How We Could Lose The Brexit War

Brexit

After the stunning victory of the Leave Campaign in the EU Referendum, I decided to take a sabbatical from blogging. The result was sufficiently decisive for it to seem that brexit was secure and my confidence was boosted by Teresa May’s remarks at the Conservative Party Conference. I don’t think I have been alone in this complacency. By 23rd June, many voters were fed up with the campaigns, and after carrying out their democratic duty at the polling stations, many joined me in a summer of quiet reflection on a sunbed. The leave campaigns folded or went very quiet, and even though a core of Remainers continued to voice their discontent, it did seem that they were shouting into a strong wind blowing the UK towards the exit door. It was only after the recent ruling at the High Court that my reverie has crumbled, and after a few days of careful thought I have decided that brexit is indeed fragile and unless leavers wake up to the risks we could easily lose, not the arguments, but the outcome. Brexit does not necessarily mean brexit and it could yet be lost.

To some extent the ongoing court action is a bit of a sideshow with one important exception that I will cover later. There is very little chance that MPs will overtly defy the people but they may well demand concessions from the Government as payment for their assent to trigger Article 50. The Government has highlighted that if they are forced to reveal their negotiating position before talks start then their hand will be weakened. To my mind, this slightly misses the point. At some stage the government will have to tell the EU what it wants from the negotiations and the strategy will then become clear. The real risk is not this but the long-term political furore and instability that will accompany domestic debates on, for example, whether the UK should remain a member of the single market. To explain this we need to look at the EU’s likely strategy.

Make no mistake, the loss of the UK from the EU would be a gigantic political blow to the project. It may not necessarily be an economic blow depending on the residual trade agreement but politically it is huge. If the EU tries to punish the UK in a final settlement then both sides will lose economically. On the other hand, if the EU allows the UK to leave without serious economic penalty then other member states will soon start to question their own position. They will look at the UK and ask why they should accept the downside of Brussels’ rule if it is possible to trade successfully as an independent nation? Trade through the Single Market was deliberately built into the EU treaties as a fundamental lever to engineer a political union. Any unravelling of the Single Market will therefore be a direct assault on the long-term strategy of the project and will not be tolerated by Juncker and his colleagues. If mutual economic damage is to be avoided they will therefore conclude that a better strategy will be to persuade the UK to change its mind.

The foundations for such an EU strategy are the courts, time, the markets and the remain campaign (including some of its British MPs). It was central to the recent High Court judgement that Article 50 cannot be reversed once triggered and this will again be addressed when the Supreme Court meets on 5 December to consider the Government’s appeal. Whilst the ruling is convenient for the Remainers’ current campaign, I fully expect that in a volte-face Remainers will later contest the irreversibility of Article 50 as a matter of EU law (and huge irony), in the European Court of Justice. It is an important judgement, and central to my argument that we will be forced to change our mind about leaving. Watch carefully: if Gina Miller and the same applicants take the matter to the ECJ then the overall strategy will be laid bare.

A ruling by the ECJ will take a number of months even under an expedited procedure. By that stage I expect Article 50 will have been triggered and negotiations will have commenced. In my view, there is only one tool to achieve a UK rethink and that is market instability. I expect the EU to try and drag out any talks for as long as possible. Simultaneously, a drip, drip of careful leaks will be used to undermine business confidence, the markets and the pound. Unattributed comments will be downbeat about future prospects and politically sensitive sectors of the British economy (such as banking and motor) will be targeted for special treatment and dire warnings. Talks will seemingly become intractable and business confidence in the UK will come into the cross hairs. At some stage over the next 2 years, a weaker pound is going to feed through to higher prices in the shops and it could have wider effects on interest rates and investment depending on how the government and the Bank of England manage the situation. Growth, that great political football, could reduce and will become a hostage to outside interference. In these circumstances, a further run on Sterling fomented by EU politicking could quickly erode market confidence and result in severe instability. The longer that talks go on, the more likely this scenario becomes.

The financial situation will be exacerbated by simultaneous political instability fomented by the Remain Campaign and aided by special interest groups and experts such as the OECD and IMF. As markets take fright, increasingly loud calls will go up for a change of direction, a second referendum or a new mandate. Remainers and big business with vested interests will protest, MPs will waver and the media will start to take sides with whoever seems to be winning. With such a slim majority, May will struggle to steady the ship. On the other hand, a General Election in such circumstances could quickly become a proxy for a second referendum and I believe the outcome would be highly unpredictable with widespread tactical voting making the result very hard to foresee. Many have said that May would have a clean sweep but I think political and financial events could quickly change that notion. The margin of 52 to 48% is conclusive but not huge, and under difficult economic circumstances there could be many leavers who decide to switch sides even if that meant voting tactically in a general election.

The only way around this is for the UK to seek a quick brexit even if that means a slightly sub-optimal final deal. The damage caused to the UK economy by a quick deal would be far less than the protracted car crash I described earlier. The UK should set hard deadlines for the different stages of the talks and be prepared to walk away at the first sign of EU bad faith and revert to red lines. Simultaneously, the UK should seek allies for a fair break within the European Council. We are far more likely to prevent the scenario I have described by careful diplomacy with other heads of state than by attempting to engage with the Commission and European Parliament. Heads of State will be more likely to be interested in the hard economics of a deal whereas the Juncker crowd and MEPs will remain fixed on their long term strategy for the EU. It is interesting to note that Juncker is aware of this likely tactic and has already tried to take steps to rein in other EU leaders and bolster the role of the Commission and Parliament in the negotiations.

There is one further tactic that May might consider if she really wants to deliver brexit (and I remain open-minded whether she really does), and that is to hold a General Election now rather than later under the adverse circumstances I described. She could get the UK Court cases out of the way, trigger Article 50 and immediately seek a mandate for the talks. The current circumstances seem relatively benign and with the Labour Party in disarray she might well increase her majority significantly. However, the time for an early election is very soon, not later and there is still a risk that it could become a proxy for another referendum. It is a hard call to make.

As for Leavers, we need to prepare for the coming battle. With the demise of VoteLeave and with UKIP somewhat in disarray there is a desperate need for leadership and an active campaign that will again attract cross-party support. Change Britain are forming the basis of a campaign but it is at an early stage and Leave.EU have declared this week that they are returning to active campaigning. There is a planned march on Sunday 4 December. I’m not keen about marching on the Supreme Court so I was glad that the date for the march was brought forward to the day before the judges start sitting. It is far more important at this stage that Leavers make a strong political point to Parliament that we are ready and determined to protect our vote. I hope some readers will also attend. We need to re-establish our networks and prepare because the coming political battle will be far harder than the one we fought earlier this year.

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