The die is cast

Now that Royal Assent has been gained, the European Union (notification of Withdrawal) Act 2016-17 is in force and the only impediment to Britain leaving the EU is for the Prime Minister to write to the EU to trigger Article 50 of the Maastricht Treaty. This is expected in the next two weeks.

The die has been cast and this British action will lead to many repercussions, not all of which are visible today. It is however true that whilst leaving the EU is a very clear demonstration of British sovereignty, it is those repercussions that will determine just how effective and valuable that sovereignty is in today’s world.

Firstly, with regard to the EU, the deal we gain through the next 24 months of negotiations will primarily be a function of what sort of relationship the EU wishes to have with Britain. It may well make economic sense for both sides to have an essentially free trade regime in goods and services, very similar to that which exists currently. However the EU also has political objectives, prime amongst which is that any deal must look and be worse than remaining within the EU and its single market, in order to deter other countries from following the UK out of the exit door. Anti-EU views are gaining ground in France, Italy and Holland, all founding members of the EEC. Some degree of economic loss will be acceptable to the EU in order to achieve these political objectives, and though this may be higher in absolute terms than the loss to Britain, that economic loss would be much smaller as a share of their total economy than for Britain.

Britain’s economic fortunes are thus dependent on the political calculations of the rest of the EU.

Secondly, with regard to the USA, a “special relationship” may or may not exist, but if it does it has always been on US terms. Pre-Trump, the UK was an invaluable bridge between an inherently individualistic US political philosophy and an inherently social European one. – Britain was able to explain and translate each side’s thinking to the other. By leaving the EU this role is hugely diminished, though may still apply to defence matters.

With Trump as President, the picture is more complex. Trump sees Brexit as part of the same changing political tide that saw him elected and Britain’s need for a series of bilateral trade agreements fits very neatly into his philosophy that the US should only negotiate bilaterally in order to maximise its own influence. He clearly enjoys visiting his properties in Scotland and he may wish to be seen rapidly concluding a trade deal with Britain in order to contrast trading relationships with other developed world economies with those of less developed economies such as Mexico and China which he believes have been detrimental to US jobs.

He is though very unpredictable, and would likely seek some painful concessions from Britain, in order to demonstrate that he had “won” the negotiation. Britain would thus be dependent on his capriciousness, both in any trade deal and more widely in global affairs.

Thirdly, China sees itself as a key world power that is happy to make agreements with other countries, but is not very interested in negotiating them. It prefers to set out its terms and wait for others to agree to them. British sovereignty would extend to deciding whether or not to agree to what the Chinese want.

These 3 giant entities (EU, US, China) account for 57% of the global economy and an even greater percentage of UK goods exports – the fate of the British export sector and thus the wider economy is very much in their hands. Britain can only “take” what they wish to “give”. In relation to the size of these economies, Britain, though the 5th / 6th largest economy in the world, has little negotiating power.

Of the other countries who have expressed an interest in early free trade deals with a Britain outside the UK, both Australia and India have indicated that a key objective in any such negotiations would be greater freedom for their citizens to come and work in the UK. This is directly counter to the British government’s policy to substantially reduce immigration. In addition all the nations seeking trade deals are a very long way from Britain and international trading relationships display very strong correlations to geographic proximity.

British sovereignty has been dramatically exercised – the die has been cast – Britain is about to set out on a new independent path for its economic development – its fortunes, however, certainly in the next few years, now depend very heavily on the actions of others. Re-asserting sovereignty may feel liberating now but be economically painful in the future.

 

The BoJo manoeuvre

It is May 2018 and the Prime Minister is in reflective mood, relaxing in 10 Downing Street with a drink. Fortes fortuna luvat was the phrase that sprang to his mind, or “fortune favours the brave” for those not lucky enough to enjoy his classical education. He was thinking of the book he would later write describing how he had emerged not only as the man who saved both the United Kingdom and the European Union, but, more importantly, how he had succeeded where his long-time rival, Dave, had so conspicuously failed. History, he was confident, would be kind to him.

Perhaps brave was not really the best word to describe the fairly straightforward political calculation that, whatever happened in the referendum, as the most prominent Conservative to stand on the Leave side of the debate, he was the obvious choice for Conservative activists to vote for as the leader to follow Dave. The fact that he didn’t himself really believe that Britain should leave the EU had been hidden away in a distant corner of his brain for the duration of the campaign.

There had definitely been a strong element of fortune though. The 50.3% victory for Leave was clearly affected by the torrential rainstorms that hit the UK in the late afternoon of June 23, 2016. The pensioners had been able to vote to Leave in bright sunshine in the morning, but a combination of storms and England playing in the European football championships in the early evening meant a much lower turnout amongst the younger generations, who polls showed were much more inclined to vote Remain.

Though Dave had initially wanted to stay on as Prime Minister, the backbench Conservative MPs quickly made it very clear that his time was up and he announced his resignation the weekend after the referendum. He felt it inappropriate to invoke Article 50 of the Treaty of Rome and start the clock on the two year timetable that would lead to Britain’s exit from the EU, saying that was a decision that should be taken by his successor.

Boris became Conservative Party leader, and Prime Minister, in September at the Party Conference, but the British public had already begun to experience doubts about the wisdom of its referendum decision in the intervening three months. Stock markets, not only in the UK but also in Europe had fallen sharply and a surprisingly large number of businesses announced their intentions to move their European headquarters to somewhere inside the EU – investment intentions and economic confidence had been hit very hard following the vote.

Not surprisingly the global banks such as J P Morgan, Goldman Sachs and Deutsche Bank clearly had well-developed contingency plans and were quick to announce their intention to move jobs from the City to Frankfurt and Paris from 2017 onwards. However what had taken many by surprise were similar announcements from key global manufacturing companies such as Siemens, Toyota and Pfizer and the withdrawal of EdF from the Hinckley power project, on advice from the French government, had left the UK’s long term energy policy in tatters. The number of announced lost jobs directly attributable to the referendum decision was much greater than even the Remain proponents would have dared to suggest in the campaign.

With Donald Trump, the Republican candidate in the November Presidential election, telling everyone how unhappy he was over the his treatment by the Scots over his dream golf course and saying that the UK had no chance of a trade deal if he was President, the UK economy was moving rapidly into recession amid massive uncertainty.

Given this backdrop, Boris also chose not to invoke Article 50, arguing initially that it made more sense to await the outcomes first of the US elections, and then the French and German elections in 2017 – after all there was no point in beginning negotiations with the EU when the two leading nations would not want to agree anything until their domestic political situations were clarified.

The European nations were also surprised by the drop in confidence in their stock markets as investment intentions declined further. The ECB were at the very edge of what was possible in terms of negative interest rates and QE, and fiscal policy remained constrained by German orthodoxy. What Europe had not expected though was the loss of respect from both the US and China, with many very rude comments about their irrelevance in the world without the UK coming from Trump and leading Chinese politicians. The continuing refugee crisis also tested to the limit the desire to maintain the Schengen area freedoms.

The critical factor had however come from Putin, who sensing Europe’s weakness has invaded and occupied Eastern Ukraine and was openly considering its annexation as he had done with Crimea. With the US consumed by its election it was left to Europe to take the lead in responding and they realised they needed to have the active and committed support of the UK.

Both the UK and Europe thus found themselves staring into an abyss in the months following the first referendum and were very frightened by what they saw.

Europe remembered that the initial vision for the EU had been to end war within Europe, and to that end the full-hearted involvement of the UK was now key. Compared with that even the free movement of labour, so beloved by the former Eastern European nations, could be seen as secondary.

So Boris had found it fairly straightforward, once the new German government had come to power, to seize the opportunity and come to a new reform agreement with the EU, which allowed the UK to control which EU residents could stay in the country, and allowed the UK much greater freedom not to implement bureaucratic EU directives. This dealt clearly and satisfactorily with the issues of immigration and sovereignty that had led many in the UK to vote to leave in the first referendum. The second referendum saw a Remain vote of 65%.

He had achieved a rare unity – the English were pleased with him, the Scots were pleased with him and even the Europeans were pleased with him. His place in history was now assured and, best of all, future historians would be able to compare directly the two referenda and prime ministerial performances, one dismal failure under Dave, one major triumph under himself.