Monday, 14 January 2019

Can Britain cope with no deal?

This evening I was earnestly asked if Britain can cope with no deal. Firstly we must define "cope". We coped with the bubonic plague. We coped with the Blitz. We coped with Noels House Party and two decades of Neighbours. Britain can take anything. This, though, is a question of where we want to be strategically on Brexit day.

So what do we know about what happens?

In respect of customs the Commission has said "all relevant EU legislation on the importation and exportation of goods will apply to goods moving between the EU and the UK". Inside that innocuous statement lies a universe of regulatory controls which are understood by view and businesses have been left to fend for themselves. It is the lack of preparation and overall lack of understanding that will create the chaos more than any one single factor.

We have been given reassurances that the customs IT is ready and that we have the people on standby. The last time we visited this subject we found that the system due to be installed was based on the current regime and Brexit was never a consideration at the design phase. Given that rules of origin apply and a whole host of other customs formalities, I take no reassurance from the government. As a former data applications designer it is my view that there is zero chance the software could have been adapted in time. The larger the system, the bigger the problems and the slower the development.

We know that some freight will need to be diverted because Calais does not have the correct inspection facilities and the facilities that exist elsewhere have insufficient capacity. Even if the EU is generous in its rate of inspection we are still looking at a complete change to a long established business model. We are adding delays, increasing voyage times and piling on costs in terms of tariffs, overtime and red tape. We also know that haulage capacity is threatened if a fifth of the fleet is sitting in a queue. Any business based on rapid transit is stuffed. Shortages are a real possibility.

Meanwhile, Brexiters tell us that flights will continue as normal, but again the Commission been clear. It has adopted some contingency measures to avoid full interruption of air traffic between the EU ain the event of no deal. These measures, though, "will only ensure basic connectivity and in no means replicate the significant advantages of membership of the Single European Sky". That means cabotage is stuffed. Costs of air freight will increase.

We know that (because of EU regulatory frameworks) a lot of specialist companies will have to resubmit their goods for authorisation and certification. In many cases this is largely a paper exercise and easier for those companies who already have partners of subsidiaries on the continent. There is, though, a worrying complacency and even if they can re-authorise their goods, That's no use if they can't ship goods cost effectively.

We have heard a number of cleverdick nostrums from Brexit, from Article 24 WTO, through to fantasies about revitalising regional ports. Though I would like to believe it, I have seen nothing at all compelling. I am somewhat well versed in the mechanics of EU regulatory systems and WTO law, and Ukipite grunters recycling BrexitCentral mantras tweeted by Jacob Rees-Mogg are not something I can take remotely seriously.

We know that with the cessation of freedom of movement, with licences and qualifications no longer automatically recognises then everything from fishing to engineering services are affected. So too is transport of live animals which has implications for horse racing. Every conceivable area of the economy is then without transboundary regulatory cover and business have to spend enormous sums navigating the labyrinth of red tape and and restrictions. Nobody can really quantify the the secondary impacts. For some there will be marginal impacts, but for others it will be an existential threat. 

Perversely, all this adjustment means major movements of money and heightened activity in the real economy which all goes to GDP, so while GDP may be telling us one thing, indicating growth in some sectors, the real story may be that  whole sectors are collapsing. 

With adequate preparation it is possible we can avert the immediate headline impacts of no deal Brexit. I do not, though, believe that there have been adequate preparations in that your preparations are only really as good as your understanding and the quality of information in the public domain, which has been poor and there have been false messages fed into the system at the highest level that we are more prepared than we actually are. 

For sure, aircraft won't fall out of the sky and and we won't have outbreaks of super-gonorrhea except for the normal levels found inside the incestuous Westminster bubble. What we can say, though, is we will experience a breakdown of normal operations in government as civil service staff are reassigned to cope with the problems it creates. As much as competence is thin on the ground, it is surely to get worse.

As to how long this lasts is anyone's guess. Within six months we will at least have an idea of what the template for the new normal is which will then take up to three years to properly establish. That's a long time for businesses to tread water. SMEs will take the biggest hits. Meanwhile, there will be implications for the energy market thus we can expect to see steep rises in the cost of electricity. Business will have to absorb those costs.

This, though is not the major concern. The questions is then what we do as an alternative to the single market, whereupon we are reliant on securing inferior FTAs to the ones we already have, requiring concessions we would not ordinarily make, adding further competitive pressure to UK industry. Agriculture especially. We will find out just how hollow the Tory "global free trade" mantra really is.

There are then the geostrategic implications of having severed all of our formal relations with the EU. This will probably lead to renewed calls for Scottish independence. We will also have to bail out a number of essential services hit by extra demands upon them. Very possibly we'll be looking at IMF loans and downgrading.

Much of the impact will only become known to us after the fact. For every headline issue we know about there will be secondary and unpredictable effects. Much of EU governance is invisible governance and you don't really appreciate that it exists until it stops working. This is why many are so cavalier about our ability to cope.

So can Britain cope? Well, yes, we can bugger on through all of this. It will be hard and we will discover the real meaning of the word austerity. More than likely defence will be first on the chopping block because it always is. Frigates will be cancelled, fewer F35s and less outings for our aircraft carriers. Public pay will also take a hit. As to fixing potholes and maintaining parks and public spaces, fuhgeddaboudit! Britain is too immature to to tolerate cuts to entitlements so everyday maintenance will take the hit. Somehow, we will come to terms with being a much poorer country and then at some point we will go grovelling back to Brussels for any deal we can get.

Economically, and from a trade perspective, there is nothing at all to be said in favour of no deal. This is why The Leave Alliance plan took the view that Brexit would have to be a process rather than an event and to limit the harm done by it we would need to retain the single market in the longer term with a view to reshaping it. We lost that argument which is why we are now here. 

In terms of exit it now comes down to two options. May's deal or no deal at all. May's deal ensures we have a transition so that we can prepare for the impacts of leaving the single market and will then lead to the negotiation of a new trade framework which will likely comprise of a core FTA, a convoluted form of customs union and a number of bilateral agreements on everything from fishing to air services. It will entail the adopting of a number of EU rules, largely based on global standards and conventions we would adopt anyway.

The deal is far from ideal and a customs union is a bitter pill to swallow, but Brexiters refused to engage in the process and offer up real world alternatives so it was left to Number Ten to triangulate and by fumbling through the process, this is the only deal on the table. The negotiations are over. It very much will soften the blow, and will at least keep us in the game so we can plan our next move. 

The point here is that no deal is not good. It is avoidable, therefore it must be avoided. We can all grumble about elements of the deal and were I inclined I could write a comprehensive demolition of it - and do a better job of its worst critics. But in the end I am a pragmatist, and I cannot imagine anything about the deal that makes it worse in practice or in principle than no deal at all. Technical and binding legal integration is a facet of all modern trade agreements. This is how the world works and taking an absolutist line over it is not only profoundly ignorant, it is also economic suicide and will involve a great many more humilatons in the future.

With no deal comes economic uncertainty, recession and a hollowing out of good governance. Moreover it brings long term political instability - which for some may well be the objective, but there is no guarantee of a future remedy and political dysfunction could very well become the new normal for a generation. Greece, Italy and Spain and never fully recovered and oddly, no deal would make us more European in a sense of becoming more dysfunctional, lawless and corrupt. But hey, if that's the will of the people, who am I to argue?   

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