What a difference a year makes!

At the Conservative Party Conference last year, a confident PM May spooked markets by confirming that the UK was not seeking any of the various soft Brexit options that were floated by Remainers, but was indeed seeking to restore full and complete independence: “But let’s state one thing loud and clear: we are not leaving the European Union only to give up control of immigration all over again. And we are not leaving only to return to the jurisdiction of the European Court of Justice. That’s not going to happen.

 

Well… or maybe it will. Or maybe it won’t. At this year’s conference a weakened and humbled Theresa May had a rather disastrous speech marred by interruption, a bad cold and scenographic malfunction. Not much was said about Brexit, but the main takeaway from the last couple of weeks is still that of a Conservative party deeply divided about Brexit – both on the details of the transition and what “glorious” future lies ahead.

 

Bridging the internal divide would be difficult on the best of days, but is an impossible task when Foreign Secretary Boris Johnson decided to steal the limelight with rock-hard Brexit statements in the run up to the conference. Various ministers – not just Boris Johnson – have offered their opinion on financial obligations, migration, transitional period and the final trade arrangement.

 

Moreover, the government is counting on support from DUP of Northern Ireland – Brexit supporters, but also defenders of the open border with Ireland. On domestic issues, the DUP support cannot be taken for granted, forcing the government to ease fiscal austerity, probably causing further downgrades of the British sovereign rating. At the same time, Labour has moved to a soft Brexit stance and could make life impossible for Theresa May if Remain Tory rebels join the opposition in supporting customs union and maybe even single market participation.

 

Why does domestic chaos matter?

The domestic chaos adds yet more uncertainty to the Brexit mess and means the EU does not have a credible counterpart to negotiate with. The EU has no way of knowing whether May will be replaced by Johnson at year-end, in which case any agreement on migration and financial obligation is likely to be thrown out of the window. They have no idea whether Labour might succeed in forcing the government to ask for single market participation after Brexit. Indeed, they have no idea what transitional arrangement would command a majority in the British parliament. In this case, the best negotiating strategy is… doing nothing and just asking for clarification. Which is basically what the Europeans are doing, while the clock is ticking.

 

The Danish lesson

In 1992 the Danish voters rejected the Maastricht Treaty against the recommendation of the entire political and economic establishment (voter rebellion is nothing new). Afterwards, the center-right government invited the center-left opposition and one of the winning “no”-parties to negotiations leading to a “National Compromise” – a unified stance that formed the Danish negotiating position. This way, the European partners knew that an agreement would be put to the Danish voters irrespective of domestic political circumstances.

 

The UK should to do the same: Work out an agreement between Conservative and Labour that would survive an election and change of government. Not just on the transition and trade aspects, but in particular on whether the UK is going to pursue the Boris vision of a low tax and light regulation haven – or a socialist vision of nationalized enterprises. A national compromise would limit future governments’ ability to fundamentally alter the economic structure of the UK, but a free trade agreement with the EU would not allow for massive corporate tax cuts or state aid anyway.

 

Stumbling along

However, there is no precedent for working across the aisle in the British parliament, and a Tory rebellion would break out the moment PM May were to announce a rapprochement. So instead the government will stumble along, frustrating its European partners and not achieving very much. The British negotiation strength has also been weakened by the turning of the economic tide. The British boom has come to an end, while European confidence is growing along with economic activity. A messy, drawn-out process is the most obvious outcome, frustrating British business and hampering new investment. Many Brexit contingency plans are likely to be activated if no transition agreement has been reached by the end of this year – an almost impossible task.

 

The most foolish of all scenarios is the “no deal” scenario, which some Brexiteers prefer to a softer version. I still think this is the most likely outcome of the ongoing process – at least initially before reason takes over. As for the long run? New free trade agreements are going to be a nightmare. The Bombardier-Boeing trade dispute (where the US Commerce Department hit the C series planes with 220% preliminary import tariffs) highlights, that the US has no problem going after close trading partners. A US trade deal would entail painful concessions on private health care services and agriculture, the latter is also in the crosshair of other anglo-saxon partners.

 

There coming years are going to be tough for the UK in general and the London area in particular. There are no easy solutions to the current mess and the economy is not likely to growth much for the foreseeable future.