08 September 2020

European Policy Centre: Brexit: Endgame

The UK Government's recent statements make a deal between the EU and UK less likely, regardless of whether that is the intent or not...The Brexit negotiation are heading into the final phase, with Boris Johnson claiming that the United Kingdom (UK) will walk away if no deal is found by mid-October.

The UK is adamant that there will be no compromise on level-playing-field (LPF) conditions, especially state aid, and fisheries. There are even reports that the UK is preparing legislation on its internal market that would breach the commitments made in the Withdrawal Agreement. If this proves to be true, an immediate end to the negotiations can be expected, given that the European Union (EU) regards the full implementation of the Northern Ireland (NI) Protocol as a precondition for a future partnership deal.

Much ado about nothing?

Many have argued that this is bluster, only to be expected at this stage of the game. It could be an attempt to extract maximum concessions from the EU while simultaneously playing to the domestic audience, claiming that any subsequent U-turn by the UK represents a major victory for Boris Johnson, given the original EU position. Under this logic, the increasingly exasperated responses from the EU and particularly Michel Barnier are framed as simply the opposite side’s equivalent posturing.

This could well be the thinking in Number 10. If it is, it fundamentally misunderstands EU politics. The UK’s emphasis on divergence as the purpose of Brexit, the desired absolute control of British territorial waters and now even the attempt to interpret the agreed and legally-binding Withdrawal Agreement divergently will not push the EU into compromising. Rather, it increases the political need for additional conditions, like a more dynamic alignment, making it even harder to find a common landing zone. In the end, the member states and EU institutions will only agree to a deal if it safeguards their interests. This will be more difficult than ever, seeing as their trust has suffered another blow following the UK Government’s recent statements.  

German carmakers to the rescue?

Brexiteers have always claimed that when the chips are down, economic interests, such as those of German carmakers, will overrule political constraints and thus force the EU to compromise. Not only is this a fallacy – the integrity of the Single Market, including its companies, is more sacred to the EU than a Brexit deal – but the underlying economic logic of Brexit might well have changed, in light of the negative economic effects of the COVID-19 crisis. In a world of overcapacity caused by permanently lower demand in numerous sectors, many companies need to consolidate their operations. Unavoidably, this implies closing some production facilities. Companies are prepared to take such a one-off hit if it reduces long-term operating costs.

A no-deal Brexit might lead EU companies to choose to close production facilities in the UK rather than elsewhere, given the more limited market that will be accessible for products produced in the UK and the difficulties that will arise with just-in-time supply chains. In some cases, this might lead to reshoring, with some of the production being repatriated to the company’s country of origin.

State aid in case of no deal

Consolidation at the expense of UK operations might be accelerated if a company’s country of origin offers state support to compensate the costs inflicted by a no-deal Brexit. In the COVID-19 context, state aid is likely to be available rather more freely than in normal times. Given that Brexit is clearly out of companies’ control, such state aid would likely be granted without onerous conditions. Under the cover of Brexit, companies might thus be able to carry out necessary restructuring, benefitting from generous state support.

Ironically, given that no deal also implies no LPF conditions, there would be little the UK could do to prevent such support being made available. Of course, the UK would be free to also provide state support to UK firms, but it would quickly run into capacity constraints given that a much larger proportion of UK businesses would be affected. In addition, UK companies would still be dependent on access to European markets, making state support far less effective.

While this is probably not the main driver of thinking in EU companies – a deal is still the desired scenario –, the need to restructure and potential availability of state support might make the private sector more willing to live with a no-deal outcome, thereby reducing the pressure to reach a deal. 

Plenty of fish in the sea?

On the other contentious issue, fisheries, a deal is feasible. For both sides, it is a question of meeting in the middle: greater control for the UK, but continued access for EU fishing to UK waters. The fact that fishing is a small part of both sides’ economies helps, making a compromise potentially bearable.

However, it is the politics, not economics, that will determine whether a fisheries deal is possible. The EU fishing sector’s expectations appear to be that not much will change, and that EU vessels will still be able to fish in UK waters, given also that the UK relies on the produce being sold in the EU. Political leaders in some key countries, such as France, will want to avoid confrontation with their sector. So far, they have done little to manage expectations.

Domestic UK hurdles 

Fisheries is also a highly contentious issue in the UK, particularly since the sector carries special significance in Scotland. Scottish independence is now back on the agenda, with opinion polls indicating that most Scots are now willing to vote for it. With a Scottish election looming in May 2021, which the Scottish nationalists are predicted to win, Boris Johnson is desperate not to add further fuel to the fire. Any concession on fishing would look like a betrayal of Scottish fishery, which has traditionally been a supporter of Brexit, thereby increasing support for an independent Scotland further.

One could argue that this is counterbalanced by the deal UK concessions might produce. But even under the best of circumstances, the deal will be rather thin and fail to deliver the close integration into the EU economy that Scotland has wanted from the beginning. It is unlikely that such a thin deal, which also does not deliver on issues like freedom of movement to Scotland’s satisfaction, would appease the Scots, given that they have been in favour of maintaining a more integrated and open regime.

Gathering storm

In the end, no one knows what the plan of the UK Government is, and whether it is posturing while still hoping for a deal, or whether these are substantive hurdles that might lead to no deal. Maybe Boris Johnson does not even have a plan but is testing what he might be able to get away with. However, time is running out, and the deadline is inescapable. The current messaging from the UK Government makes a deal less likely, regardless of whether that is the intent or not. Calculations on the EU side have changed, given COVID-19 and the state of the global economy. Once again, all signs point to the EU and UK heading towards no deal.

Fabian Zuleeg is Chief Executive of the EPC.

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