, because all IT projects are research projects, and are not amenable to a fixed schedule. IT projects are like buildings with a variable number of floors, difficult to get the foundations correct.

        When I worked for a large blue computer company, initial line item development estimates were multiplied by 4, detailed designs by 2, and line items never cam in under estimate.

        Best book I ever read on IT estimate was “Software Engineering Economics,” much more useful than “The mythical Man Month.”

        Brexit: Another case of “Ready, Fire. Aim!”

      2. gallam

        I think that the problems that are arising out of this process are caused by the fact that the people negotiating (by and large career politicians) are not the same group as the people wishing to trade (private sector individuals in the UK and EU). There is a principal-agent problem.

        The politicians are all, without exception, trying to make themselves look good. They are acting like divorce lawyers in a divorce, not like grandparents discussing what to do with the children after the parents have both died in a car crash. Given this, and given that the process would be complex in the event of full cooperation, it would seem that no agreement is the most likely outcome.

        This could well entail upwards of 5 million people having to move out of the UK and Eire deciding to leave the EU as well. In a no-deal situation the Northern Ireland border becomes a huge problem for the EU if it wants to keep the CAP, because the smuggling opportunities are endless. The EU budget will have to be fundamentally restructured, given that the UK’s net contribution is more or less equal to all the other net contributors combined excluding France and Germany. That will entail asking Italy and Spain for more Euros, and why the Italians in particular would say yes to that I have no idea.

        No deal sounds like a hopeless outcome and at the moment appears inevitable. However, it could be that the following analysis, taken from a UK Newspaper’s comments section, is more accurate:

        “What is very telling in Yanis Varoufakis, the former Member of the Hellenic Parliament’s book, is that there really is only one person who has to be satisfied for any EU requests above all others, Chancellor Angela Merkel. In fact, the book demonstrates how everyone else in the EU including EU ministers either quake in their boots at offending Chancellor Merkel or make unfulfilled promises without checking with her. Clearly Chancellor Merkel is the gatekeeper past whom everyone must pass if favours are needed from the EU.

        Ultimately, Chancellor Merkel will decide those terms of the Brexit acceptable to her and the EU. Until she is ready to finalise a deal, all other politicians and commentators will posture, threaten, bicker and make ultimatums all of which should be ignored. The temptation is for everyone to pitch in as if his or her opinion or position matters. With all due respect to the various protagonists and antagonists, all of the posturing really is a waste of time. The real challenge facing Chancellor Merkel is how to construct an exit deal that does not send a signal to other EU Member States that leaving the EU is very easy. That could lead to others deciding to exit especially if times are or will become difficult for a Member State and the EU continues to demonstrate its lack of flexibility.

        However, the most obvious reason for EU to be more accommodating is because of the trade potential with the UK, not to mention that there is a very educated pool of talent in the UK. Moreover, the City of London with its financial and regulatory infrastructure is not easy to replicate in spite of the drumbeats from some European countries to do so. It has taken decades for the City of London to the reach the global status as a financial centre to rival New York and Tokyo. It would take a vast amount of money and decades for any European City to replicate London. Are these advantages in the UK enough to make Chancellor Merkel think twice and be more flexible than she otherwise would be? It is very difficult to predict the outcome.”

        1. Yves Smith Post author

          I don’t agree with this, at least from the EU side. They have a deep bench of bureaucrats who have negotiated trade deals for years. And the EU most assuredly wants to take a pound of flesh out of the UK in this process if and when it gets to trade. The complicated thing on the EU side, as was pointed out higher in this thread re Denmark and the Netherlands, is that different countries have different objectives re trade, so they do have some issues on their side as to determining where to hang tough and where to give ground on trade.

          But the UK has been hollowing out its Foreign Office for years. As we described very early on, it’s been hiring consultants who at best know only certain industries and don’t know trade deals at all. So even worse than having a team of bureaucrats who might not have their interests aligned, they have expensive mercenaries who lack a lot of the relevant skills. You can see that reflected in how bad many of the UK position papers have been.

          And the City of London is people in a location. There is nothing magic about it. The big UK banks, which used to be called “clearers have operations all over the world. The Continental banks and US banks would love to eat the UK banks’ lunch if they are flat-footed about moving. Banks set up major dealing rooms in the stone ages of the 1980s, building up from token outposts, and had them staffed in a year or two despite the difficulty of hiring Japanese staff. It’s not hard to move people and operations. It’s just a hassle.

          1. gallam

            Thanks for the reply – just as an aside it’s as well to remember that a pound of flesh was a metaphor for death in 16th Century Venice.

            There certainly is a faction in the EU focused on the Commission in Brussels that is seeking a pound of flesh from the UK. They are causing about half of the problems in the negotiations. The other half of the trouble is caused by the slightly weird and rather elderly Brexit wing of the Conservative Party who are constantly hoping for their ship to come in. It would be greatly to the benefit of the people of Europe if both of these factions were to fall into the sea.

      3. Robert Mackirdy

        With reference to your first point the following is the second sentence in paragraph 2 of Article 50 of the Treaty on European Union :

        “In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union.”

        [ Source Wikipedia : Article 50 of the Treaty on European Union ]

        1. Yves Smith Post author

          That in fact is not an accurate quote. Please go read the text, which you can find at an official site. The parts that Wikipedia omitted are important to understanding that the EU is not being unreasonable.

          This is the full text of the second section:

          A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union. That agreement shall be negotiated in accordance with Article 218 (3) of the Treaty on the Functioning of the European Union. It shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament.

          First, note the importance of the fact that it is the European Council which will set the guidelines. Their ball, their rules, as provided in Article 50. This is the text of the guidelines:

          The guidelines specifically say that the first phase shall address (and these are the only items listed):

          provide as much clarity and legal certainty as possible to citizens, businesses, stakeholders and international partners on the immediate effects of the United Kingdom’s withdrawal from the Union;

          settle the disentanglement of the United Kingdom from the Union and from all the rights and obligations the United Kingdom derives from commitments undertaken as Member State.

          The second item is the exit tab. The first was construed to cover the rights of EU citizens in the UK and UK citizens in the EU, and any transition/movement issues. I’m not sure how the Irish border got added to the list as a first phase issue, but that’s now deemed to be part of it.

          I have yet to see any Brexit backer refer to the guidelines and use that to argue certain issues should be in or out of the first phase.

          This Politico article confirms what we have been saying, that the EU has made a big concession in being willing to talk in a general way about a future relationship. It indicates that any preliminary understandings will not be included in an exit deal. By contrast, the “try to get to an exit deal” is stipulated in Article 50. :

          While Article 50 governs a country’s departure from the bloc, Article 218 describes how the EU makes agreements with “third countries or international organizations.” So while Article 50 will get the U.K. out the door — the indisputably crucial first step — experts on EU law say an agreement on the future relationship between the U.K. and the EU can only be brokered under Article 218, once Britain returns to third country status.

          In declaring that its chief Brexit negotiator, Michel Barnier, will not have a mandate to negotiate a trade deal or other future agreement, Brussels is clearly seeking some tactical advantage, trying to force resolution of divorce issues like the U.K.’s post-Brexit financial obligations and the rights of citizens. Only if Barnier brings the EU27 a satisfactory result on that front, officials say, will leaders consider broadening his mandate to include a future trade deal or other partnership agreement.

          But it’s not merely a strategic ploy. The EU is also declaring what its lawyers understand to be legal fact. Any withdrawal deal with the U.K. that violates the terms of the EU treaties would be subject to invalidation by the European Court of Justice.

          1. gallam

            The problem with this analysis, whilst it may be accurate, is that it precludes any sort of orderly withdrawal from the EU. Whilst it is tempting to say that the rules are the rules and it is the EU’s ball etc, there are strategic issues in play and an orderly exit is clearly desirable for the EU, as well as the UK.

            From your link to the politico article

            note this comment:

            “On this basis no member state can ever use the withdrawal clause Article 50 to negotiate an orderly withdrawal from the EU. According to paragraph 2 of that article it will only get you out the door in an orderly fashion through an agreement “negotiated in accordance with Article 218(3) of the Treaty on the Functioning of the European Union”, but now it is being claimed that Article 218 can only be invoked once the member state has already withdrawn and become a “third country”, or the ECJ will want to know the reason why. So it’s not just an agreement on future trade arrangements which can’t be negotiated, it’s any “agreement with that State” of any description whatsoever, and that must include one “setting out the arrangements for its withdrawal”, with for example those all-important provisions on the huge sum it will stump up before it goes.”

  4. Meher Baba

    to quote Malcolm Tucker (The Thick Of It – essential viewing ) while his government was falling apart ‘ its like the breakup of the Beatles- during the fall of the roman empire”

    i am wondering if Dublin is ‘ not unhappy’ about this mess and quietly musing upon the wheel of fortune turning a la history.
    having lived in Dublin I can say there is literally no accommodation available – dont know if that includes office space but possibly. Then again there heaps of vacant townhouses landlords are greedily keeping vacant.
    Irish government possibly quietly wondering if the Celtic Tiger will back to stay in a few years. Watch irish construction stocks to rise’

    1. PlutoniumKun

      The Irish construction industry is stretched to its limits right now, mostly due to the destruction of production capacity caused by austerity. The Dublin region is in full scale boom mode right now. There is a reasonable supply of office space available for relocations from the UK, but housing is a major choke-point, and can’t be resolved in the short to medium term. There is also no shortage of serviced and ready-to-go industrial sites in the smaller cities and towns.

      But there are few upsides for Ireland. The UK is by far the most important single market for Irish products and the Irish agricultural supply chain is intimately interlinked with the UK via Northern Ireland. The costs of a hard border – which seems inevitable – will be enormous, and a dropping sterling will hit Irish exporters to the UK hard. Even attracting 10,000 or more high paying jobs would only partially compensate for the hit.

      1. Colonel Smithers

        Thank you, PK.

        I hope Messrs Magnier et al keep these construction industry spivs well away from horse racing country.

  5. Colonel Smithers

    Thank you, Yves.

    I have heard from a former colleague, working at the UK (Buckinghamshire) HQ of a German car manufacturer, and colleagues in corporate banking coverage and trade finance (City) that UK based manufacturers are beginning to roll off EEA supply chains.

    Last Friday, a report was issued about the latest fall in productivity. Failure to invest in machinery and skills were partly blamed, but the BBC did not ask the chief economists of a manufacturing trade body and German bank why that was so. Brexit seemed the obvious elephant in the room, although poor productivity goes back decades.

    The Bank of England has been warning about both, the latter for years, but their warnings are not being picked up. In early summer, the governor and chief economist toured the provinces, often meeting the manufacturers of intermediate goods, and were made aware of the problems, so they have alerted the politicians, but to no avail.

    Readers may be interested in how the long road to Brexit was formed, , and what is making it worse, .

    With regard to my (EU27) employer, which employs 6000 in London and 3000 in Birmingham, the largest private sector employer in the UK’s second city, contracts are being novated from London Branch to the head office or EU27 branches, membership of the CREST settlement system is moving from the branch to head office, much of what relies on passporting rights to the EU is either moving to the EU27 or being prepared for sale, and most of what is booked on the London Branch balance sheet will be booked at head office or a big branch like Amsterdam.

    The process feels like salami slicing at the moment, but the process will accelerate over 2018, as Vlade wrote about on Saturday. One wonders if any of the headline grabbing moves out, on the assumption that the media either wakes up or grows a spine, will be in time for the local elections in early May 2018, which could force a rethink. I am not holding my breath and, as such, preparing my exit.

    1. paul

      you bring to mind the end of just about every Balzac novel, there only remains those above the grass.

      The rest mulch the way things are

    2. cnchal

      From your first link.

      The British class structure, reinforced by the educational establishment, channelled the brightest people into the professions and the City rather than engineering and industrial management. Once inside the companies, the brightest were unlikely to be those who got their hands dirty.

      Production and operations were in large part run by people who started on the shop floor and received almost no training when promoted to management even though they were in charge of the one area on which the company’s life depended

      The class divide meant that those who understood the job had no voice in strategy and those who decided strategy had no understanding of the job.

      Then, into this unholy mix, was injected an unwarranted respect for accountants.

      Because operations were “below the salt” head offices instead ran their subsidiaries purely on the basis of the numbers, without taking the trouble actually to understand the detail of the businesses or what opportunities each faced.

      There was no incentive to go for top-line growth. Instead success was measured by financial ratios like return on assets. 

      The accountant basked in the picture of short-term prosperity, and failed to notice that the plant was clapped out, as it would be when everything mitigated against the heavy investment and long-term research and development which was needed to ensure long-term competitiveness. 
      Similarly, there was little investment in skills and training to improve the quality of the workforce because it did not deliver an easily measured return. Britain’s industrial decline correlates strongly with the increase in the influence of accountants.

      Modern management is skewed towards wealth extraction from the rubes that get their hands dirty. Stupid labor get’s taken for a ride every time.

    3. purplepencils

      The novation point is intriguing — by definition it means contractual counterparts are willing to have the contracts novated. Out of curiosity and only if you’re able, are they based in the UK, the EU27 or outside the EU? Or… all three?

      1. Colonel Smithers

        Thank you.

        In the asset servicing business, counterparties come from around the world, not just the UK and EU27. In the global markets and corporate finance businesses, counterparties tend to be UK or the UK arms of multi-nationals. I have not heard of any unwillingness to novate contracts. We have / had more resistance for the recovery and resolution / bail in provisions for creditors.

        I have just picked up your comment, hence the delay in reply.

  6. Dan

    It looks like a zero-sum game – the UK is losing and Germany, France and the whole EU will win! Isn’t that a great good news? Who cares about the UK? Germany and France rule! “when Germany and France agree on anything, the rest of the EU falls into line” – the UK, in its stupidity, didn’t want to fall in line!
    Still looking for a well documented article about the Brexit benefits for the EU! At least as well-documented as the one above!

    1. Yves Smith Post author

      Whinging does not change what is going on.

      Did you miss that the EU didn’t decide to go down this path? I’ve repeatedly said the EU from the start accepted that it would take an economic hit. They are focused on how they can reduce the damage of a bad situation, and that included taking as much as they can out of the UK’s hide.

      It’s the UK that is harboring the delusion that it can come out a winner.

  7. Jabawocky

    A good summary. The Tories still seem to believe they will be able to negotiate frictionless trade outside of the customs union. This is nothing more than collective insanity for all the reasons you raise.

    Furthermore, this week a letter to the EU by various countries including the US has demanded a voice in how quotas from existing EU trade deals are carved up between the U.K. and EU. It should soon dawn on the government that exiting the EU threatens not only trade with the EU itself, but with all countries with which the EU has trade deals. There is no time to renegotiate these deals.

    Here is a good example from the UK agri press. With no agreed definition of organic between the US and the UK, exporting organic cheese to the US could cease. Investment in agricultural timescales is already critically threatened without agreements in the next few weeks. There must be millions of these kinds of issues.

    1. H. Alexander Ivey

      This cheese example is exactly what others have said. That on the 29th of March 2019, there will be a new country in the world – the formerly known as the UK of the EU. This “new” country will have no trade agreements with any non-EU country, including and especially with the US of A.

  8. JustAnObserver

    Personally I think that Cameron’s pledge to hold a referendum purely as a way to quell Tory infighting and backstabbing is going to rank in UK political/economic history as a Richter 10.0 disaster; and no one, repeat, no one in the UK has any interest in spelling it out, in detail, in those 144pt bold caps favoured by Sun headlines.

    And that includes you Mr. Corbyn.

    Reality will only dawn when in April 2019, instead of turning on Sky News to watch herds of sparkling unicorns dancing along the South Downs, the population will see streams of vans coming to deliver their P45s (US = pink slip).
    The long, bitter, and appallingly destructive recession of the early 1980s will return and Thatcherite dream from 1979, stalled by some last ditch resistance from the “wets”, will have come to pass.

    Anyone care to speculate on the UK unemployment numbers in, say, April 2020?

    1. Colonel Smithers

      Thank you.

      The UK’s real unemployment rate, as opposed to the official figure, is well into the teens per cent. I would say the official rate will be well into double figures within five years.

  9. SA

    Sigmar Gabriel, the German foreign minister, summarized the mess perfectly right after May’s speech in Florence: “The Conservatives in Britain didn’t tell their citizens the truth about the consequences [of Brexit], and that is why they seem unable to present a clear strategy.”

    1. Colonel Smithers

      Thank you, SA.

      It did not help that the remain camp was usually fronted by neo-liberals, City / business shysters etc.

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