Rather late in the game, some high profile corporate players have cleared their throats to say that Something Must Be Done about Brexit. The Society of Motor Manufacturers and Traders warned that Brexit uncertainty was putting 860,000 auto industry jobs at risk and was responsible for investment dropping by 50% in 2018 compared to the same period last year. This followed a bleat from Airbus that if they didn’t know pretty soon what UK was up to with Brexit, it was going to have to hunker down, which would be very bad for its 15,000 jobs at 25 plants in the UK. BMW then piped up, saying that if customs got to be a mess, it would have to close production sites in the UK, which could imperil 8,000 jobs.
The Government roused itself, scheduling a meeting with Airbus and one next week between May and her ministers to try to sort out the UK’s position on trade as part of a white paper set to be published on July 9.
Yet bad news keeps coming in. Yesterday, Politico wrote that the European Commission warned the EU27 to prepare airports for a crash-out Brexit. This is a scenario that most have deemed to be so cataclysmic that they’ve assumed it can’t happen. As with so many other possibilities, the unthinkable is now looking decidedly possible. From Politico:
If the U.K. leaves the EU without an aviation agreement, flights would immediately cease between the islands and the EU27 since EU-issued operating aviation licenses would no longer be valid, and British airlines would no longer have the right to fly to EU countries. The U.K. would also cease being a member of the European Aviation Safety Agency (EASA), which issues the certification and licenses EU aircraft require.
The Commission told officials and diplomats at the briefing about the problems that additional customs checks on cargo would impose on airports under a no-deal Brexit.
Currently, a lot of air cargo from third countries first arrives at the U.K. and is then shipped on to other EU countries, where it doesn’t need to be processed by local customs. But in the event of no deal, those shipments would either fly directly into other EU airports or from the U.K., but in either case it would have to be cleared by customs, something that may entail a large increase in staff and infrastructure.
Richard North gives a high level overview of the aviation agreements and concludes:
Putting the fragmented areas together, it is very hard to see how, in the context of a “no deal” Brexit, aviation agreements with the EU can survive…
That would almost certainly bring international traffic at Heathrow (and all other UK airports) to a complete halt.
Getting the airport back in operation though would not be that simple. There is not one agreement to deal with, but a host of issues, including the highly technical safety issues, which require formal procedures to resolve. One would see pressure for emergency action but, if the EU stands its ground, it could be several months before full functionality is restored.
After such a break in operations, and the certainty that UK businesses will be looking elsewhere, it would be unwise to expect traffic volumes be automatically restored. Reduced trade volumes will affect freight and business travellers, while uncertainty over visas and freedom of movement will undoubtedly affect tourism.
The fact that the press is finally discussing the formerly taboo topic of what a clusterfuck a crash-out, or even a mere hard Brext, would be might explain an oddly sunny, as in seemingly unhinged, article in the Financial Times over the weekend. It argued that Theresa May was on her way to deliver the softest Brexit possible. The story claims that May made a commitment to Phillip Hammond that in return for him delivering the “Brexit dividend” of more funding for the NHS, she would come down firmly for a soft Brexit at the upcoming “Chequers summit” in early July to finalize the famed white paper. From the article:
Mr Hammond, confronted with a stubborn deficit in spite of almost a decade of growth and near full employment, will tell cabinet colleagues at Chequers that the NHS funding boost has left his coffers empty: if they want more money for other public services, Britain’s economy will have to grow faster — and that means a smooth Brexit.
The chancellor is weaponising Britain’s fiscal weakness, pointing out that the country’s slide close to the bottom of the G7 growth league since the Leave vote has left the public finances badly exposed, just at the time when health, housing, schools and defence are crying out for money. Mr Johnson knows the potency of this argument. In his taped private remarks, he took aim at Mr Hammond’s “mumbo jumbo”, adding: “The fear of short-term disruption has become so huge in people’s minds that they’ve turned into a quivering wreck.”…
The evidence suggests Mrs May wants to keep Britain in a tight customs relationship with the EU and something that looks suspiciously like a single market for industrial goods; services and financial services would be covered by looser agreements
The fact that the pink paper is publishing this sort of thing uncritically says it’s gotten an overdose of court gossip. First, it isn’t clear that the hard Brexiters will be deterred by Hammond’s budget warnings. Second, a mere customs union, even if the UK could achieve that, does not solve the UK’s need for low friction trade. The UK needs to be in the single market to get that. The entire EU leadership from Merkel on down has explained from the very morning after the Brexit vote, the UK needs to accept the four freedoms to have access to the single market. That includes accepting the movement of people, ie, immigration.
The article contains more recycled lunacy:
Meanwhile Mrs May, in her Mansion House speech in March, noted that as part of a “comprehensive system of mutual recognition” parliament might choose to pass identical laws in the goods field to the ones adopted by the EU. Although she insisted Britain was leaving the single market and that any mutual recognition deal would have to be policed by an independent body, Eurosceptics fear that some of these caveats would be lost in future negotiations on trade with Brussels.
Ahem, the EU already said no to mutual recognition repeatedly. This idea is going nowhere too.
The Financial Times also indicated that Remainers in the Cabinet were on board with Theresa May presenting yet again a technology solution for the Irish Border, on the assumption that ti would never get done or get nixed by the EU again so the UK would have to accept the backstop of a sea border.
However, the Financial Times appears to be reading the tea leaves incorrectly, pre this important find by Clive, that even the most pro-Remain Tory won’t give Theresa May any air cover on an Irish border fudge, even if the EU were suddenly to reverse its stance.
The Conservative MP Dominic Grieve, on a visit to Northern Ireland, said that he and his colleagues would not tolerate an internal UK border.
“A border down the Irish Sea is completely unacceptable and I think it’s abundantly clear that the government will never accept it,” the MP for Beaconsfield told the News Letter.
The remarks are significant because strongly pro-Remain politicians such as Mr Grieve are thought to be the most likely parliamentary supporters of an arrangement such as Northern Ireland staying in the customs union and single market unlike the rest of the UK, which would necessitate an Irish Sea frontier.
So the lack of progress on Ireland means the odds of a crash out Brexit are still uncomfortably high.
And to add to that:
The notion that May is prepared to pump for a soft Brexit is questionable. May has consistently wanted irreconcilable things, and the FT story seems to be cherry-picking only part of her demands. May is famously rigid and close-mouthed about her thinking. She has been set on limiting immigration and it’s hard to find a basis for her relenting on that red line.
Even if the Government manages to agree on a viable-looking trade scheme in July, it’s already too late. Airbus effectively said they need certainty now. That would have meant having the UK’s pitch ready for the EU Council meeting of June 28 and 29, which was what the EU has set as the deadline for sorting the “future relationship” out. That means the earliest there could be an agreement in principle would be at the October EU Council meeting. That further implies the EU pushing back its timetable for negotiating the text to be approved by the EU27 (experts think this effort could go into early January at the latest). In other words, even assuming the Tories start marching in one direction, there’s still so much ground to cover, and enough potential for mishap, that from the business perspective, a reduction in uncertainty can’t be treated as the same as certainty.
The Government is bizarrely acting as if the City will somehow be unscathed. From the Financial Times:
While Mr Hammond insists Britain could secure a trade deal covering financial services, the Bank of England believes the City could flourish outside the EU’s regulatory orbit.
As we’ve noted from time to time, the EU has rejected every clever UK idea for protecting its banking sector, such as passporting and mutual recognition. The EU has also flatly rejected Hammond’s claim that the EU needs to keep London healthy for its own benefit. The Financial Times comment section similarly contained updates on various firms moving staff out of the City, such as BB pointing out, “JPM will move 600 bankers to Luxemburg, 600 to Dublin and 1100 to Frankfurt.” These are certain to be mainly senior jobs, and law firms and accounting firms will similarly shift some staffers to service the business they do.
Even a transition deal does not solve all that much. As of Brexit day, the UK becomes a third country with respect to all the trade deals it has with countries other that the EU27. Not only does the UK not appear to be on a footing to do what it needs to do about that, as the Independent described in May, no large economies are in any hurry either. Canada, Mexico, and South Korea are prepared to move forward, but they up about cinching a deal quickly with just want to preserve the status quo, and the commentary that applies to Canada holds for Mexico and South Korea::
The first is that even if this goes well, there would be no gain for Britain – it would merely be replicating an existing trade deal that the UK already benefits from as an EU member.
The second is that it may not be as simple as it sounds: little progress has been reported so far on issues such as what share of the EU’s quotas belongs to Britain. The third is that Canada is not a huge economy, equal to one of the larger 28 EU member states – its GDP sits roughly between Italy and Spain.
Mecosur is also more eager because they want to sell beef to the UK. That suggests the mutual benefit would be limited.
Even more important, the eighteen months the UK would get in a transition deal isn’t enough for the UK to complete a new trade agreement with the EU, raising the question of what happens in December 2020? The EU has been hostile to the idea of extending the transition further, since among other things, it would mess up the EU’s seven year budget cycle.
It was odd to see Sir Ivan Rogers, the UK’s former chief trade negotiator (among other things) offer some hope for the UK, when he has been quite clear that the UK is not going to be able to complete a new trade agreement with the EU before the early-mid 2020s. From the Financial Times:
Mr Barnier has also said that splitting up the single market and the “four freedoms” — free movement of goods, services, capital and labour — is unacceptable. He also points out that nowadays goods and services are inextricably bound: car sales, for example, often come with finance packages.
But Sir Ivan claims that in the trade talks which will only really start after Brexit next March, Brussels might show more flexibility if Mrs May proposed a deal focusing more on goods than services. “Candidly, it’s a bloody good deal for the other side of the table,” he says. The EU has a surplus with the UK in goods but not in services, “so they get massive continuity in trade on the goods sectors and from their perspective they screw us over on the services sector”.
Given the rumblings from Italy, as well as intransigence in Poland, the EU has even less reason than usual to be nice to the UK. As we’ve said repeatedly, the EU has already accepted that it will take losses from the EU. Per the whinging from Airbus and BMW, they probably perceive that the equation for them is more like the one the UK fancied for itself: a short-term hit, but longer term gains as multinationals move much of their UK production to the Continent. And the EU for political and practical reasons is not going to relent and set up a special huge new regulatory and supervisory apparatus for a special arrangement with the UK, and I can’t see the UK continuing to accept the jurisdiction of the ECJ and wholesale adoption of EU laws with respect to goods.
So as I keep saying, it would be better if I were wrong, but as a friend put it: “Things look darkest before they go completely black.”