It appears to be Groundhog Day again in the long-running Brexit soap opera. As the clock ticks towards the end date of the transitional Brexit deal, the UK and Europe are engaging in a dangerous game of tightrope as they peer into the abyss of the UK that collapses outside Europe without a trade deal by the end of the year.
With so much more at stake this year than last for Britain’s and Europe’s pandemic-ravaged economies, it is to be hoped that the UK and Europe will soon find a compromise that will spare them both from the economic shock of a Brexit hard landing. But if the past is any guide, if a deal is struck this time around, chances are it won’t be until the very last possible moment.
Despite British Prime Minister Boris Johnson’s protests to the contrary, the UK appears to be in a much weaker negotiating position than its European partners. It’s not just that the UK is much more dependent on trade with the large European single market than is Europe with the relatively small UK market. It’s not just that hopes for a speedy and favorable free trade agreement with the United States have all but faded. It is also that the British economy has been much harder hit by the pandemic than the European economy.
With the UK economy having fallen by 20% on a quarterly basis in the second quarter of 2020, one would think that the UK is unable to absorb a no-deal shock that would have a much greater negative impact on its economy. than that of Europe.
Last year, ahead of the previously scheduled Brexit end date, Johnson said he would rather die in a ditch than ask Europe for another Brexit extension. Ultimately, however, he was forced by the British Parliament to ask Europe for a one-year transition period that would keep the status quo between the UK and Europe for another year. More humiliatingly, he was forced to compromise with Europe over the contentious Northern Irish border issue in a way that reneged on the British government’s long-standing promise to Northern Ireland never to treat it differently from the rest of the UK.
A year later, Johnson is again warning Europe that he would prefer a no-deal Brexit to a Brexit that in any way impinges on the UK’s right to determine its own economic policy. This time, he does so knowing that he has a comfortable parliamentary majority following the legislative elections last December.
More threateningly, Johnson is now proposing to introduce legislation that would reverse some of the UK’s previous commitments under its Brexit Withdrawal Agreement. That would involve reversing key concessions he made last year to find a compromise on the Northern Irish border issue. This would also include maintaining the UK’s right to introduce state industrial subsidies without EU interference.
If Boris Johnson appears to be drawing red lines as Brexit negotiations reach a critical stage ahead of the October 16 European Council meeting, so is Michel Barnier, the European Union’s chief negotiator. He insists the UK must honor its commitment under the Brexit Withdrawal Agreement to stop goods entering Northern Ireland from the UK without customs inspection. He also insists 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 way that does not comply with European regulations aimed at guaranteeing fair conditions of competition.
With the specter of a second wave of the pandemic hanging over the UK and European economies, and with their respective economies in shambles, it would appear to be the worst time for the UK to crash out of Europe without deal. However, for that to happen, both sides seem to have to give up their red lines to reach a compromise.
Fortunately, there is reason to believe that Johnson is bluffing with his red lines and that, just as he did last year, when the critical moment in negotiations comes, he will back down. After all, he must know that with the widespread rise in protectionism in response to the worst global economic downturn in 90 years, the UK’s prospects of securing favorable free trade agreements to replace its lost access to the European single market seem weak. He must also know that he can ill afford a major Brexit mistake if he is to undo the damage to his popularity caused by his mishandling of the COVID-19 pandemic.
All this is not to say that a Brexit deal should be reached quickly. Indeed, it is hardly in the nature of Johnson or his European partners to strike a deal before the last possible moment. In the meantime, we will have to learn to live with the uncomfortable prospect that there is always the possibility of the UK leaving Europe without a deal by the end of the year.
Desmond Lachman is a resident scholar at the American Enterprise Institute. He was previously Deputy Director of the Policy Development and Review Department at the International Monetary Fund and Chief Emerging Markets Economic Strategist at Salomon Smith Barney.