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
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.
Eurointelligence
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.
Credible Threats
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
Foster notes Ireland under EU pressure to lay out plans for border as fears mount that no-deal Brexit is unavoidable.
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.
Dumping DUP?
What about Dumping DUP or changing the border position?
Foster asks: Can the Irish border ‘trilemma’ be solved? A new Brexiteer-focused group thinks so
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.
Deal Givens
- 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.
Fabled Unicorn
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
UK has stated even under May that they will NOT impose a hard border between Ireland and Northern Ireland. Boris Johnson will NOT impose a hard border because that would lead to losing DUP support and new elections where Tories would Lost ma ny seats to Brexit Party.
Irelans will NOT impose a hard border because that would be a political suicide.
So the only way hard border happens would be for Merkel and Macron to send troops to invade UK or Ireland and that will NOT happen.
The backstop was an insanity inserted in the May deal to sabotage Brexit by May herself and Olly Robbins and demanded by EU to sabotage Brexit.
Who cares if some product goes thru that border tariff free since by NOT paying the EU’s 50 billion dollar ransom UK is still better off even if product flows freely thru that border for the next 20 years.
Sigmar Gabriel, the former Vice- Chancellor of Germany, recently wrote that “the EU should be ready to make more concessions to the UK and to allow more time for negotiations,” adding: “the British have withstood bigger crises and will overcome this economic crisis sooner or later. But it’s by no means assured that Europe will survive Britain’s departure.”
Theresa May had lots of red lines, but she crossed every one of them. The next PM will have to live down the poor reputation that UK leaders have for following through. Moreover, it is hard for anyone to take a PM’s statements at face value when they know their grip on power in such a divided an fractious parliament is extremely tenuous.
The reality is that the minority position the tories hold in the commons means that the PM’s room to maneuver is extremely limited and can easily be hamstrung by a handful of MPs who vote with the opposition. Sure, there are steps the PM can take to push a no deal outcome through (like proroguing parliament), but these are not without significant political costs. Pushing a no deal outcome through a parliament opposed to it will result in a parliament that refuses to do ANYTHING the government wants it to do. Johnson could get the Brexit he wants but find he has lost the ability to enact any policy at all.
In short, no one trusts what a British PM says because they know they are extremely weak given the fractious nature of parliament at present.
May was totally incompetent in negotiations.
If there is a NO deal Brexit Germany and France will be hit hardest economically.
Are Merkel and Macron ready for it?
Who hurts most from Brexit is beside the point. The issue is whether the pain is tolerable on a political level, and how that pain ranks against other pains. On that level, I think the pain of giving the UK a “good” exit deal is worse for Germany than playing hard ball. From Germany’s perspective, maintaining the stability of the EU is a first order priority and a successful UK outside of the EU poses an existential threat.
Sure, Brexit will hurt Germany but a collapse of the EU will hurt immeasurably more (from the perspective of Germany politicians that is).
Make no mistake, there is no better deal to be had from the EU than what May negotiated. Maybe in a post Brexit future the EU would be amenable to giving better terms (particularly if the EU starts to further unravel), but further compromise just isn’t going to happen in 2019 or 2020.
“Brexit “Do or Die” Game Theory: Is Johnson Lying? Hunt? Ireland? EU?”
When is a politician lying? Their mouth is moving. Somebody famous said that, once upon a time. Draghi said that when it is serious, you have to lie. Brexit is serious business.
Actually it was Juncker who said that when it’s serious you have to lie.
Fantasy built on fantasy. All Brexiteer solutions depend on the EU either disobeying International Law-WTO-or EU law. It is not going to happen. No one seems to understand that the EU hasn’t blinked once. It made a monkey out of two British Prime Minister in succession and whoever the next Prime Minister is they will make a monkey of him. If there had been any truth or fact behind the nostrums like “they need us more than we need them ” , ” easiest deal in history”, ” etc… etc… Then the EU would have crumbled by now. Instead it is the British government and main political parties that are in turmoil. Who holds the card? Not the English for certain.
UK holds most of the cards but May did NOT use the cards.
The above is all too clean. I’d have no surprise to see the Irish thrown into turmoil by the French who are very keen on seeing Irish competitiveness clobbered.
The border is just another chess piece against the UK or against Ireland. UK, Ireland, border are all disposable to the EU. Of little consequence outside of helping achieve their political aims.
If the French can’t attract the inward investment Ireland has they will hamper and hinder any chance Ireland have until France is equally as competitive. If that doesn’t happen then they will make sure Ireland pays more than its fair share into the budget and US multi-nationals (Apple etc) in Ireland get hit with further tax demands. Watch this space. Forget promises made to Ireland around the Lisbon Treaty.
As for Leo V, he’s another piece of work. Disposable as far as the EU is concerned. Say no more.
The French will clobber the Irish low tax regime later – now is not the time – especially if they want Irish backing for Barnier as next President not Weber.
Obviously as taxation is a National Competence they will have to do it a backdoor way – like alleging unfair competition / state subsidies which both fall under EU competences.
Of course, France could just lower its taxes to Irish levels. Something else for Mish’s 0% bucket!
With the recent French tax cuts, without spending cuts, their deficit is already due to rise. Same everywhere, hard and painful decisions to be made.
Somewhere in this is the future EU attitude to deficit spending and that also related to how Italy is all mixed in.
For all their hard talking it would be no surprise to see the ECB/EU go very dovish on Italy and thereby give France a free pass. The French hoping to pick up higher levels of inward investment post-Brexit to help pay for tax cuts without spending cuts. Just imho.
Not so much helping Italy, more like turning a blind eye to France. Germans will ultimately pay one way or another and easier to soften Germans up than confront France/Italy.
Seriously easier to soften up the Germans in the name of solidarity so that path of least resistance is likely to be trod. Again, just imho.
Agreed, they squeeze the Irish later. A pound of flesh for helping the struggle vs British etc.
All costs of Irish border should be paid for by Ireland/EU. It’s their problem.
Boris J and the Tories will have a real problem in future if money is seen spent helping those wishing the UK harm – take that to mean the EU/Eire.
Leo V is a right piece of work.
Lastly, UK needs to become more competitive. Not easy given demands on spending but after next election, if Tories win, they should consider sweeping changes to make it easier for corporates to retain profits for UK investment.
Many ideas need exploring on less regulation, tax breaks for investment and generally lower corporate rates in exchange for corporate behaviours that help the UK.
“the U.K. will postpone article 50 until Johnson can re-negotiate a new Brexit deal that will include puppies and fairy dust that everybody will love.”
Put that in the 0% bucket.
If someone tries, expect to see Nigel as PM
I’ll put “revoking article 50” as a higher probability than “PM Nigel” 🙂
I think the French are not going to allow another extension, as as Oct 31st gets closer and closer and a “No Deal Brexit” becomes the only other option, the politician will take the easy way out – enough of them will point at Boris and say “you got us into this mess by promising something you couldn’t deliver on, so we’ll postpone article 50 and you can go and get us a deal we can all live with”. This will, of course, kill Brexit.
themono, Boris J doesn’t give a sh!t.
EU won’t budge.
Hard Brexit coming with Irish issues.
Boris J would rather go down in history as having fought and lost than back down. He is being given that chance by the Tories. Backs against the wall, do or die, Battle of Britain.
No £39Bn to the EU and if monies are paid £1Bn a year for 40 years in today’s money. The money will be needed at home.
Disaster very possible but he really doesn’t give a sh!t and neither do a Hard Core some of whom are looking forward to a fight including blocking British Territorial waters.
Airspace will also become a battle ground.
7
It could be a disaster but there are people wanting a fight.
As for a return to the EU – it would mean adopting the Euro post 2025 and Shengen. Good luck with selling that, might happen, but not an easy sell unless UK does become an economic wasteland.
Hard times coming.
We will know the outcome in 6-10 years, in the meantime change, turmoil and stress. Blood, Sweat & Tears.
Let’s hope good sense prevails.
No £39Bn to the EU and if monies are paid £1Bn a year for 40 years in today’s money. The money will be needed at home.
Sure that will do wonders when the UK tries to reach trade agreements after Brexit….
BTW do not see Mish or any of you address Belfast Agreement which is a treaty not only between the UK and Ireland but among all the Northern Ireland parties.
Mish is totally wrong when he says that the EU will cave… Try getting all those countries in agreement between now andthe deadline…
How about Gibraltar….
BTW your comment about airspace get real. The EU has more airspace that the UK.
Finally you are correct when you say Hard times coming. IMO mostly to the UK.
EU won’t cave, UK will exit on WTO.
No monies need change hands, it’s not defined in the Treaties or Article 50 and there is no 3rd party to judge it. Both could agree on a 3rd party but it can’t be the ECJ, perhaps The Hague but nothing is defined. This has been discussed by top legal types on both sides and the conclusion was there is no legal reason to pay a penny.
No exit arrangement = no £39Bn.
As for airspace, study routes into the North Atlantic.
Same for English Channel shipping that can be narrowed.
Gibraltar is free to join Spain anytime & NI join Eire. So long as they don’t expect future financial support for their social programs.
As for hard times, yes, we’ve been bombed before now and survived. Personally I think we should just get on with it like New Zealand, Australia, Canada, South Africa etc.
There is already a deal for airspace in the event of a NO deal Brexit since EU does not want to create an economic depression in many EU countries that losing UK tourists would cause. Eu also does NOT want to re-route all flights from EU to USA and Canada to avoid UK airspace because this would bankrupt many EU airlines.
Themon you are dreaming on both. Tories would get clobbered in the next election on an extension
“Boris Johnson is a politician. What do politicians do? Lie.”
Of course, so what? In what direction?
I suspect it’s more likely that he rather have no deal than anything else.
Do or Die is brilliant
What’s Likely #10
the U.K. will “postpone” article 50 until Johnson can re-negotiate a new Brexit deal that will include puppies and fairy dust that everybody will love.
Another delay would lead to political paralysis until elections and in new elections Brexit party would eat Tories lunch so it is do or die for the tories. EU bureaucrats are misjudging the situation completely.
I have always thought the backstop was bullshit. I think in the case of a no-deal exit, the Irish themselves will talk a big game about setting up customs controls, but will, in the end not really enforce anything- the border will be just as it is now, and the EU will pretend otherwise.
There aren’t such great problems with tariffs on German/EU products, but there will be a lot of contention about re-importation of stuff via Britain, not only price-wise, but regulatory-wise. Many such problems are not that easy to solve (by executive decision) since they are tied to legal regimes.
German and French economies will be devastated by tariffs since they export much more product to UK than UK exports to Germany and France.
No deal Brexit aka WTO trade Brexit will lead to Merkel being thrown out and make Macron a 1-term president so they would have to be IDIOTS not to tell EU to make a deal where trade continues as is despite NO deal Brexit for 2 years to give time for negotiations on new relationship with low or no tariffs.
Under May ‘s deal these negotiations would still have continued but UK would have it’s hands tied and becoming a colony of EU unless UK gives EU a deal on permanent relationship that is Great for EU and bad for UK.
Boris Johnson is a politician. What do politicians do? Lie.