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.

RECOMMENDED ARTICLES

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

Theresa May Delays Brexit Vote: "Meaningful", Clarity and Temporary Defined

UK Prime Minister Theresa May wants more time. She told Parliament they can have a vote on March 12.

Eight Reasons the EU Will Suffer Far More Than UK in Brexit

The EU would be wise to make a deal with the UK. It will get clobbered in the event of no deal.

EU Throws Theresa May a Poisoned Lifeline: Court Rules the UK Can Cancel Brexit!

The European Court of Justice (ECJ) is willing to let the UK cancel Brexit even in a negotiation Extension.

Clarification Toilet Paper: Theresa May Asks MPs for Two More Weeks

Theresa May wants two more weeks for discussions with the EU. All it will do is run down the clock.

Trick or Treat? Less than Half of UK Believe the UK will Leave the EU on Oct 31

The EU thinks there is an 80% chance of no deal. Yet, less than 50% of the UK thinks the UK will leave at all.

UK Prime Minister Theresa May Will Be Gone Before Christmas

The UK’s opposition Labour party Foreign Secretary says May will be gone by Christmas or this Spring at the latest.

Brexit Update: Less Than Half of UK, Italy, Czech Republic Wish to Remain in EU

Although less than half of the UK wants to stay in the EU, there is still no majority for any particular outcome.

UK Debates the Meaning of "Temporary" as Legal Review Reveals Permanent Trap

As expected, a review of the Brexit doc that May signed shows the distinct possibility the UK could be trapped forever.

Hypocrite Theresa May in Bed With the EU While Chastising the UK Parliament

Theresa May chastised the UK parliament to "listen to constituents." She should do just that, herself.