Why Brexit Won’t Happen


 

Prime Minister Theresa May has set March 2017 as the start of a two-year negotiation process that will lead to the United Kingdom’s exit from the European Union. While she has spoken optimistically about a successful outcome, it’s far more likely that these talks will fail, her government will fall, and the UK will remain in the EU.

Here’s how the Brexit story will unfold . . .   

 

Theresa May has set high expectations – sort of.

The new Prime Minister wants a Brexit deal that gives the UK complete control over immigration, ends its EU financial and legal obligations, and provides UK businesses with continued favorable access to the single European market.  Moreover, she wants to negotiate all of this in the two-year time frame allotted for an Article 50 exit.

It’s an ambitious agenda. As if to acknowledge the challenges, May has indicated the top priority of negotiations will be ending EU court of justice jurisdiction and immigration controls. She apparently thinks that’s smart politics. Polls taken just before the June 2016 In-Out vote showed the public’s number one concern was immigration. But her signal that free access to the European market is on the chopping block is sending shock waves through the business community.

 

British banks that want to do business in the EU are packing their bags. 

The UK’s financial industry totals 11% of the UK’s economic output and supports 1.1 million jobs.

If UK-based banks can no longer do business in the EU, they will establish new EU-based subsidiaries to comply with EU banking regulations. That means layoffs back in the UK and new hires on the continent. A related loss will be UK-based derivatives trading which now totals £ 440 billion per year. British trading houses that now enable this business will have to move to the continent if EU customers insist on using clearing houses operating under EU law.

Forecasters associated with the financial industry suggest that in the event of such a “hard” Brexit, up to 35,000 industry jobs would be lost along with another 40,000 jobs in related businesses.

So far Theresa May has  turned a deaf ear to the concerns of the financial industry. Even if her government suddenly falls into the arms of the big banks, uncertainty in the City of London will dominate the financial pages over the next two years and complicate the government’s ability to control its Brexit narrative.

 

Meanwhile, major export manufacturers are shaking down Her Majesty’s government.

The impact of Brexit on the UK’s export market is hotly debated. One reasonably objective analysis suggests EU tariffs would boost the price of UK exports an average of 4%. That’s a small amount, one fully wiped out by the 14% post-Brexit drop in the value of the British pound against the Euro. It supports “Leave” supporter’s claims that British manufacturers will do just fine.

However, the issues facing manufacturers are more complex. Many import raw materials and components from overseas, and the price they pay for these goods has risen sharply. Others, with narrow profit margins, view the prospect of new tariffs as an existential threat.   Nissan’s upcoming decision whether to expand its Sunderland auto assembly plant is a case in point. Sunderland builds 500,000 cars a year and exports roughly 75% of its output to the EU. It also imports diesel engines and transmissions from Japan.  In 2015 it reported a 2% pretax profit on over ₤5 billion in sales. A hard Brexit could subject its EU exports to a 6% import tariff effectively wiping out its profits and/or forcing it to increase prices.   Nissan’s CEO, Carlos Ghosn, recently stated:

“If I need to make an investment in the next few months and I can’t wait until the end of Brexit, then I have to make a deal with the UK government. If there are tax barriers being established on cars, you have to have a commitment for carmakers who export to Europe that there is some kind of compensation.”

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Does Carlos Ghosn look like he’s bluffing? We’ll soon find out.

Some might call this extortion. Others, an attempt to save local jobs.

If Her Majesty’s government submits to Nissan’s demands, how will it manage similar demands from Toyota, GM, BMW and other major exporters? And if it offers little or no compensation, how will the government manage the steady stream of bad news from the manufacturer community as they cancel or reduce their UK investment plans?

Update October 31, 2016: See the addendum at the end of this post to find out Nissan’s  decision about investing in Sunderland. 

 

Did we mention Scotland is starting to pack its bags, too?

Scotland voted overwhelmingly to stay in the EU. The referendum results have spurred plans by the Scottish government to hold yet another independence referendum.

The threat of Scottish independence won’t deter Theresa May from Article 50 negotiations. It will force her government to take a stand on this new independence vote and add to the growing economic and political chaos surrounding Brexit.

 

If it bleeds, it leads. The Brexit narrative over the next two years will be overwhelmingly negative.

It’s not that good news about Brexit won’t be published. But what gets more attention from the public – a report that the pound’s drop since the referendum may help UK exporters, or one that details the higher prices UK consumers are paying for their Spanish vacations?  Even minor stories like the recent request by the EU that Brexit negotiations be conducted in French can consume multiple news cycles and add to the impression that the process is out of control.

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Count on the British press to provide thoughtful, balanced coverage of the Brexit process.

Just as the In-Out vote energized Leave supporters, the growing media frenzy around Brexit is helping opponents make the case to Stay. They argue, among other things, that the real cost of Brexit is turning out to be much higher than what voters were led to believe and that Theresa May and her ministers are incapable of negotiating a workable deal.

 

 By the way, Brexit critics are right. Theresa May’s chances of getting a “good” Brexit deal are near zero.

It’s not that the EU’s leaders want Britain to go. But if Brexit is unavoidable, they’ll favor a hard exit that will grow their banking sector, signal other EU members about the high price of exit, and rid the EU of a partner that has always insisted on special privileges denied other member states.

Some have argued that the EU must negotiate a soft Brexit in order to protect the many EU businesses that export to the UK. That’s a legitimate point if economics is the only consideration.  EU leaders face a host of political pressures at home.  Rewarding the UK with the same economic benefits as EU members without the associated responsibilities (contribution to the EU budget, freedom to work and live anywhere in the EU, etc.), would be political suicide.

 

A bad Brexit deal means lights out for Theresa May’s government.

There are two possible outcomes of Brexit negotiations. Talks ultimately breakdown, or the final deal leaves the UK without a new trade agreement that gives businesses full access to EU markets.

A Parliament vote to unilaterally exit or approve a hard Brexit would fail. One reason is that prior to the In-Out referendum almost 75% of MP’s favored staying in the EU.

In other words, the vast majority of MPs could justify voting against a Brexit deal that they deem harmful to the nation’s economic future.

These MPs will also be influenced by changing public attitudes. Of those polled in a recent survey, 45% favored a Brexit negotiation approach that puts economic interests ahead of immigration control. Those favoring an approach that puts immigration control on the top of the agenda totaled 39%. That suggests that Theresa May’s approach to the Article 50 talks is already in trouble.

Finally, MPs already disposed to stay in the EU will have been unwilling participants in a two year-long Brexit media circus. They will face an electorate and business community that’s fed up and desperate for stability. Is there any doubt that these lawmakers will reject a bad deal and in so doing force a vote of no confidence?

Is there a way out of this mess?

Two years from now the leaders of the EU will be in agony. The prospect of a UK exit will be a defeat for a common European community, hurt the continent’s economy, and threaten European political unity in the face of Russian aggression and a continuing refugee crisis. Even if the UK stays, the wounds from the long period of economic uncertainty and political rancor may take a decade to fully heal.

Rather than allowing the UK to further descend into political chaos, EU leadership could instead propose an historic compromise.  Offer all EU nations the right to set annual limits on the number of new immigrants. This would be a clear victory for those in the UK and elsewhere in the EU that have made immigration control a burning issue. And while a sizeable minority in the UK would still be unhappy with the EU, there would be no Brexit.

Freedom to live and work anywhere in the EU has been a hallowed principle, with leaders like Angela Merkel and Francois Hollande citing its importance in the continued development of a unified Europe. While “open borders” is a lofty ideal, it ignores growing public sentiment throughout the EU that national identity is also important.

The racist version of this view is directly or indirectly voiced by politicians like Marine Le Pen, Nigel Farage, and Frauke Petry. These right-wing politicians have built small, but dangerously influential followings. Reasonable people who reject these racist ideas are still asking two questions:  First, how can my country retain its unique language and cultural heritage if unlimited numbers of other EU citizens can move-in? Second, why can’t my elected, national representatives set immigration limits that are consistent with national needs?

EU leaders would do well to think about this as they draft their Brexit negotiation strategies. Like any liberal democracy the EU is a work in progress. Its citizens expect that their elected representatives will fix policies that no longer work. Returning direct control of immigration policy back to individual member states would win strong support from the public, strengthen the EU’s legitimacy, and undercut many of the racist arguments of the growing far right.

This compromise would have downsides, one being to greatly complicate the EU’s efforts to manage the refugee crisis brought on by the civil war in Syria. But they’re a small price to pay in order to definitively address one of the major internal issues that threatens a unified, prosperous Europe.

 

Addendum – October 31, 2016

This post was originally released on October 26, 2016.

On October 27, Nissan announced that it was moving ahead with plans to increase its investment in its Sunderland facility and so safeguard 7,000 jobs. This was great news for Nissan’s UK employees and suppliers, and a shot-in-the-arm for Brexit supporters.

What did Nissan get from the government to secure this commitment? UK Business Secretary Greg Clark said that he sent a letter to Nissan promising to seek tariff-free access for UK built vehicles after Brexit. He also pledged to support training, innovation, supplier support, and R&D while also promising no additional public money.

Brexit critics have added to the Brexit media storm by suggesting that other commitments were made to keep Nissan. Whatever facts emerge from of this case, it will increase efforts by other UK manufacturers to get assurances that after Brexit they will have continued, unfettered access to the single European market.

 

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