By John Foley
LONDON (Reuters Breakingviews) - Britain’s vote to leave the Europe Union took just one day – but the divorce process is dragging on. In October, talks between the two sides are supposed to shift from the terms of exit to the terms of re-engagement. There’s little chance of that happening. Despite the positioning papers published and legislation initiated, progress is being slowed up by bickering – within the UK government and between London and Brussels – as well as technicalities and economic fog. Nonetheless, five clear lessons stand out.
The notion of a “bespoke” Brexit has been a refrain since 2016’s vote, and appeared again in a series of positioning papers released by the UK government in August. Prime Minister Theresa May insists an off-the-shelf relationship – for example, a copy of deals negotiated by other countries like Norway or Turkey – would be particularly inadequate in two areas: the border between Ireland and the United Kingdom, and the customs regime that will take effect once Brexit takes place.
The trouble is that UK negotiators haven’t yet put out a compelling, fact-based reason why Europe would want to grant special treatment on substantive issues. Finance might prove to be the exception, since the continent’s capital markets are largely wired through London.
For goods, however, the balance of power is likely to be on the EU side. British threats that Italian Prosecco will stagnate in unwanted lakes unless the United Kingdom is granted “free and frictionless” trade are hard to take seriously – even if British imports of Italian sparkling wine are up 23 percent so far this year.
Britain is on the way to passing its “Repeal Bill” to translate European laws into British ones. But even that wasn’t a given. Politicians on both sides have raised the alert over “Henry VIII” clauses that allow the government to amend rules without seeking approval from legislators. Such debates will tie up policymakers even more as the bill runs through parliament. The chance that they will stop the Brexit juggernaut, however, is virtually nil.
As with the triggering of Brexit formalities in March, pro-EU campaigners have actively sought to scupper the process. It is becoming clear, though, that almost no British politicians feel they have the political capital to push that point too hard. If Brexit is going to be scrapped before it can be completed, it will be because there is popular support for a U-turn.
That is only likely if the country feels seriously economically ravaged. For now it doesn’t, mostly because Britain hasn’t actually left the EU. Beyond the slide in sterling, economic conditions remain much as they were before the referendum, and in some cases, appear better. Low-price pub chain JD Wetherspoon and sportswear store JD Sports both reported strong UK sales growth last week. Clothing retailer Next says it has so far been able to get suppliers to absorb the impact of exchange rates.
While Britain’s growth is forecast to lag that of the euro zone in 2017 according to the International Monetary Fund, labour market data has been unambiguously strong. The unemployment rate fell to a 42-year low in July. That makes it hard to convince Brexit supporters that Britain has no choice but compromise on matters of trade and immigration.
Not only have jobs been created, but the share of employment generated in goods relative to services has been increasing over the past year, something barely seen this century outside of the financial crisis – albeit that change started before the referendum.
As the Bank of England warned on Sept. 14, a readjustment is inevitable. Real wages are likely to keep falling – meaning that workers will get poorer in real terms. But without the shock of rising joblessness, a direct link between Brexit and economic hardship will continue to be disputed. No one wants to see a spike in unemployment – but without it, there’s more chance that Brexit talks will end in stalemate.
Economic heft is clearly in the EU’s favour. But so is timing, which is what could really shape the next few years. Michel Barnier, the EU’s chief negotiator, has refused to discuss the future of British ties until the present and past – specifically the so-called divorce bill to be settled by the United Kingdom – have been tied up.
That’s frustrating and obstructive, but also totally rational. Barnier isn’t fighting a popularity contest, unlike the government represented by minister David Davis, his British counterpart. If Barnier holds out and talks edge closer to the March 2019 deadline, it’s likely Britain will be left with little choice but to ask for a lengthy transition phase, most probably involving hefty budget contributions.
There’s another risk for the UK side: companies may not hang around long enough to find out whether Britain can avoid a chaotic departure. German carmakers, for example, are now putting together plans for life after a hard Brexit. Global banks have already done so. No wonder Theresa May is planning to suggest a temporary extension to the status quo in a speech this week in Florence – and the UK’s Office for Budgetary Responsibility has already factored EU budget payments beyond 2019 into its assessment of UK finances.
A clear and visible reason for the discontent that provoked Brexit was the inequality of opportunity and resources across the country. That hasn’t changed. Potentially redistributive ideas, such as a tax on housing wealth and caps on executive pay, have been watered down or shelved. After sterling’s slump, the price of everyday items is rising – beer is 7 percent more expensive than a year ago, while clothing is up 5 percent.
Admittedly, there’s one narrow way in which inequality has already fallen. Central London property values have dipped, and price signals are the worst they’ve been since 2008, according to the Royal Institution of Chartered Surveyors.
That will bring Hampstead and Hull a little closer together, at least on paper. But if it means foreign investment is starting to be ripped away from Britain, the summer of nothing could segue into a nationwide winter of discontent.
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