Brexit Game Theory
There is an excellent discussion of Brexit game theory by Eurointelligence and Peter Foster in a set of articles on the Daily Telegraph.
Stated Positions and Red Lines
- Boris Johnson: "Do or Die". He will deliver Brexit on October 31. No delays. No extensions. He does not want No Deal but he is prepared for one.
- EU: They will not under any circumstances reopen the deal they made with Theresa May. In the event of No Deal, they will not negotiate trade agreements unless the UK honors the backstop, helps Ireland, and agrees to pay the Brexit fee.
- DUP: They will not agree to a backstop.
- Ireland: Leo Varadkar, the Taoiseach (Prime Minister) demands a backstop. It cannot be temporary. He is willing to crash the Irish economy, if necessary, to preserve the integrity of the EU.
- Jeremy Hunt: He will not commit to "do or die" but says he is willing to walk away with No Deal.
Let's discard Jeremy Hunt as a not serious. He voted Remain and he is no more credible than Theresa May whom the EU played for a patsy.
More importantly, we can discard Hunt whether or not he is believable because the next prime minister will be Johnson.
What We Know
We know what the relevant four parties say they will do.
What We Don't Know
We do not know what any side really will do in practice.
Economic estimates are, well, estimates. No one really believes the UK will suffer as much as the EU says. At least I don't, but more importantly neither does Johnson.
The estimate for Ireland is far more important. Peter Foster explains:
The Irish Central Bank warned this week that a disorderly no-deal Brexit could knock four percentage points off Irish economic growth in the first year; result in 100,000 fewer jobs and inflict “very severe and immediate disruptive effects”.
That's a shocking hit to the tune of an immediate 4% hit to GDP. Even if the estimate is half-accurate, that is one hell of a hit.
We think it is significant that Boris Johnson has given a do-or-die pledge on the October 31 Brexit date. The reaction from Brussels is equally significant: nobody believes him.
For us it raises a far more interesting, yet unanswered question about Brexit: what would the leaders of the EU and the UK do if they were really confronted by such a threat? Not what they say they would do, but what they would actually do. One of the few journalists who has been gaming this scenario in detail is Peter Foster of the Daily Telegraph.
He started off with an observation that also sits firmly on our minds: would Dublin really not blink? We are assured by people with a much better understanding of Irish politics that Leo Vardkar cannot conceivably compromise on the Irish border. For him, it is politically easier to have a super-hard border imposed on him by the UK than to agree a compromise. We believe that this assertion correctly reflects the views in Dublin. But then again, it has not been tested, only stated. Would the politics not change if people were confronted with the economic reality of a harder border, when people lose jobs and income? Would they still want their prime minister to be brave and principled in that situation? The answer may well be yes, but should we really take this for granted?
Do or Die
Johnson's "Do or Die" statement seems credible to me, whether the EU believes it or not.
Foster asks: what if a Johnson government were to demonstrate that it could deliver a majority for a withdrawal agreement with a time-limited backstop? Would the EU and Ireland really choose pain today over pain tomorrow?
Eurointelligence answers: The answer again may well be yes - but it would be out of character.
Out of Character
Eurointelligence did not explain what it meant by out of character, but here's the explanation in the form of two questions by me:
- Would the EU really leave Ireland dangling with a 4% hit to GDP if Ireland changed its mind and Leo Varadkar were to suddenly agree to a time-limited backstop?
- How about a technical solution currently labeled a "unicorn"? How about a technical solution following a two-year wait period?
We do not know the answers, but we do know it would be out of character for the solidarity-conscious EU to say no if Ireland wants a deal.
Neither the UK nor Northern Ireland is making any provisions to implement a customs border in the event of "No Deal".
100% of the costs would fall on Ireland. Thus, the threat to push all the costs on Ireland is very real.
This too, explains how it would be "out of character" for the EU to abandon a baby.
Pressure on Ireland
Three senior EU sources confirmed that Ireland was being forced to work with the European Commission’s Task Force 50 to lay out detailed plans on customs controls, tariff collections and checks on plant and animal products.
The European Commission has made clear that it will require Ireland to defend the integrity of the EU single market and will not provide legal exemptions on required checks.
The decision to put pressure on Dublin reflects concerns in Berlin and Paris that if the UK does not cooperate, then Ireland will pose a risk to the integrity of the EU single market in the event of a no deal.
“We need to know exactly what is going to happen in Ireland on day one of a no-deal Brexit if the British do nothing to help,” said an EU diplomat with knowledge of the discussions.
Pressure in Reverse!
It is Johnson's and DUP's best interest to not help with this dilemma, so they haven't and won't.
The turnaround irony is astounding.
Michel Barnier, the EU's top Brexit negotiator openly spoke, on camera, of using the backstop as a "strategic and tactical means to put permanent pressure on the UK."
Please play the clip: Let's Discuss Brexit (and How the EU Bragged, on Film, About Screwing the UK)
Suddenly, the backstop pressure is in reverse. It's on Ireland and the EU.
What about Dumping DUP or changing the border position?
It is the single biggest issue that has bedevilled the Brexit process - how to retain an ‘invisible’ border in Northern Ireland while leaving the EU’s customs union and single market, but not creating a trade border in the Irish Sea.
The hunt for “alternative arrangements” still holds the key to delivering an orderly, rather than a ‘no deal’ Brexit, which is why a Brexiteer-focused group has set up an Alternative Arrangements Commission to try and find a solution.
The Commission says is looking to deliver workable solutions in “two to three years”. Separately the Government has committed £20m to the search.
Although the AAC is officially non-partisan, it is explicitly designed to deliver a ‘hard’ Brexit which sees the UK able to have an independent trade policy, setting its different tariffs and standards from the EU to facilitate trade deals with other countries, like the USA.
Irish Sea Border Back in Play
The proposed solution puts the border in "two or three years" in the Irish Sea, not a land solution between Ireland and Northern Ireland.
DUP rejects this prospect. And Theresa May desperately needed DUP to keep her minuscule 3-seat coalition intact.
Johnson is headed for elections anyway, so he just might not care.
Would the EU go along?
Nothing is certain, but I suspect it's highly likely.
Barnier proposed this solution in the first place. Please recall that it was Theresa May, needing DUP to prevent a collapse of her government, that led to the nightmare backstop currently in play.
Warmed Over Theresa May Deal Won't Cut It
If we take Johnson seriously, and we should, a warmed-over rehash of the deal the EU offered Theresa May will not cut it. It would be the kiss of death for Johnson if he proposed such a thing.
"Do or Die" should be taken seriously, very seriously.
The EU reaction so far has been "we don't believe you". Of course, that is what they say, but do they mean it?
Contemplating the EU's Strategy
The EU's riskiest strategy is to hope for or facilitate an immediate motion of no confidence on Johnson that succeeds.
It is risky because Nigel Farage just might be the next PM. Alternatively, a Tory-Brexit Party coalition just might get an amazing majority.
However, I do not believe a motion will succeed.
Regardless, the EU is not in control of this, short of saying it would be willing/not-willing to talk with Johnson as soon as he is elected.
Time to Think
The EU has time to think about this, at least up to the elections, and likely until September 3. If May gives a final address to Parliament as planned, the first chance for parliament to dump Johnson via a motion of no confidence would be September 3 due to a scheduled summer recess.
From August 25 through September 2 the EU can likely stave off a motion of no confidence simply by agreeing to meet and discuss things with Johnson.
I suspect the EU will do just that, preferring to deal with Johnson rather than risk Nigel Farage. It might depend on Brexit Party polls between July 25 and September 1.
After September 11, it will not be possible for the UK parliament to prevent a No Deal Brexit. There would not be sufficient time.
I discussed the September 11 cutoff timeline in Brexit: Please, Let's Discuss 10 Pertinent Facts.
What's Likely? Some Combination of the Following
- The EU will have to give up something. So it will.
- Johnson will have to give up something. So he will.
- The EU will will agree to a temporary backstop or technology solution somewhere.
- The Backstop may shift from land to sea or it may be technology based.
- The permanent border is more likely to be at sea than on land (My conclusion based on the above discussion).
- If the border is land based, either temporary or long-term, Johnson will agree to help Ireland with costs.
- Johnson will agree to pay the Brexit fee.
- Both sides will agree to work closely on trade deals and other issues starting immediately.
- There is a some chance of a zero-tariff or low-tariff interim deal for five or 10 years. Given the EU is a net exporter to the UK, a zero-tariff solution would hugely benefit the EU (in the eyes of EU exporters, especially Germany). I suspect a low-tariff agreement is more likely, but with specific agricultural restrictions.
- Assuming there is a deal, points 1, 2, 6, 7, and 8 are a given.
- Points 3, 4, and 5 are where the deal will be struck.
- Point nine is a hopeful possibility, and not all that unlikely.
The end result of this encouraging setup is highly likely to be a fabled unicorn: a managed WTO-Brexit.
This would represent the best possible result for the UK (from the outset) and the best result possible for the EU (from this point going forward).
Alternatively, is the EU really willing to risk dealing with Nigel Farage? Over Germany's objections and a collapse of EU exports to the UK? With Italy simmering in the background? With the head of the ECB simmering in the background?
I think not. Thus, a good deal for everyone is what I expect, and have for some time.
If So, Six Things
- Johnson will have genuinely delivered Brexit (as opposed to May's deal which wouldn't).
- Parliament will overwhelmingly approve the deal.
- The Brexit Party will no longer have a reason for being.
- Remain and Referendum notions get thrown on the ash heap of history.
- Johnson will be a hero, Corbyn a goat.
- Johnson will handily defeat Corbyn and his splintered Labour party in the next general election.
Should that happen, and I think it will, congratulation UK!
Mike "Mish" Shedlock