Brexit and Article 50 negotiations: why the smart money might be on no deal

David Cameron famously got precious little from his pre-referendum attempts to negotiate a special position for the UK in relation to existing EU treaty obligations. This was despite almost certainly having held many more cards back then than UK negotiators will do when Article 50 is eventually invoked. In particular, he was still able to threaten that he would lead the Out campaign if he did not get what he wanted, whereas now that the vote to leave has happened that argument has been entirely neutralised.

Theresa May might nonetheless have taken some confidence from the fact that her whistle-stop tour of EU capitals on becoming Prime Minister did not reveal too much by way of open hostility. It is EU heads of state, acting through the European Council, who after all are required to formally approve the Brexit deal. They know that they will be lobbied domestically to allow the UK to keep something approximating its existing single market membership. Cameron also knew this when he was attempting his pre-referendum renegotiation, which is why he much preferred to be pictured with Donald Tusk, the President of the European Council, than with Jean-Claude Juncker, the President of the European Commission. Tusk’s position was generally to urge compromise on all sides, in the hope that Cameron could be given something that he could sell politically in the UK. Juncker, by contrast, set the tone for what he thought should happen next by reiterating that there could not be different rules for different member states.

We should therefore not expect the Commission to content itself with being merely an idle bystander in the upcoming negotiations. It has the responsibility for choosing the chief EU negotiator, and in Michel Barnier it has already installed one of its own in that role. The Council will only be given a deal to approve that the Commission has previously consented to. There must consequently be short odds on there being no deal at all, because the Article 50 protocols do not say that the two-year negotiating period must produce a result that everyone will happily sign off on. It is entirely plausible that the UK Government will not allow itself to be seen asking for something it thinks the Commission will agree to, and that the Commission will not allow itself to be seen offering something it thinks the UK Government will find acceptable.

All the signs currently emerging from Brussels suggest that the Commission is willing to allow the formal process to descend into an unseemly scrap. This would in part be revenge for Cameron’s perceived recklessness in gambling the integrity of the entire integration process, on what ultimately turned out to be a failed attempt at internal party management. More importantly, though, if the impression takes hold that the UK is being punished for saying that it wants to leave, then this might act as a strong deterrent to stop other countries from offering their populations a chance to vote on overturning their own EU membership. If the Commission really wants to show itself to be inflicting pain on the UK then it knows that, for as long as the clock is ticking on the Article 50 negotiations with no deal yet in sight, it is the UK economy that will suffer most. Investment plans will be pushed further into the future, firms will begin to wonder openly whether moving away is now the right thing to do, and banks will struggle to maintain their business that requires full EU ‘passport’ rights.

In the ‘no deal’ scenario, the Brexiteers who now sit in the May Cabinet would probably go back to their referendum campaign mantra that this makes the UK free once again to trade with the rest of the world. What this means in practice is that the UK would have to rely on making trade deals with other countries on the basis of World Trade Organization rules. This would involve recreating from scratch the deals that it is already a signatory to as a partner in the EU’s collectively negotiated deals. Experience suggests, though, that countries outside the so-called Quad – that is, the WTO’s four-pronged agenda-setting grouping headed by the US and the EU – struggle when trying to ensure that they receive level playing field conditions. The UK has been used to having its interests secured through being part of the EU delegation within the Quad. In future it will find itself outside the EU delegation and often face-to-face with the same people it will have tried and failed to negotiate Brexit with. The reproduction of existing trade deals but within a new non-EU context might thus prove to be far from straightforward.

The ‘no deal’ scenario would also clearly have implications for the way in which the UK was integrated into the structure of global finance. It would almost certainly lead to the loss of a lot of City business if banks located there subsequently had to give up their right to operate in euro-denominated markets. This would not necessarily mean that the financial sector would shrink to bring about a long overdue rebalancing of the UK economy away from an over-reliance on finance. Instead, we should expect to see an internal rebalancing within the City, as some sectors rise to greater prominence, most likely those that provide confidential services to non-residential clients. As Commissioner for Internal Market and Services, Barnier attempted to address broader concerns that emerged from some markets within the single European financial space enjoying offshore status. It would thus be a supreme irony if his actions as chief EU negotiator of Brexit were to push the City further towards specialising in offshore finance, having previously done everything in his power to legislate against this outcome.

There is, of course, an awful lot of guesswork going on here, and we will all have to wait to see what ultimately transpires.

Featured image credit: Houses of Parliament London by skeeze. Public domain via Pixabay.