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Thursday, December 2, 2021

The Brexit chicken game will come to an end

Boris Johnson won the 2019 election for promising to complete Brexit. But it is not finished yet. The relationship after the divorce has not stabilized, but has deteriorated. Not surprisingly, what they worry most is that the responsibilities are still shared. Fisheries is such a point of contention. But by far the most dangerous is Northern Ireland. As early as October 2019, Johnson announced that he had reached a “great new agreement.” Now he wants to tear it off. This is a feature, alas. But this is not only dangerous for the UK, but also dangerous for the European Union and the wider West.

In a sense, Brexit will never be “completed” now. The end of the marriage turns the prospect of the partner into the future. Other things being equal, the more economically dependent partners will also suffer more.

The chart shows that UK exports are lagging behind other European powers in the recovery

In its Economic and fiscal outlook Last month, the Office of Budget Responsibility concluded: “Because of… In November 2016, our forecast assumes that the total UK imports and exports will eventually be 15% lower than when we stayed in the EU. The reduction in trade intensity leads to long-term potential The 4% drop in productivity, we think, will eventually be caused by our departure from the EU.” Putting this in context, this is twice Covid’s estimated long-term cost, which is 80 billion pounds per year at today’s value.

So far, the results are close to earlier predictions. Relative to what would have happened, trade between the UK and the EU is shrinking. This will not be offset by other trade. This will bring permanent costs. (See chart.)

The chart shows that UK exports to the EU have slowed sharply since the Brexit vote

However, the situation may be worse than this. Suppose domestic and foreign traders and investors conclude that they cannot rely on the negotiation framework of relations between the UK and its most important economic partners. To make matters worse, suppose that the credibility of the British government as a partner is destroyed. Then the losses in the UK could greatly exceed the losses indicated by the OBR. They will also far exceed economic costs.

How realistic is this fear? In a broadcast over the weekend, Irish Foreign Minister Simon Covini said that if the British government threatens to suspend part of the Northern Ireland agreement, the EU may reject its post-Brexit trade agreement. He warned that Britain was pushing for an agreement that it knew could not be reached. The UK is indeed pushing for radical change. In a combative speech in October, Johnson’s Bantam, Lord David Frost, Argued: “For the EU, it is now said that the agreement-made in a hurry in a very uncertain period-can never be improved. When it causes such serious problems so self-evidently, it will be a historic one. Wrong judgment.”

The chart shows that UK imports from the EU have also slowed sharply since the Brexit vote

This is the language of rejection. What is particularly striking is that the meaning of the agreement-consciously, it must be assumed that Johnson himself consciously agreed two years ago-somehow “uncertain” and “extremely hurried”. In fact, its consequences are completely predictable. This is why his predecessor, Theresa May, rejected the idea of ​​dividing Northern Ireland from the rest of the UK in this way. If Johnson doesn’t understand what he signed, he is incompetent. If he does this, but has no intention of complying with the agreement he signed, he is dishonest.

This is not to say that the management of the agreement cannot be improved. The European Commission made important recommendations in this regard. But the UK insists on being able to deviate from EU standards in terms of food, which will definitely cause problems in trade with Northern Ireland. It did.

The chart shows that the UK's export market forecast is consistent with the forecast after the OBR referendum

Now, in order to completely change the agreement it intends to sign, the British government proposes to adopt “safeguard” measures. Article 16 of the Protocol allows such measures. but, The latter explanations, such “the scope and duration of measures should be limited to the range absolutely necessary to correct this situation”. Britain wants to abolish the role of the European Court of Justice in resolving EU single market laws, which is far from “absolutely necessary.” In addition, the EU will have the right to take its own rebalancing measures in response to such actions by the United Kingdom. No one knows where this cycle of revenge between these neighbors will end.

The optimistic view is that this “chicken game” will end as before, but a repair agreement will be reached: the European Union will make some concessions, and the UK will not be able to get everything it wants. However, there are obvious difficulties with this pleasant view. First, the endless attempts to renegotiate the most controversial part of the withdrawal have worsened the relationship, and worse, it will continue: after all, Ireland, Northern Ireland, the European Union and the United Kingdom will not disappear. Second, this entanglement severely undermines the trust in its commitments, which is needed by any government. Britain can no longer hope to get rid of its reputation as the “treacherous Albion”. The last point is that the chicken game may end with the kind of collapse suggested by Covinni. Maybe it won’t happen this time. But it looks like the British government will continue to do so until the EU completely disintegrates or collapses. In the long run, the latter seems more likely.

The chart shows that the import penetration rate forecast is also consistent with the OBR post-referendum forecast

So, what would happen if the core part of the deal between the UK and the EU collapsed? The economic impact must be devastating. But to make matters worse, when these countries face great challenges, the trust between the major democracies and their eternal neighbors is broken. These risks are something that no sane person dares to take. This dangerous “game” must stop. We must keep going.


Follow Martin Wolf My FT And in Twitter

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