Saturday 24 August 2019

Colm McCarthy: 'Pretence, promises and the hard reality of Johnson's Brexit'

The UK prime minister's vision of a crash-out departure from the EU would be a ridiculous outcome to a national political failure, writes Colm McCarthy

'If Johnson proceeds with the no-deal crash-out, for which no democratic mandate was given or sought, a hard border in Ireland is unavoidable'
'If Johnson proceeds with the no-deal crash-out, for which no democratic mandate was given or sought, a hard border in Ireland is unavoidable'
Colm McCarthy

Colm McCarthy

In the immediate aftermath of the narrow Leave victory, 52 to 48, in the referendum of June 2016, the UK political class was free to contemplate three broad routes to the implementation of the verdict of the electorate. These were a ''soft'' Brexit, with the UK remaining in the EU economic orbit, outside the political structures but inside the customs union and single market; a ''hard'' Brexit with departure from both but an agreed and amicable withdrawal and a free trade agreement as an outsider; or a crash-out Brexit, with no formal arrangements at all with the European Union.

That the third option, never proposed by Leave campaigners, should emerge as the declared policy of the British government is a ridiculous outcome and a comprehensive national political failure.

Nobody voted consciously for the outcome which now seems probable. It was never proposed, even by ardent Brexiteers, in the referendum campaign, during which its leader Boris Johnson made not a single reference to the possibility. The principal victim will be the United Kingdom, followed by the Republic of Ireland, with smaller negative impacts throughout the European Union, negligible as one travels south and east.

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There is now a blame game under way. The slow transformation of the 52/48 verdict, the Will of the People, into a crash-out Brexit, is a British political malfunction, for which no British political actors are offering to accept responsibility.

Last Thursday, Mark Carney did something quite unusual. He predicted that the currency of which he is custodian (he is the governor of the Bank of England) is likely to weaken. This he attributed to Brexit, continuing a trend in evidence since the 2016 referendum. The Bank statement was clear: "In the event of a no-deal Brexit, the sterling exchange rate would probably fall, CPI inflation rise and GDP growth slow." Central bank governors rarely speculate about the future path of exchange rates and never publicly predict weakness.

Happily, the UK government was unconcerned. Later that day Pippa Crerar, political editor of the Daily Mirror, reported that ''a No 10 insider tells me they're relaxed about pound falling because it shows that business is 'finally taking it seriously' that UK is leaving EU on Oct 31.'

Presumably if business focused even harder, the pound would weaken even faster, inducing ever wilder celebrations in Downing Street.

The source of Ms Crerar's story is mistaken in attributing the recent slide in sterling to the belated seriousness of business. Foreign exchange dealers, not ''business'', drive currency rates and they have been positioning against sterling because the Johnson government is set on a no-deal crash-out. They must feel that his decisiveness is bad news for the UK economy, worse than the limbo which was Theresa May's legacy.

In this they agree with Governor Carney, who feels that Brexit with a deal will do damage but Brexit with no-deal will do even more. ''No ifs, no buts, we are leaving on October 31,'' according to Johnson.

Carney is not alone among economic and financial experts in expecting the worst from no-deal and the news channels have struggled to locate a contrary professional opinion from any reputable source.

One of the asserted upsides of no-deal is that it will end uncertainty and get the whole thing over with.

It will do neither. The absence of a deal means no transition arrangements and no organised basis for trade with the UK's largest actual and potential partners. It is unprecedented for a large and sophisticated country to impose economic sanctions on itself. The UK, in a position of needless weakness, will immediately be plunged into contentious negotiations with an antagonised EU over the issues which the British political system has failed to resolve for the last three years.

No-deal does not get the whole thing over with. The current UK demand is (i) the hardest version of Brexit, outside both the customs union and the single market, (ii) applicable throughout the United Kingdom territory but (iii) avoiding frontier controls in Ireland. This is impossible. The pretend solution, unless the EU delivers what is not possible, is a no-deal exit, which means immediate chaos in the UK's external trade and controls at the Irish Border, which becomes the EU's external border with a third country, moreover a third country which has effectively gone rogue

In addition to the do-or-die end-October date, the Johnson government is, according to the chancellor Sajid Javid, planning to ''turbocharge'' no-deal through spending money.

The UK Treasury is blessed with two cabinet ministers and Javid's colleague, responsible for controlling public expenditure, is one Rishi Sunak, elected to parliament as recently as 2015 and promoted straight to cabinet by Johnson. Sunak's debut on the national media consisted of a pledge to spend an extra £2.1bn on turbocharging, in addition to the £4.2bn already committed.

The idea is to scare the EU-27 with evidence of the UK's no-deal fearlessness, the better to bring them to heel.

The money will purchase, for example, 500 extra Border Force officers for passport inspection, in addition to the 500 already announced. The new British passports they will be scrutinising are to be blue rather than Brussels burgundy, one of May's few deployments of sovereignty. They will be manufactured in France - a French firm, rotten sports, won the contract with the lowest tender. Sunak described the new spending as ''investment'', which sounds prudent as against the boring designation (current payroll) on which the Treasury accountants will insist.

The Chief Secretary to the Treasury, to give Rishi his full title, is going to have fun controlling public spending, which is his job description. Johnson has at various points promised the following: income tax cuts for higher-rate taxpayers costing £20bn per annum, a special fund for Leave-voting target seats in the Midlands and North (£2.5bn), a bridge across the channel to France (£80bn, vital for all the extra trade flows), a bridge from Scotland to Northern Ireland (another £80bn or so, welcomed, why not, by the DUP), a new airport on an island in the Thames Estuary (£120bn) and a new railway line from Manchester to Leeds (£20bn, give or take). There will also be extra money for the National Health Service and 20,000 recruits to the police force. The list is complete as we go to press but it is hard to keep up.

The UK has a fiscal council, called the Office for Budget Responsibility. The OBR has cautioned that UK government revenue will weaken because of Brexit, even with a deal, and by considerably more with the no-deal version favoured by the Brexiteers now in office.

That means the budget deficit, currently 1pc of GDP and perfectly manageable, will rise under no-deal even if none of Johnson's schemes come to fruition. One of the reasons for recent sterling weakness is the abandonment by the Tories of any pretence at fiscal caution, until recently a unique selling point.

If Johnson proceeds with the no-deal crash-out, for which no democratic mandate was given or sought, a hard border in Ireland is unavoidable. The pretence is blatant: if there are no solutions, it's because there is no problem.

Sunday Independent

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