Brexit’s back. Of course, it never went away. But for three years it dominated UK political debate, before the decisive December 2019 General Election finally set Britain on a definitive course for leaving. The pandemic then knocked it out of the headlines. We are three-quarters of the way through a transition year until the UK is out of the EU, but only today has the question of the terms upon which Britain will be leaving come back to the fore.
The instigator is what appears to be a high risk manoeuvre on the part of Johnson’s government to put the divorce agreement last year in doubt, as part of a gambit to raise the stakes in the negotiations. New domestic legislation, the UK Internal Market Bill, will scrap the new customs arrangements in Northern Ireland and override provisions on state aid, only if no trade deal is struck between the UK and EU. Government sources told the BBC it was a “fallback option”.
Threatening to unravel the painstakingly put together divorce agreement will not go down well in Brussels, but then it is not intended to. The whole idea is to send a message to the EU’s negotiators that if there is no deal, all bets are off – the Tory majority in the UK Parliament has a free hand to make any changes it wants.
State aid is one of the key unresolved areas in the talks, according to Foreign Secretary Dominic Raab (along with fishing rights). The reason it’s so important is because Brussels doesn’t want the UK gaining a competitive advantage over corporates in the 27 member bloc through unrestricted state financing. Of course the notion of ‘free’ market competition is largely fictional anyway, but there are some possible weapons which the UK state could have to super-charge investment which nation-states on the continent don’t.
We have seen how the Bank of England has injected billions into corporate Britain in wake of the financial crisis, while the UK Government has went on an outsourcing spree in its pandemic emergency response. EU state aid rules have been effectively suspended since the pandemic to give nation-state’s a freer hand, but it’s likely that a UK state acting entirely outwith EU State would use the financial fire-power of the pound in an even more targeted and strategic way, something that Germany, France, etc can’t match within the Eurozone and the EU’s state aid regime. In an era of Central Bank-run capitalism, monetary and fiscal independence has its advantages.
Of course the EU has some weapons as well which it can use if the Divorce Agreement unravels. The most important is ‘passporting’ rights for the UK financial sector to operate in Paris, Frankfurt, etc. Protecting the City of London’s pre-eminent position in global finance is the first and primary concern of the UK state; if this is threatened expect support for Johnson to suddenly start disappearing.
So this is a high stakes game of poker, with the Prime Minister to make a speech later today in which he will set an artificial deadline of 15 October to get a deal done with the EU, otherwise both sides should “move on”. He will insist that no deal is still a “good outcome” for the country. The UK’s chief negotiator David Frost said on Sunday that they are not “scared” of walking away.
Behind the rhetoric, the reality is probably somewhat different, which Brussels will know. Given the huge economic shock of the pandemic, the last thing Johnson needs is lorry queues at Dover. No deal hurts the EU too, especially big exporters like Germany – which is why the safe money is on an agreement being found in the end – but it doesn’t hurt them nearly as much. Then again, Johnson’s party could easily turn on him if his Brexit comes with too many EU strings attached. There is a lot riding on the next five weeks of Brexit poker.
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