Covid-19 and the ‘decadent Brexit’ hypothesis

The crisis changes quite a lot and not much

A second wave of infections spreads through autumn, the economic damage of the first starts to bite, and the political climate is tense as a competent leader of the opposition channels a growing mood of recrimination about the British government’s handling of the Covid crisis. By now it’s a demonstrably avoidable one rather than a potentially forgivable episode of force majeure. A No Deal Brexit beckons, as the June transition extension opportunity has elapsed, and the UK and the EU continue to talk past one another on the ‘level playing field’ and regulatory sovereignty. In this third quarter 2020 scenario, what will Boris Johnson do?

Not much, according to informed commentators OMFIF has spoken to in the last two weeks. Although the prime minister has ‘no appetite for chaos’, as one who has known him since childhood told us, he has never believed in the economic doomsday cases, according to a former civil servant who has worked with him. His room for manoeuvre is as much constrained by Covid-19 as it is enhanced by it. Nobody we spoke to discounted the chance of a last-minute deal or set of mini-deals, with Johnson able to pass off concessions and even money to the EU under the banner of getting a deal done in time when all had dismissed the chances of just that. Plenty is stacked against this outcome.

The view some months ago was that ardent Bexiteer Johnson would be more likely than predecessor Theresa May, as a reluctant convert, to bring a softer Brexit – under the guise: ‘Any deal is a win for Brexiteers’. But due to Covid-19, and his personal experience of the health crisis, Johnson is operating under a different environment. Despite his parliamentary majority, Johnson still needs to appease the Conservative right-wing who have pushed him to loosen lockdown.

There is a debate among Brexiteers about whether the crisis presents an opportunity to usher through the short-term inconveniences of No Deal, an idea described to us as a ‘decadent Brexit’. There is some excitement among backbenchers, according to a longstanding eurosceptic, about the freedom to press ahead with a US trade deal which would be constrained by ‘level playing field’ standards. The Department of Trade, which is conducting the negotiation, is doing its bit to proselytise on that issue, though others are less enthusiastic, including Conservatives who represent farming communities, and a British business organisation whose boss told us his members see very little upside compared with current arrangements (0.17% of GDP over 15 years), and quite a few downsides (an unlevel playing field). Watching for the political calculus in the Conservative party around convergence with the US is now more important for the outcome than the wrangles over diverging from the EU. The commentators we spoke to were unanimous that a China-oriented Global Britain policy is toast, in part thanks to Covid-19.

The last round of UK-EU talks concluded with David Frost, the UK negotiator, accusing the EU of dogmatism and his counterparty Michel Barnier countering with an enumeration of the UK’s liking to ‘have its cake and eat it.’ Covid-19 had indeed intruded: the negotiators themselves were ill, meetings have been hampered by the video format which precludes ‘corridor conversations’, and the crisis has changed priorities both for politicians and civil servants.

Plenty remains unchanged by Covid. The two sides are losing interest in one another. ‘Only 10 minutes on Brexit, please’, was the instruction for the June Council of Ministers meeting, we are told. A French official we talked to seemed relaxed: his government expects the UK to land on a No Deal Brexit and then, after finding it a nuisance in places, gradually to work its way back to a less advantageous arrangement than the status quo ante. The stated insouciance of both sides may wear thin as the December deadline approaches and the political realities around disgruntled French fishermen, and shambolic customs procedures at Dover and between Great Britain and its regulatory co-dominion with the EU in Northern Ireland sink in. There are meaty contingencies in the financial markets still to be settled. A bridging arrangement to enable euro derivatives to be cleared through London runs out in December. Avowals to settle ‘equivalence’ in a non-political way by June were empty. It is unclear which side will be damaged most if these are not addressed, so addressed presumably they will be.

What of other last-minute deals? Economic impetus might be less important than a tricky EU budget round a UK Treasury beleaguered by Covid might otherwise imply. According to an experienced official, the UK persistently misunderstands the marginal salience of finance ministries in EU negotiations, and does not navigate the ‘tortuous internal EU processes’ well. He believes that David Frost is not a ‘No Dealer’ and would prefer a Canada-plus-style deal. In the end he will follow his political instructions.

The index page of the UK’s position on the EU deal is a tacit admission of economic risks. Yet at the government’s core is a Vote Leave team that see upheaval as a necessary price for reforming a country they believe has been enfeebled by supranational governance.

The Conservative party may be moving towards exchanging partial sovereignty over EU regulations for none at all over equivalent US rules. Ultimately it will be up to the electorate to judge whether this is a fair bargain.

John Orchard is Chief Executive Officer of OMFIF. Ellie Groves is Programmes Manager, Europe at OMFIF.

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