Wednesday, 18 January 2017

Broken beyond repair

JP Morgan is bang on the money.
The notion that the UK can simply “fall back” to WTO rules as providing an alternative (as summarised in “no deal is better than a bad deal”) is, in our view, very dangerous. Significant parts of the UK service sector would, under these conditions, lose their ability to provide services to EU-based counterparties overnight. Much of the plumbing that supports trade in goods and services on a day-to- day basis would be left without defined administrative processes and legal foundation. The imposition of tariffs is almost a side show relative to these issues. In addition, the UK is threatening that under constrained market access it would reinvent itself as a pseudo-Singapore of Northern Europe via low corporate tax rates and a ‘new economic model’. We note that the success of such low-tax entrepots has typically been at least partially based on the ability of firms to access markets in their locale, not on the withdrawal of that access. And, as we wrote yesterday, it is far from clear that there is a durable political commitment to the UK becoming a permanently low-corporate tax, low-regulation locale. 
Taken as a whole, we do not view the no-deal WTO option as credible. So what happens in these negotiations? We assume that the EU will not seek a punitive arrangement for the UK, only that it will negotiate guided by its legitimate self-interest. Even so, we see a high likelihood of a disruptive and damaging outcome. For some time, we have argued that the bespoke FTA route would ultimately see the UK realise that it could not land the required deal within a pre-2020 election timeframe, while the option of a “WTO only” route would be recognised as untenable. Hence, it would be forced to prioritise a set of sectoral deals while seeking to extend the Article 50 process, and the result would be an exit under a hastily arranged patchwork of deals with some sectors seeing significant disruption upon the EU exit. An alternative (to which we ascribe only slightly less probability) is that the EU offers the UK a heavily modified temporary version of EEA membership to allow further time for discussion on future arrangements as the EU exit occurs. While that may have broader sectoral coverage, accepting it would come at high political cost for May, having eschewed the EEA route at the outset.
If Mrs May can deliver at all she can deliver only a mess that we will all live to regret that we will spend a decade or more trying to correct. May has completely misread the situation and the risks. We face a lost decade as we try to claw back the preferential terms we could have had if May had taken a more grown up approach.

Major UK manufacturers will struggle to compete even with a currency advantage. They will apply pressure all the way down the supply chain. We can expect less generous terms of employment and lower pay. We will see an economic and cultural retrenchment. For all the left have squealed about austerity over the last decade, they are about to find out what it actually looks like. Brexit will not come cheap and we will be spending and borrowing to cope with the administrative fallout.

We cannot expect any compensatory trade deals of significance. The power to trade on our own terms is only effective if you know how to wield it - and it is clear that the government and its advisers are still working to ideas from the previous century. We will be lucky not to be fleeced by the USA. I seriously doubt bilateral deals will be anything more than a morale booster.

This will be the legacy of Tory arrogance. In a way, I think we all deserve it. As members of the EU we have become disengaged and deeply complacent in assuming our politicians are guided by the wise. 

In voting for Brexit, Britain has voted for change. And change it will get - just not that which is anticipated. May has snubbed a workable solution for a cavalier approach to trade and diplomacy, apparently unconcerned for the consequences. When her dog's Brexit finally happens people will be asking what went wrong and who is to blame. On that day they will realise that Wesminster is responsible, there are no go-to excuses and will then start to demand long overdue constitutional changes.

As much as the Labour party is a hollowed out shell, when May makes a pigs ear of Brexit and the Tory Brexiteers are exposed as the clueless, malevolent frauds they are, the Conservative Party will be on borrowed time as well. With the last functioning party on the rocks there will be no-one left to vote for. It will be inescapably apparent that Westminster is broken beyond repair. 

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