Saturday 24 August 2019

Brendan Keenan: 'Leaving Brexit to Boris will be a big mistake as we seek to avoid disorderly departure'

Boris Johnson would not be in running for top job if deal had been done with the DUP. Photo: PA
Boris Johnson would not be in running for top job if deal had been done with the DUP. Photo: PA
Brendan Keenan

Brendan Keenan

A favourite cartoon, from a long time ago, showed the archetypal newspaper seller standing beside a billboard which read: 'Archduke Ferdinand Found Alive: First World War a Mistake'.

It is not often that one can point to a particular date on which history changed, but there was one recently - Wednesday, March 27. This was when Jacob Rees-Mogg, chief ideologue of Brexitism, said he would vote for Theresa May's deal if it were supported by the Democratic Unionist Party.

DUP support, as we know, depended on changes to the Irish backstop. Astonishingly, no meaningful attempt by the Irish Government to win that support and achieve a deal was made.

And no convincing explanation has ever been given as to why not.

Had it been achieved, Mrs May would be prime minister and Boris Johnson would not. The UK would no longer be a member of the EU, so that particular septic boil would be lanced. Thanks to the transition arrangement, economic arrangements would be exactly the same.

No such obvious opportunity is likely to appear again. It will all be hard slog from here on. Unless new opportunities are created, the ever-present risk of disaster, economic and political, remains.

One thing Brexit has demonstrated is that, despite its ambitions, the EU is still essentially an economic project. It has indeed brought peace to Europe, which makes it all worthwhile, but it has done so through trade, commerce, travel and social policy, not through political structures.

It is not just the British who have been surprised by how difficult it is to leave the EU but all these entanglements are economic.

The backstop tries to deal with the profound political questions post-Brexit; the place of northern nationalists and unionists and the nature of Ireland's membership of the EU via the economic regulation of goods and services. Chlorinated chicken meets the peace process was never going to lead to much.

Mr Johnson has history on his side when he talks airily about border checks wherever is convenient. It was different before and during World War II, but from the 1960s, UK Customs were hardly to be seen on the Border. Day-to-day travel did not matter much to them.

It was different on the southern side. Stops at the customs post, presentation of documents and regular inspections were the norm. The Republic emerging from protectionism had more skin in the anti-smuggling game than Britain.

The same thing would probably happen with the backstop border in the Irish Sea. Especially under Mr Johnson, it would, in all probability, be so casually policed that there would have to be some kind of border in the Celtic Sea - exactly the thing Dublin dreads most.

Under no-deal, Ireland would have to apply the EU border in the way that Brussels wanted, while the British might well be as fuzzy as ever about that part of their territory. The nightmare which should haunt everyone is not that commercial border, however, but the enforced return of security barriers.

The economics are bad enough of course. There was a veritable blizzard of warnings last week about the consequences of a disorderly Brexit. As the danger of such an outcome has grown, forecasters have concentrated on the more alarming range of their predictions.

The IMF annual report on Ireland merits close attention. The IMF is an official organisation and governments respond to the findings on their respective countries so its wording is always sober. Bearing that in mind, the content is, well, sobering.

The Government may be cheered by its recommendation that more borrowing may be justified, but that is only if the situation is so bad that the so-called 'automatic stabiliser' rise in the deficit from slower growth proves inefficient.

It will be a rise in the deficit because, as other reports from the likes of the ESRI and Fiscal Advisory Council pointed out, it is too late to create the budgetary surplus which could have absorbed some of a Brexit slowdown. And growing deficits may present a problem.

We know from the euro crisis that the IMF proposes but the EU, as represented by the creditor countries, disposes.

There will be assistance from Brussels to support particular sectors: the Commission loves handing out money and national politicians love receiving it.

Extra government borrowing, though, is another matter.

Besides, what would the markets make of it? Adjusting Irish debt for multi-national operations (Gross National Income) has made its way into the hallowed chambers of IMF reports. At 105pc, of output, it is 60pc more than the conventional GDP figure and 20pc more than a similar figure for the UK.

The most worrying line in the IMF report, then, is the one which talks of a "sharp credit contraction". That is IMF code for trouble in the banks. That would indeed be bad. Allowing the banks to spend some of their new hard-won capital, as suggested, hardly looks like a solution to that kind of crisis.

There is still a chance that there will be no crisis. There is a crucial difference between a no-deal Brexit and a disorderly Brexit. It is theoretically possible that departure at the end of October would be followed by a freeze where everything stays the same, but which would not be a formal transition period between a withdrawal deal and final post-membership arrangements.

Brexiteers would hate it but Mr Johnson could say, in his inimitable way: "Look, we're out of the blasted thing. We have our cake; let's get on with the job of eating it." The psychological impact of no longer being a member state might be enough to let him get away with it.

Yes, it looks highly implausible but, oddly, it seems to be what the markets are expecting. Each lurch towards a no-deal outcome is met by negative response in sterling and interest rates, but nothing major.

Either market participants have priced in the costs of a disorderly exit, which seems unlikely given their probable scale, or they are betting that the very prospect of those costs will stay everyone's hand in the end.

Some analysts are taking comfort from the UK's safety buffers. The unemployment rate of 3.8pc is the lowest since 1974. Employment is at a record 76pc. National debt of 85pc of GDP, while high, is falling and not out of line with eurozone levels.

Despite all the difficulties of the last few years, the current account deficit with the rest of the world has fallen by more than a percentage point to less than 4pc of GDP since 2016. And of course, Britain's public debt is in its own currency and most of the lenders are British. That reduces the chances of an Irish-style bankruptcy.

Perhaps, mesmerised by the dire possibilities in a disorderly Brexit, we've been asking the wrong question.

When the Ford motor company announced the closure of its engine factory in Wales it explained that it had nothing to do with Brexit - there was excess capacity, diesel engines were on the way out, and so on.

All of which was true but the real question is whether, if Britain were a member of the EU, it would get a proportionate share of European car industry investment - to which the answer is yes; and whether it will if it is not a member - to which the answer is no.

Policy on Brexit, particularly Irish policy, should focus on the long-term, not what happens over the next 12 or even 20 months. Time is on our side. If we believe what we say about the implications for Britain of Brexit, economic logic will inexorably lead to a close alignment of UK and EU, even if short of renewed membership.

In those circumstances, one can envisage a meaningful backstop which avoids a highly visible Border and makes possible a resumption of the peace process. A disorderly Brexit means an all-too-meaningful Border and a broken peace process.

The objectives for Irish policy could not be clearer but they also look further from success than at any time since this began.

If Dublin continues to watch with folded arms and gritted teeth as a disorderly exit looms it will, as Talleyrand may or may not have said, be worse than a crime. It will be a mistake.

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