Brexit’s Groundhog Day

It seems to be Groundhog Day again in the long-running Brexit soap opera. With the clock ticking down toward the Brexit transitional arrangement end-date, both the United Kingdom and Europe are engaged in a dangerous game of brinksmanship as they peer over the abyss of the UK crashing out of Europe without a trade deal by year-end. 

With so much more at stake this year than last for both the UK and European pandemic ravaged economies, one has to hope that the UK and Europe will soon find a compromise that will spare them both from the economic shock of a hard-Brexit landing. But if the past is a guide, if any deal is reached this time around, it is likely to be reached only at the very last possible moment.

Notwithstanding British Prime Minister Boris Johnson’s protests to the contrary, the UK would appear to be in very much weaker negotiating position than its European partners. It is not only that the UK is very much more dependent on trade with the large European Single Market than is Europe with the relatively small UK market.  Nor is it only that hopes of a quick and favorable US free trade deal has all but evaporated. It is also that the UK economy has been very much harder hit by the pandemic than has been the European economy. 

With the UK economy having declined on a quarterly basis by as much as 20 percent in the second quarter of 2020, one would think that the UK is in no position to absorb a no-deal shock that would have a much greater negative impact on its economy than on Europe’s. 

Last year, ahead of the previously scheduled Brexit end-date, Johnson famously declared that he would rather die in a ditch than ask Europe for another Brexit extension. In the end, however, he was forced by the UK Parliament to ask Europe for a one-year transitional period that would maintain the UK-European status quo for another year. More humiliating yet, he was forced to compromise with Europe on the vexed Northern Ireland border issue in a manner that went back on the UK government’s longstanding promise to Northern Ireland never to treat it differently than the rest of the United Kingdom. 

One year later, Johnson is again warning Europe that he would prefer a no-deal Brexit to one that in any way impinged on the UK’s right to determine its own economic policy. This time around he is doing it knowing that he has a comfortable parliamentary majority following last December’s parliamentary election. 

More menacingly yet, Johnson is now proposing to introduce legislation that would walk back some of the UK’s earlier commitments under its Brexit withdrawal deal. That would include going back on key concessions he made last year to find a compromise on the Northern Ireland border issue. It would also include maintaining the UK’s right to introduce state industrial subsidies without European interference.  

If Boris Johnson seems to be drawing red lines as the Brexit negotiations reach a critical stage ahead of an October 16 European Council meeting, so too is Michel Barnier, the European Union’s chief negotiator. He is insisting that the UK must honor its commitment under the Brexit withdrawal agreement to prevent goods coming into Northern Ireland from the UK without customs inspection. He is also insisting that if the UK wants to maintain access to the European single market, it cannot be allowed to provide subsidies to its industries in a manner that does not accord with European regulations aimed at securing a level playing field. 

With the specter of a second wave of the pandemic hanging over the both the UK and European economies, and with their respective economies in shambles, now would seem to be the worst of times for the UK to crash out of Europe without a deal. However, for this to happen both sides would seem to need to back down from their redlines to reach a compromise. 

Fortunately, there is reason to believe that Johnson is bluffing with his red lines and that, much as he did last year, when crunch time in the negotiations comes he will buckle. After all, he must know that with the pervasive rise of protectionism in response to the world’s worst economic recession in 90 years, the UK’s prospects of striking favorable free trade deals to replace its lost access to the European single market would appear to be dim. He must also know that he can ill afford a major Brexit blunder if he is to repair the damage to his popularity wrought by his gross mishandling of the COVID-19 pandemic.

All of this is not to say that one should expect an early Brexit deal to be struck. Indeed, it is hardly in the nature of either Johnson or his European partners to strike a deal anytime sooner than the last possible moment. In the meantime, we will have to learn to live with the uncomfortable prospect that it is still possible that the UK will crash out of Europe without a deal by the end of the year.

Desmond Lachman is a resident fellow at the American   Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.