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Iain Begg

August 7th, 2019

To deal or not to deal: these are the questions


Estimated reading time: 10 minutes

Iain Begg

August 7th, 2019

To deal or not to deal: these are the questions


Estimated reading time: 10 minutes

Why is the new government prepared to countenance no deal, when it would be so damaging to Britain? Iain Begg (LSE) says the question is not whether but how much it would harm the country.

To judge by the early pronouncements of the Johnson government, a ‘no-deal’ Brexit is not only worth contemplating, but could well occur. Although both sides continue to profess their hope – and expectation – that a withdrawal agreement can be negotiated, the risks have plainly increased, despite Johnson’s bold assessment of there being a one in a million chance of a no-deal Brexit.

Photo: Michelle O’Connell via a CC-BY-NC 2.0 licence

His stance is belied by the ramping-up of no-deal preparations and a statement in the Sunday Times on 28 July from Michael Gove (now charged, as Cabinet Office Minister, with over-seeing a possible exit without a deal) that: “no deal is now a very real prospect, and we must make sure that we are ready”. For several ministers, it appears, no-deal is now the working assumption.

Manifestly, after the bluster and increasingly exaggerated claims made during the Tory leadership campaign, the reluctance of the EU to re-open negotiations on a withdrawal deal is now being taken seriously. Gove is one of a small number of senior ministers assigned to a new cabinet committee charged with accelerating no-deal preparations. The EU Exit Strategy Committee (its beguiling shorthand code is ‘XS’) is to be chaired by the Prime Minister, with Gove as Deputy Chair, and will meet frequently to review progress. Intriguingly, two-thirds of the May government’s cabinet committees have been culled, leaving just six, of which three have the word ‘exit’ in their title.

Leaving aside the vexed matter of whether the only ‘pure’ Brexit is one which extricates the UK fully from the EU prior to negotiating some form of future relationship, several questions about the new willingness to countenance no-deal need to be answered.

First, what does no-deal mean in practice? The simplest answer is “not Theresa May’s deal”, or being prepared to walk away if all that is on offer is one on broadly similar terms. What was thrice rejected by the House of Commons covered citizens’ rights on both sides, settlement of financial accounts and, especially, arrangements to ensure no hard border in Ireland, thereby reconciling Brexit with the commitments made under the Good Friday Agreement.

These three components are the EU’s pre-conditions for moving on to negotiations on a subsequent deal to redefine the relationship between the EU and the UK, yet in all the recent talk of no-deal, this has barely surfaced. Hence, a second question is how no-deal now would influence the future relationship. The most plausible answer is adversely, especially if it were accompanied by equivocation over the UK’s willingness to honour its EU budget commitments.

Third, what would the consequences be for the Irish border? No-deal would mean the UK leaving the EU customs union and, necessarily, different trading regimes applying in the two parts of Ireland, yet all sides have committed to avoid border controls. This is why the backstop was devised. The ironic outcome of no-deal could be the hard border no-one wants; vague promises of (untried) technological solutions will not do.

What about the economy?

A fourth set of questions concern the aggregate macroeconomic effect of a no-deal Brexit, and its implications for particular sectors of the economy and UK public finances. There will also be an economic impact on the EU27, with member states trading most intensively with the UK – Ireland in particular – most affected.

The answer from external analysts, such as the IMF, is unambiguous: no-deal will damage the British economy and is a risk for the global economy. Even if similar analyses by the likes of the Bank of England are summarily dismissed on the (disturbingly spurious) grounds of pro-EU bias, the same conclusion has been drawn by all but a tiny minority of commentators.

Studies looking at the effects on the EU27 – for example by Goldman Sachs – suggest the aggregate effect could be a little greater than for the UK, but relative to the size of the respective economies, the magnitude would be five times as great for the UK. The car industry – a major UK exporter – would be profoundly hit, as would certain agricultural producers, such as Welsh hill farmers.

Much the same is true of the public finances. The Office for Budget Responsibility (OBR), in its 2019 Fiscal Risks Report, uses the IMF scenario as a basis for estimating the fiscal consequences of no-deal. As the OBR puts it, the scenario “is not necessarily the most likely outcome and it is relatively benign compared to some”, but it would nevertheless add £30 billion a year to public debt from the 2020-21 fiscal year onwards. By fiscal year 2023-24, public debt will have increased by 12 percentage points of GDP, undoing the effects of the last decade of austerity and pushing debt well above the level reached in the aftermath of the financial crisis. The OBR states that a more disorderly Brexit “could hit the public finances much harder”.

Inevitably, such estimates are condemned by pro-Brexit optimists as the latest manifestation of “project fear”, usually citing in evidence the recession predicted by the Treasury that did not happen after the referendum. But it is disingenuous to regard any economic assessment of anything to do with Brexit as inherently flawed or misleading. Projections are subject to margins of error, but hardly anyone doubts no-deal will hit the economy. The double question for those relaxed about no-deal is not “whether” the economy will be hit, but “how much?” and “for how long?”.

The political implications of no-deal

One of the obvious attractions of a hard deadline for Brexit is to enable the country to move on and to start focusing on what many see as the real problems of our economy and society. But in the latest of a series of analyses of no-deal, Anand Menon observes “whatever the superficial, intuitive attraction, no-deal will not make it easier to focus on other things. On the contrary, it will make it harder”.

This brings us to questions about UK politics and governance. The prospect of no-deal has already elicited strong objections from the Scottish and Welsh First Ministers, and who knows how it could affect the delicate politics of Northern Ireland. For the Conservative Party, the exile of so many prominent ministers from the May government to the backbenches portends trouble which could metamorphose into a fresh contest between parliament and the government.

Meanwhile there is a growing recognition in the Labour party of the damage being done by the weak and indecisive leadership of Jeremy Corbyn. Labour is performing badly in the polls at a time when it ought to be prospering, given the disarray in the Conservative party, while the case for a softer Brexit (or none at all) is being inadequately put. At the end of July, one party grandee, Peter Mandelson, openly called for Corbyn to go. The wonder is that it has taken so long.

Without persuasive answers to the many questions about what will happen if a mutually satisfactory withdrawal deal cannot be secured, the UK would face great uncertainty. As should be repeated and repeated again, no-deal would not result in the maintenance of the status quo, but a fundamental shift in how the country relates to the rest of the world. It would also affect how many domestic policies, from agriculture to anti-terrorism, are conducted, because policies and regulatory arrangements would have to be recast, potentially in a disorderly manner.

Summing up, the most telling question is why the Johnson government would knowingly plump for a no-deal expected to have an adverse effect on the UK economy, to foment division inside the UK, to raise the prospect of a break-up of the Union, and to pose an existential threat to the Conservative party? The most benign answer is that is a bluff designed to put pressure on the EU.

Granted, no-deal might further discomfit the Labour party and pave the way for a Tory general election win, but are these valid justifications? The more worrying explanation, however effective the preparations are to limit the damage, is that the new government has failed to think through the consequences and has allowed its zeal to deliver the referendum result to trump (to coin a phrase) its judgment.

Let’s hope the remaining grown-ups dotted around the green benches of the House of Commons can find the parliamentary wherewithal to stop this folly.

This post represents the views of the author and not those of the Brexit blog, nor LSE. It first appeared at the Dahrendorf Forum blog.

Professor Iain Begg is the Academic Co-Director of the Dahrendorf Forum and Co-Chair of the Dahrendorf Working Group “The Future Of European Governance”. He is also a Professorial Research Fellow in the European Institute at the London School of Economics and Political Science.

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About the author

Iain Begg

Iain Begg is a Professor at the European Institute, London School of Economics and Political Science.

Posted In: #LSEThinks | Economics of Brexit | Featured | No deal


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