Sunday 8 December 2019

Brendan Keenan: 'A long Brexit transition may be the best result we can hope for'

The UK will continue to face Brexit rifts long after the withdrawal agreement is passed. Photo: Reuters
The UK will continue to face Brexit rifts long after the withdrawal agreement is passed. Photo: Reuters
Brendan Keenan

Brendan Keenan

That's the easy bit out of the way - probably. If you thought the three years to agree a withdrawal deal for the UK's departure from the EU were awful, just wait to see what's coming next. That's making the more than heroic assumption that, whether before or after an election, the current deal will go through Westminster sufficiently unchanged not to need another EU summit. I make the assumption partly on the grounds of saving my sanity, but also because it is now the probable outcome.

Which means it is time to start thinking about what on earth might happen next.

It is hard to know what the reaction in Britain will be when the general population discovers that ceasing to be a member of the EU is not the end. Let us hope that it is the beginning of the end but, to use Churchill's phrase, it could yet be merely the end of the beginning.

People can be forgiven for not realising that this is just the withdrawal deal setting out the terms for the negotiations to follow on the UK's new relationship with the EU.

Historians will wonder how something which need not have covered much more than the financial liabilities and the position of citizens during the transition period provoked the greatest political crisis since, well, let's say the Corn Laws.

They will undoubtedly look to the Irish question. Frictionless trade on the island after the final relationship is settled was made a condition for a withdrawal agreement. This is generally considered to have been a brilliant idea and a diplomatic triumph for Dublin.

It was certainly the latter, but it is possible to be too clever.

The thinking was that if it were not made a pre-condition, Ireland's requirements would be ignored at the end of what was bound to be a wearisome process, if everything else was agreed.

That was a real danger, but it does not require diplomatic brilliance to know that trying to copper-fasten the results of negotiation before negotiation begins is apt to go horribly wrong.

The Treaty of Versailles comes to mind, but Britain pulled a similar trick on both Redmond and Carson over Home Rule, and we know how that ended.

On this occasion, though, almost everyone, not just the Irish Government, seemed determined to get their final objectives before arguments began.

Theresa May was a serial offender. She had no need to say that Britain would leave the customs union and the single market. Even if that were her preferred destination, it did not have to be reflected in the withdrawal agreement.

Yet the Irish question was the biggest bone of contention; not so much between the different Westminster factions, as the DUP discovered to its cost, but between the UK and EU. The DUP also wanted its final objective - no internal UK border - nailed down. Someone had to lose, but that does not mean anybody won.

For the moment, it looks as if Ireland came closest to being a victor, with agreement that there will be no border on the island. For the moment. There might still be a no-deal exit and a new land border.

In the meantime, we have a worse withdrawal deal than May's, a more unreliable London government, and a more fractured UK political system than would have seemed possible, even in the febrile conditions of a year ago.

There is also a traumatised peace process, moribund all-island institutions, and a northern economy which will be damaged by the implications of an unprecedented trading structure, the practicality of which must be open to grave doubt.

Uncertainty is the problem. The behavioural economist Tim Harford noted last week that investment in the UK is the weakest relative to growth yet recorded.

The weakness started at the time of the referendum, which he says can hardly be coincidence, before going on to explain why it represents perfectly rational behaviour on the part of businesses.

There will be more uncertainty in Northern Ireland than anywhere. There is little incentive to invest when managers cannot know when the new arrangements might apply, what they will cost, what effect they will have on the order books, or whether they would even work in practice at all.

What could be described as the typical successful northern firm featured in recent news bulletins.

This one makes parts for the British car industry (itself subject to great uncertainty). That means buying raw materials from Britain or elsewhere, shipping them in, and shipping the finished intermediate products to the car factories.

Northern manufacturers do little trade with the rest of the EU, Ireland included.

Their frictionless trade on the island is less than half the frictionless trade with the rest of the UK. Under the deal, frictionless trade will continue where it matters least, and there could be any amount of friction where it matters most.

It is not only the car parts firm which will be subject to costs and delay. So too will those who sell to it and buy from it.

Modern shipping costs are so low as to be irrelevant. The same is not true of customs delays and tariffs, even repayable ones.

The northern economy's capacity to withstand such a shock is limited. Its growth is the slowest among the 14 regions of the UK. Its potential growth is also among the lowest because, according to ESRI findings, its two-tier education system leaves large numbers of young people without decent qualifications.

Excited talk about a united Ireland will fade fast if a long Brexit agony accelerates the widening gap between the North, the South and the richer regions of the UK. And the agony looks likely to be long.

It is easy to believe, but difficult to take on board, that the transition period to a permanent arrangement could be even more problematic than the awful exit process.

Uncertainty is already having its effect on the Irish economy.

Last month's AIB index of purchasing managers' confidence - the most quoted indicator of future trends - showed manufacturing output falling for the fourth month in a row.

Notably weak orders from the UK were cited as the main reason, although the remarkable resilience of the Irish economy through all of this was seen in the effect that the decline was still the smallest in the euro area.

We need an end to uncertainty, but despite all the developments of recent weeks, it may not be forthcoming.

Withdrawal proved so difficult because there is no agreement in Britain on its relationship with the EU after it has left.

There is also no agreement on what kind of Britain it should be. These are now the actual issues to be decided.

In that context, the disappearance in Boris Johnson's deal of the pledge to stick closely to EU regulation could be more significant than the changes to the backstop. Nothing is supposed to happen on that during the transition, but the line may not hold.

Regulation, rather than EU membership, will be the new battleground. It is very easy to foresee demands from what was the Tory Brexit lobby for 'deregulation' during the transition period, and even attempts to introduce it.

The member states are unlikely to tolerate that, but the issue cannot be kept out of the negotiations on a final agreement.

Regulation is the key difference between the UK being just another trading partner of the EU, or having a much closer relationship which would involve, or come close to, membership of the customs union. Expect more Westminster blood-letting over Britain's future.

Whatever the withdrawal agreement may be, it is not 'peace in our time'.

It is hard to keep up with events or interpret them correctly. Who knows, the vagaries of politics might see similar issues arising with a Labour-led government, if Corbynite policies are introduced during the transition, but this time over state aid rather than regulation.

These risks were highlighted in a speech to the Association of European Journalists by former Taoiseach Bertie Ahern - a man who knows a thing or two about these matters.

He suggested the transition period could last not until 2022, but for many, many years to come. It rather sounded as if he thought that might be the best outcome we could hope for.

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