Brexit: The Way Forward

Perhaps the ‘no deal’ scenario may not be as bad as advertised. Whilst the outcome of Brexit negotiations may seem unclear, whatever the future holds is unlikely to be much more difficult for British businesses to handle than the problems companies usually face every day, writes John Mills.

In June 2016 – much to the surprise of many people who had got dangerously out of touch with what was going on in much of the country – the UK electorate voted by a small but decisive majority to leave the EU.
 

The main reason for the Leave result was widespread discontent with the way the country had been run, particularly since the 2008 financial crash. More than half the UK population had seen their living standards stagnating or reduced over the previous ten years while those responsible for the crash had got away almost entirely scot-free. People felt that they had lost control of their lives, with the EU seen as a symbol of unaccountable bureaucracy. Immigration was certainly a factor, but polling evidence showed that “taking back control”, for which having some say on who was allowed to come and work in the UK was an important component, and a bigger factor. 
 

What did those who voted Leave think was going to happen when their side won the referendum? Up to that point, surprisingly little detailed work had been done by anyone on what the consequences might be – either by the government, the civil service, academia or the organisations which campaigned for a Leave vote. The outline of what a Leave vote meant in practice, however, was clear – and had been reflected in numerous statements made by both sides running up to the referendum. The UK would leave the EU’s Single Market and Customs Union and would seek a comprehensive free-trade deal with the EU on a similar basis to the one which had just been concluded between the EU and Canada.  
 

This was very much the thrust of successive speeches made by the Prime Minister, Theresa May. If negotiations along these lines had gone ahead, they might have provided an outcome which both pleased the Leave camp and one with which Remainers could live. Trade with the EU would have become slightly more complicated but not much. Co-operation on all the main issues from terrorism to climate change, on which it obviously makes sense for the UK to work together with our near neighbours – and vice versa – could have continued. The UK, as a major net contributor to the EU budget and with a huge balance of payments deficit with the EU 27, was in quite a strong negotiating position. But this does not now look like the case being the way that events are going to unfold. Why not? What went wrong?
 

CURRENT NEGOTIATIONS WITH THE EU

Essentially, three things have blown the negotiations off course. One was an early decision to put discussions of the border between Northern Ireland and the Republic of Ireland, citizenship and money ahead of trade, which bogged down negotiations on ground favourable to the EU 27. The second was the general election in 2017, which was intended to increase the Conservative majority in the House of Commons, but which in fact achieved the opposite, leaving no majority in Parliament for a clean break with the EU. The third was the behaviour of many members of the House of Commons and particularly in the Lords who were against Leave in principle and who believed they had the right to use legislative amendments effectively to reverse the rest of the EU referendum.
 

The result is that, as time is running out, we are now drifting towards a series of potential outcomes to the Brexit negotiations, all of which have major disadvantages. The only way to negotiate any kind of reasonable deal involves being prepared to walk away from a really poor offer, but the unwillingness of a majority of MPs – let alone members of the House of Lords – to contemplate a clean break with the EU means that this option does not, at least at the moment, exist. Furthermore, even if there was a change of heart so that it did, it is no longer clear that there would be time to implement all the changes in customs facilities, which would make this option operationally viable. In these circumstances, all the negotiating cards fall into the hand of the EU 27.
 

In consequence, the deal which is likely to come before Parliament in the autumn of 2018 will probably be a very tough one from the UK’s point of view. It is likely that we will be offered continuing membership of both the Single Market and the Customs Union, but on the basis that very little changes from what we have now, except that going ahead we will have no say in the way in which the EU develops because we will no longer be a voting member. We will continue paying large net sums into the EU budget, with no border control, subject to the European Court of Justice, still in the Common Agricultural and Common Fisheries Policies, and unable to strike our own trade deals outside the EU. This is a substantially worse position than we would have been in if the EU referendum had gone the other way and we had stayed in the Union.  
 

STABLE PROSPECTS FOR UK BUSINESS

Will Parliament accept such a deal? Possibly, especially if MPs feel by then that they have no alternative which isn’t worse, and especially if this arrangement is described as “temporary”, even though it might be very difficult to move away from it once it has become established as the norm. 
It is, however, also possible that Parliament will not accept what the EU 27 offer – and what happens then becomes much more difficult to call. The recent proceedings surrounding Parliament having a “meaningful vote” mean that Parliament will have a substantial say in what then occurs although the government, if it survives, will be in final charge. What might happen then?
 

It is likely that the position will further polarise. If the deal on offer from the EU27 has been rejected, a possible outcome would be a choice between a clean Brexit or the UK trying to re-join the EU. The clean Brexit option would entail the UK coming out of the Single Market and the Customs Union, and trading with the EU on WTO terms, perhaps with a free-trade agreement in place. If the UK was to consider re-joining the EU, a second referendum would almost certainly be required, especially as by the time this happened the UK would probably have left the EU. Any new referendum therefore would not be on whether the UK should stay in the EU but whether we should apply to re-join – quite possibly with an additional obligation to join the euro and on more onerous financial terms than we have now, if we were to lose our rebate. Even if the EU27 wanted us back at all. In these circumstances, it is far from clear that the referendum result would be any different from the last one. If Leave won again, there would be little alternative other than a WTO-term Brexit. 
 

It is the starkness of these two choices which makes it likely that the eventual outcome will be some kind of fudge; a deal that leaves trade between the UK and the EU continuing to operate on much the same terms as it does now, nominally outside the EU but effectively still bound to it. Will this be a stable position? Probably not but “temporary” arrangements have a habit of lasting a long time. Norway voted not to join the EEC as it then was in 1972. Forty-six years later it is still in the European Economic Area, which is essentially the type of relationship in which the UK might find itself for a long time ahead. 
 

So, faced with all this uncertainly, what should businesses do? My advice is that they should hold their nerves and assume – with a large amount to justify this view – that in the end, Brexit will not make a huge difference to their trading prospects. Neither a fudge, nor re-joining the EU, nor trading with the EU on WTO terms would make that much difference in trading terms to what happens at present, even though there is a possibility that a reversion to WTO terms may happen very late with inadequate preparations. If this does occur, however, sterling is likely to fall sharply, giving the economy the same boost as happened after the 2016 referendum result. Whatever the Brexit negotiations outcome, therefore, the prospects for most UK business looks fairly stable from an EU trading standpoint. 
 

Indeed, other non-Brexit-related risks are likely to turn out to pose a much greater threat. Our future economic and business prospects depend hugely on both the internal economic policies pursued by the UK government and what happens externally, not least on the stability of the EU itself – and particularly the eurozone. Businesses are used to dealing with uncertainty. The outcome of the Brexit negotiations may be unclear but whatever the future holds it is unlikely to be much more difficult for UK businesses to manage than problems about the future which businesses face every day.  
EG

Oli Scarff / iStockphoto.com

EXECUTIVE GLOBAL

First published Summer Issue 2018