U.K.'s Internal Brexit Debate Stymied by Grim Choices

One of the alarming aspects of the British Brexit debate is the way that it keeps going around in circles.

Over the summer, the cabinet appeared to have taken a step toward a more realistic Brexit policy when it agreed to request a transition period of around two years after the U .K. leaves the EU in March 2019. At the time, this looked like a victory for the Treasury, which had been warning that it was impossible to negotiate a new deep and comprehensive free-trade agreement with the EU in what remained of the two-year Article 50 negotiating period. To avoid the economy falling off a cliff-edge, extra time was needed to reach a deal and prepare the economy for whatever changes lay ahead.

Yet in the two weeks between the Conservative party conference and the October EU summit, this policy appears to have unraveled.

The government is once again insisting that a deal on the terms of the future trading relationship needs to be struck by March 2019 and that what follows will be an implementation period to allow time for government and business to adjust. If the EU agrees to such a deal, the government hints it might be willing to pay more than the EUR20 billion it has put on the table so far in the divorce talks. If not, it says it is ready to walk away and trade with the EU on World Trade Organization terms. This policy looks very much like the old policy -- and is based on the same delusions.

This idea that a full-trade deal can be agreed by March 2019 seems extraordinary when one considers that the U.K. and EU have already spent seven months trying to close a deal on the future rights of EU expatriates, an issue on which both sides say they want the same thing. A typical free-trade deal runs several thousand pages of dense legal text covering every sector, each presenting their own complex issues.

The deal that the U.K. wants would be the most ambitious ever struck, extending into financial services. It is fanciful to imagine this could be completed in the year that remains if time is to be allowed for ratification of the deal. Besides, the EU has made clear that it won't negotiate a trade deal during this time: all that is on offer is a deal on the framework of the future relationship.

Why does the government stick to such an obviously fantastical position? The answer is that adopting a more realistic policy would require it to confront deeply unpalatable political choices. The government is terrified that if it exits the EU in March 2019 with only a transitional deal, the U.K. will be screwed by the EU in the subsequent trade negotiations.

Or put another way, the government believes that it needs to nail down binding commitments from the EU to a new trade relationship based on mutual recognition of each other's regulatory standards -- especially in financial services -- while it still has leverage in the process, in the form of the money it is willing to pay as part of a divorce deal. Its threat is to walk away from the Article 50 process with no deal if the EU refuses to accept the UK's demands.

Of course, this concern over negotiating leverage is hard to square with past claims by ministers that the U.K. holds all the cards and that a deep partnership is in both sides' mutual interest.

The government may in any case be overestimating its leverage. The money that the EU is demanding to settle past obligations is undoubtedly important to the member states. But it amounts to around 0.1% of the bloc's gross domestic product. Will the EU really allow itself to be bullied into a hasty agreement to allow its financial center to remain outside its jurisdiction in perpetuity -- effectively hand over control -- over such a paltry sum? That seems unlikely.

Similarly, is the UK's threat to walk away really credible? Some ministers claim a no-deal scenario would be manageable because the EU would inevitably have to agree to a series of mini-deals to avoid complete chaos on both sides of the Channel.

But this may be too optimistic, according to Sir Ivan Rogers, the UK's former ambassador to the EU. "In the absence of a deal, have the French, Belgians or Dutch any incentive to sort that problem [of lack of border inspection posts on the other side of the Channel], or do they have an incentive to keep us stewing?," he said to the House of Commons Treasury Select Committee this week. Meanwhile, there are no WTO rules for important sectors of the UK's services-oriented economy to fall back on.

So what would a more realistic Brexit policy look like? There are two options. One is to ask the EU for an extension of the Article 50 process to allow enough time for a deal on the future relationship to be reached. But this would be politically toxic in the U.K. and the EU might refuse. The other is to make a much more generous offer on the divorce bill, accept a lengthy transition deal and pray that -- with goodwill and the healing passage of time -- the logic of a mutually economically beneficial trade deal wins the day. Of course, that means taking a huge amount on trust.

But then no one -- other than Boris Johnson, David Davis and Liam Fox -- ever said that Brexit would be easy.

Write to Simon Nixon at simon.nixon@wsj.com

(END) Dow Jones Newswires

November 01, 2017 19:44 ET (23:44 GMT)