Brexit deal is down to trust in the EU - Parliamentary approval next month all but denied

Monday, 3rd December 2018 08:03 - by Shant

By Shant Movsesian.

It is hard to broach the subject of Brexit without touching on personal sensitivities on the issue.  Some of you voted to stay in the EU, and some of you voted to leave.  It is clear that emotions will continue to run high on what is one of the most contentious moments in UK history - certainly in the last 45 years, which is when the UK joined the EEC, and later incorporated into the EU, which was formed in 1993.  As such, I view this as best to consider the economic considerations as much as possible as well as the reality of the crux of the stalemate in parliament, and it all comes down to trust.

Having observed both Commons sessions where Theresa May has presented both the initial withdrawal proposals as well as the amendments which later featured in the declaration approved in the EU Summit last weekend, it was impossible not to notice the level of opposition to the current deal.  While the PM maintained the positive aspects of the deal such as taking back control over immigration and fishing quotas as well as an equivalence deal for UK banks, there is one overriding element of the deal - as it currently stands - which will not allow hard-line members of her own party to vote in favour of the deal which is on the table - the backstop.  

Given that the EU will not allow the backstop to have a time limit, the protracted negotiations which begin after the UK leave the EU in March next year, could go on indefinitely, and this effectively keeps (or traps as some MPs phrased it) the UK inside the customs union and under EU rules.  While this may seem to be of little consequence to businesses linked with Europe, the political ramifications will be indelible once the UK has signed on the dotted line.  Again, irrespective of how one may feel on this issue, the reality (political in this case), is that the level of trust in the EU is completely absent among pro Brexiteers, so no amount of lobbying by the PM and her supporters will sway sentiment in the Jacob Rees Moggs and the Boris Johnsons in her party.  

Consequently, this deal is set to be rejected - and some of the rhetoric from the PM herself suggests she knows it.  Labour and the SNP are still aligned in trying to pressure the government to initiate a second referendum, as both parties cannot view the current situation as anything other than inferior to maintaining membership with the EU.  Countless times we heard Labour backbenchers urging the PM to consider another vote,  but Theresa May was and still is unbowed and will not (in her eyes) betray the vote of the people.  

Moving onto the economic backdrop, and not of those projected by the BoE.  Governor Carney has come under a lot of criticism in reporting some of the doomsday scenarios which include a significant drop in GDP in the immediate aftermath of a cliff edge Brexit.  I was personally somewhat baffled by their view on how GBP may react and more to the point, the degree to which they believe the exchange rate will fall - 25%.  This I did believe to be overly alarmist, and somewhat unnecessary, especially when some of the best market strategists and fund managers get it wrong.  There would, however, be some degree of negative impact on the Pound, though as we saw in late 2016, manufacturing and exports thrived in a world where price competitiveness is a major advantage. 

And this is where the UK negotiators have underperformed.  At a time when European exports and exporters - and Germany in particular - have struggled and continue to struggle, the reliance of the UK customer base has been underestimated.  One in seven German cars end up in the UK.  On trade in total, the UK is Germany's fifth biggest export market behind the US, China, the Netherlands, and France.  With the US putting tremendous strain on the economy through tariff threats and China vulnerable to a credit blowout, the UK's position carries greater value (as a bargaining chip so to speak) in the current climate.  Indeed, German rhetoric has been the more lenient towards the UK throughout the back-and-forth of Brexit posturing by both sides.  

One only has to look at the growth in the Eurozone to see that all is not well on the continent, with the ECB finally resigning themselves to the fact that recent weakness is not as temporary as they believed earlier in the year.  Europe is far from negotiating from a position of strength, and with a trade surplus with the UK - put simply - they have something to lose as much as London has in being denied access to European markets. 

Whether this could lead to fresh negotiations if, or rather when, the deal is rejected next month is open to question.  Donald Tusk has reiterated the 'party' line that it is this deal or no deal or, no Brexit (wishful thinking at this stage).  What would, however, be more settling, would be a no deal with open borders on trade.  This is the major worry for UK supply chains but is also a source of much-needed export/import revenue for the EU.  Let's hope common sense prevails, and on admitting to the realities of the political deadlock in the UK, make the best of what clearly does not need to be a highly disruptive outcome where nobody wins.