Angela Merkel is beginning to bend a bit on Brexit. She has to. German exports will collapse if there is no Brexit deal.
From Eurointelligence
More in Optimism in Brussels, Less in London
There is a duality in the Brexit process – a trade-off between the likelihood of a deal against the likelihood of ratification. This week, the former went up, and the latter went down. We have been close watchers of more than a few conflicts in the EU over the last 30 years, but none quite so intractable as this one.
The chances of a deal in the European Council are indeed higher. What we find particularly significant was the intervention by Angela Merkel who urged both sides to show compromise. As the FT reported this morning some observers saw in her remarks a message that the EU negotiating team should rethink its approach to the Irish border. She also stressed that in the event of a no-deal Brexit there would be a hard border in Ireland, something the Irish government still seems to be in denial about.
There is now one, and only one, avenue towards successful Brexit deal: a late agreement, possibly as late as early January. As became evident this week, this agreement will involve a longer transitional period, but it will also include new elements with the aim to provide a political safeguard to the UK that the Irish backstop need not be triggered.
The reaction among UK Brexiteers to a longer transition period is bordering on the hysterical. The ultras are now openly campaigning for a no-deal Brexit. They are urging May to reject any notion of an Irish backstop – which amounts to the same. The DUP’s language was more moderate. They said that an extension of the transition does not solve the problem, which is of course correct.
As we are now headed into overtime, preparation for a no-deal Brexit are starting in earnest on both sides. This will continue even after a deal, all the way until ratification in the House of Commons which may not happen before March. If there is no majority for May’s position early on after a deal, preparation for a no-deal Brexit will intensify dramatically, in the industry, in the UK government, in the other EU27 member states and at EU level. We would expect the EU and the UK to negotiate a series of mini-agreements to ensure that customs borders are technically operational. We think a no-deal Brexit is undesirable for many reasons, but we should not overestimate the potential of a no-deal Brexit to scare hesitant MPs at a time when most of the frictional costs associated with a no-deal Brexit, will have already been incurred. We fear that another Project Fear episode, this time in relation to a deal, could badly misfire. We think the best strategy for May is to go for a 9-12-month extension of the transition period and a barebones trade deal – one that only requires EU-level agreement – as a backstop to underline the finiteness of the transition.
May’s Best Strategy
The longer May takes to agree to a deal, the more Merkel will bend.
Not only has Merkel’s “grand coalition” collapsed, so has the German car industry.
Germany is heavily dependent on the UK for exports.
EU infighting with Italy’s budget and rising yields in both Italy and Spain are more headaches.
Since many of the costs of a hard Brexit are already baked in the cake, May has nothing to gain by making concessions.
Indeed the UK’s best option is simply to walk away counting on a series of mini-deals that both sides will need equally.
A delay serves no real purpose. Another year will not fix the Ireland issue.
Mike “Mish” Shedlock
“If the Brits adopted the Unilateral Zero Tariffs idea, would that solve the Irish border question?”
No, and I doubt they would. They would punish Germany until they reached a better deal.
I strongly suspect that once the UK does leave and German exports collapse, it will be the EU (led by Merkel) pleading for a better deal than the WTO policies that will be in place. Not sure if Ireland has WTO contingencies but the EU will be quick to do something.
Fishing rights will be a big deal. France does not really care that much about German cars.
France exports lots of agricultural products to UK.
If Macron messes things up and French farmers are hurt by losing their markets in UK or export to UK becoming more difficult and more expensive then Macron can expect burning manure and spilled wine when he tours France.
It is crazy how blind and incompetent Merkel and Macron are about this issue.
Merkel and Macron should have NEVER left negotiations with UK to EU bureaucrats that want to punish UK.
But both Merkel and Macron want to punish the UK for voting to Leave. As a UK person one has to ask what the UK gains from EU membership considering it costs us £10 billion a year and we end up with a trade deficit of £70 billion. As far as I’m concerned the more EU goods are replaced by those from the rest of the world the better, and I want the EU to suffer big time. Wish it nothing but ill.
Passing through the UK recently, I was amazed by the number of German cars on the roads — mostly quite new, due to strange UK rules which seem to get older vehicles off the road. If post-separation the UK sticks tariffs on German vehicles, it is going to make life tough for the Brits since the English have lost so much of their manufacturing base.
If the Brits adopted the Unilateral Zero Tariffs idea, would that solve the Irish border question?
That’s where “Boycott for Britain” could help. The EU takes so little UK produce compared to UK imports (that could be displaced from Japan, Korea, China, US) it’s worth considering if tariffs on EU finished goods can deliver tax income to support UK business to also help displace.
The answer is usually no but given the UK is so weak industrially, and it worked for others post WW2, it should get serious consideration.
Off-topic question Mish.
What are you thoughts on EU/Russia if they decide to settle all trade in Euros?
How would the US likely respond?
EU exports much more products to UK than UK exports products to EU so in a trade disruption EU will be a much bigger loser and if tariffs/customs return then EU will be paying much more to UK than UK will to EU.
Economies most at risk from this are Germany with many manufactured products and France with many agricultural products so since Merkel and Macron have allowed EU’s Juncker, EU’s Barnier and European Council’s Tusk to have a negotiation style concentrated on humiliating UK and especially PM May I have started to think Merkel and Macron are completely incompetent in economic policy also.
If UK tells EU that they will NOT be paying the 40 billion in EU payments that EU has demanded then mostly taxpayers of Germany and France will be paying that 40 billion so Merkel and Macron can explain to their voters why they let Juncker, Tusk and Barnier screw the negotiations.
For UK the best Brexit in a current situation is a NO deal Brexit since the Chequers deal proposed by May is totally stupid waving of white flag and chaining of UK to EU forever.
May has had the worst advisers.
First she already had a clear majority but then she called elections to get a bigger majority when polls were favorable but then her advisers made plans to slash pensions and take away benefits because they were drunk from the polls and May did not increase her majority but instead lost her majority so May had to lean on support of Northern Ireland party DUP.
Then May let ex-communist never-worked-a-day Remainer Olly Robbins write her the Chequers plan to keep UK chained to EU forever and caused a crisis at Tory party and many resignations because May’s Chequers plan really is totally incompetent.
Now May thinks her Chequers plan is the only one possible because she does NOT want a hard border between Northern Ireland and Ireland because the peace agreement forbids it and because DUP would not accept it.
May thinks the only way to not to have a hard border is to tie UK to EU forever (chequers plan) or to leave Northern Ireland in EU free trade area creating a customs border between Northern Ireland and rest of UK (DUP will not accept this).
Here is again a solution for the incompetent May:
-No deal Brexit.
-Let Germany and France pay the 40 billion to EU instead of UK
-Let German industry attack Merkel for endangering their exports to UK.
-Let French farmers attack Macron for endangering their exports to UK.
-Create a self customs system through IT where people submit customs reports in advance themselves and have large factories have customs officials on site to confirm this and have customs officials in large cities to go around many midsize companies to check their customs were ok. Have only spot checks on small companies Customs issues. Have a 500 pound customs free allowance for individuals.
-Leave the border between Northern Ireland and Ireland open like before and tell companies they need to do the customs thing like specified above. Since there is a 500 pound customs free allowance for individual it means individuals should not be bothered at all. Have spot checks for companies.
-Since Ireland is also outside of Schengen free movement area like UK this means Ireland controls arrivals to Ireland so there is NO danger of terrorists or hordes of welfare seeking migrants crossing over from Ireland to Northern Ireland so the border between them can be open.
Now get on with Brexit and make it a success so other EU countries will also exit the bureaucratic monstrosity that is EU in the future.
UK gave ground too early on in the negotiation on various areas.
Calls in some UK quarters to boycott German cars as a starter.
A list of goods and services to avoid.
If enough people go along it will be felt by the exporters targeted.
May is hopeless negotiator.
Her good will building strategy by agreeing to pay 40 billion to EU as a first step in negotiation has to be among the dumbest negotiation tactics ever.
I can understand that as UK had signed up to various spending commitments and tidying/settling the bill is an honest thing to do.
A popular misconception. The EU has a ‘legal personality’ and so when it agrees to finance something IT does so, not the member states. If the EU had any legal basis for demanding billions from the UK they would have produced that advice. To date not a word. The 40 billion is ‘buying’ a trade agreement it is as simple as that.
Well it’s taking long enough. Let’s hope the £40Bn gets pulled if there is no trade deal but I doubt it will.
When was the last time we had a Government putting the UK first? Under Thatcher, none since. This bunch are no better.