Brexit conclusion approaching

11 December. This, for many Britons and Europeans, will be a red-letter day, the day when the House of Commons has to vote on the ‘Withdrawal Agreement’, or “divorce settlement”, if you will, that Prime Minister Theresa May has negotiated with the European Union.  At the time of writing, May is still far from assured of a majority in parliament.

The divorce agreement was just about the only “achievable” compromise to have taken into account the most important demands and deal-breakers of both parties. For the EU, that has meant establishing a level playing field to ensure that lower-standard or lower-tariff goods cannot simply be imported into the EU via the UK. Further, the border between the Republic of Ireland and Northern Ireland is to be left open, this being an essential part of the Good Friday peace agreement of 1998. For the UK, it is important to actually exit the EU and take back control of the borders and those seeking entry into the country. There must also be no hard border between Northern Ireland and the UK.

Technically speaking, the deal provides for the UK remaining for at least two years in the customs union and for Northern Ireland remaining in the single market. This will be the situation until a final trade agreement has been reached between the UK and the EU. In the meantime, the UK may not enter into any trade agreements with third countries and must continue to comply with EU goods-related standards and jurisdiction.  The UK shall have no input into the standards. Although no new tariffs will be levied, there will, on the contrary, be additional border controls.

From an economic point of view, by far the best-case scenario for both the UK and the EU involves the UK not exiting the EU. May’s ‘Soft Brexit’ deal is detrimental and will disrupt trading between both parties via extra border controls, which will lead to crossing delays. What’s good about this deal, however, is, again, that no extra tariffs will be applied to trades conducted between the UK and the EU. Consequently, the economic cost of this soft Brexit will remain relatively limited in both regions. 

Theresa May might not even get majority support for this deal. Her own coalition has the narrowest of majorities, and her government partner, Northern Ireland’s Protestant DUP, feels that the deal splits their country from the rest of the UK to a greater extent than they would like, and so is likely to vote against it. Even the hard Brexiteers within her own Tory party, such as Boris Johnson, will vote against.  They see the deal as one that keeps the UK under the EU umbrella and are pushing for what would nonetheless be an economically disastrous hard Brexit.

A hard Brexit, for both the UK and the EU, is likely to be economically highly detrimental. Increased WTO tariffs  of up to 20% will be levied on UK exports and imports. Frequent controls and delays are promised at the borders, with the threat of food and medicines shortages in the UK ... The accumulated growth loss should, for the UK, amount, in the long run, to 8% of GDP.

The PM will, in such a case, have to seek support from the opposition to secure approval of the deal.  Jeremy Corbyn’s Labour is the biggest opposition party and he is already on record as saying that he will reject the deal. He is hoping above all for new elections. Many Labour members also hope that rejection will bring in its wake a new referendum overturning Brexit.

We think that the House of Commons will end up approving the Withdrawal Agreement, after perhaps several rounds of talks, as some Labour members will have reached the conclusion that this is the most realistic and responsible choice. However, a rejection is certainly not out of the question. What then happens is far from clear. Although most parliamentarians are against a hard Brexit at all costs, it may be difficult to avoid in the case of a rejection.  A new referendum is also a risky alternative with a highly uncertain outcome.  Approval of the deal is therefore the least bad option.