The Brexit talks will run into the sand soon. That may be a problem for Britain. But, for Europe, Brexit is only one of many problems.
Beware: all the major stock market crashes of the last century have occurred in October. The 1929 crash occurred on Tuesday, the 29th. The 1987 crash was on Monday, the 19th – a 20 percent one-day drop or, in technical terms, a 12-standard deviation event. (Theoretically, or so the risk models tell us, that was about as probable as being crushed by a whale falling out of the sky[i]). Then the Credit Crunch was precipitated by the collapse of Lehman Brothers on 15 September 2008: but the stock market melt-down played out over the course of October, when it seemed the entire global financial system might go to smash…
There are reasons to be cautious in this season of mists and mellow fruitfulness. A number of critical issues are in play which will determine the future of the single currency and its members’ economies – of which Brexit is just one. (And possibly not even the most important one.)
Two embattled ladies
Both the British Prime Minister and the German Chancellor have been returned to power this year with many fewer seats than before the elections and are dependent on other parties to continue in power. (Mrs May controls 317 seats out of 650; Frau Merkel 246 seats out of 709). Both have been chastened by a new electoral arithmetic: a shift to the left in the form of Mr Corbyn’s something-for-all socialism in Britain, which particularly appeals to the young; and a shift towards the anti-immigrant populist right in Germany, yielding 94 seats for the AfD.
Mrs May is trapped by Brexit. And she is menaced by a blonde buffoon who would seize her crown. She has only survived thus far because she presides over a cabinet of such modest talent that it makes the parish council in The Vicar of Dibley look charismatic by comparison. Her influence, internally and externally, is weak.
Mrs May has only survived thus far because she presides over a cabinet of such modest talent that it makes the parish council in The Vicar of Dibley look charismatic by comparison.
Frau Merkel will be engaged, this side of Christmas, in weaving together a durable coalition, knowing that this is the last act of her play. She has lost her stalwart Finance Minister, Wolfgang Schäuble – the man, you will recall, who refused to shake Yannis Varoufakis’s hand during the Greek debt crisis.
In the meantime, a young dynamic French President is intent on wresting hold of Europe’s tiller. That is why he delivered his Sorbonne speech (26 September) at Mrs Merkel’s weakest moment.
The two ladies are not natural allies; but they really ought to connect on Switch.com – a website where women of a certain age can swap stories about their dreadful dating experiences and the ghastliness of men in general.
The war of the British secession
If David Cameron really thought that a referendum on British membership of the EU would resolve the matter once and for all then he was mistaken. The Brexit vote has condemned British politics to be monopolised by the modalities of leaving the EU for years to come. To the detriment of almost every other pressing issue: how we address the structural fiscal deficit; how to stimulate the UK’s lagging productivity – much lower than many of our competitors; how to raise the game of the National Health Service in an age of lengthening longevity; how to restrain the relentless expansion of the welfare system without penalising the worst-off; how to keep the lights on in an age of electric cars; and so much more.
On the European side, the advent of Brexit has been a green light for those who favour a federal Europe to press hard down on the accelerator (and in so doing they have confirmed nervous Leavers in the UK that they made the right decision). But they know that they must extract a high price from the British for their lack of fidelity lest other countries (Denmark, Sweden, Poland, Hungary?) fancy their chances elsewhere. As Voltaire said, it is wise from time to time to shoot an admiral pour encourager les autres. Or, as the Chinese proverb has it: Kill a chicken to scare a monkey.
The three pre-requisites to trade talks – EU citizen’s rights, the Irish border and the Exit Bill – were never going to be resolved swiftly to Europe’s satisfaction. For a start, we cannot determine the nature of the border arrangements with the Republic of Ireland until such time as we know the tariff regime (if any) that will prevail post-Brexit. The EU wants European citizens living in the UK to continue to be subject to the rulings of the ECJ for evermore. But it would be extraordinary if Belgians and Czechs living in Britain were to be subject to different laws than native British citizens. (I have compared that to the religious laws of the Moorish Caliphates or of Mughal India.) Then the EU wants Britain to draw up an Exit Bill before we know to which EU satellite institutions we shall continue to adhere (Europol, the Erasmus Programme, the European Space Agency, the Galileo satellite system and so on).
Mrs May’s Florence speech (22 September) was conciliatory in tone and offered the Europeans a two-year transitional (she calls it an implementation) period during which Britain would continue to pay up in accordance with the present dispensation and would abide by its rules (presumably including freedom of movement) – even though we would have no representation in Brussels whatsoever. This was controversial with a section of the Brexiteers as it looks like a concession. But it might offer enough time to avoid the much feared Crash Brexit that looms on D-Day, 29 March 2019.
On 03 October Herr Juncker opined in Strasbourg that, despite the more emollient tone on the part of the British Prime Minister, the talks had not made sufficient progress to continue to the next phase – trade talks. And the European Parliament passed a resolution scolding the UK for dragging its feet on the Exit Bill.
How sensible of the Labour Party not to have even discussed the little matter of Brexit at their jamboree last week in Brighton. To do so might have cast a pall over proceedings. We know that Mr Corbyn is, to put it mildly, lukewarm on Europe – as all the British left have been since the 1960s. They think it is against working class interests. So he has largely kept out of the argument and sticks to what he does best – fasting in the wilderness like some Old Testament prophet.
How sensible of the Labour Party not to have even discussed the little matter of Brexit at their jamboree last week in Brighton.
It has therefore been left to the combined intellectual heft of Ms Abbott, Lady Thornberry and Sir Starmer to formulate a coherent Labour Brexit policy. (Mr McDonnell is largely absent, whipping up revolutionary fervour amongst the huddled masses.) If any reader can tell me what that policy is I would be most grateful as I have failed to grasp it. They are apparently in favour of leaving; but at any given moment Ms Abbott is banging on about the benefits of the Single Market and Lady Thornberry is extolling the virtues of unrestricted immigration. I have no idea what is their stance on the Exit Bill, or indeed what they think our negotiating tactics should be.
The same cannot be said of the Tories who convened in Manchester this week: Brexit was much aired though it was not top of the agenda. The Tory high command is resolved that Brexit will go ahead – but there are important areas of disagreement.
Boris Johnson is adamant that the transition period should not last a day longer than two years – so that the UK will be entirely free of the EU by March 2021. The media have sought to characterise Boris as undermining Mrs May, and jockeying for her job, though actually the argument is more about what is feasible than what is desirable. Mr Hammond hankered for a soft Brexit whereby Britain would remain in the Customs Union – but that option is not even on the table at the Brexit talks.
The transition trap?
Many Brexiteers, especially Tories, suspect that the transition period might be some kind of ruse: it will be extended and prolonged until such time as it will become permanent. Remainers like Mathew Parris are quite candid that this is exactly what they want. Mr Parris wrote in the Spectator last week that the subversion of Brexit has begun[ii]. He believes that the transitional arrangement will give a breathing space for the forces of Remain to regroup and to force a second referendum. For every year that passes he says, Leavers will die off and more Remainers will come of age.
No doubt there is a significant exit-Brexit bloc in the House of Commons, embracing the Liberal Democrats, Labour MPs like Chuka Ummuna and Tory MPs like Ken Clarke. This bloc might amount to as many as 50 MPs. They will certainly be given hope by the prospect of an open-ended transitional period.
But all this is academic, I am afraid: because the Europeans are not going to agree to a transitional period anyway. It was always in their game-plan to make the talks as fractious as possible. I am now persuaded that they want to push Britain off the Brexit cliff on 29 March 2019 even if that were to damage German car exporters, Italian shoe manufacturers and French wine makers. Sadly, I suspect they never entered the negotiations in good faith.
Crash Brexit – a Millennium Bug?
I explained back in late June why people like Mike Hawes, Chief Executive of the Society of Motor Manufacturers, fear that a Crash Brexit – switching overnight to WTO rules on 29 March 2019 – would be damaging. It could disrupt the smooth running of supply chains and restrict exports – especially from our world-class automotive and aerospace industries. Eighty percent of the 1.7 million cars manufactured in Britain each year are exported; and Britain has the second largest aerospace industry in the world.
John Redwood MP thinks differently[iii]. In fact, he thinks that we should not even try to negotiate a free trade deal with the EU since to pay them to get access to the Single Market could be against WTO rules. Many fear that there will be gridlock on the M20 as trucks trying to leave Dover will be held up by customs chaos. But Mr Redwood points out that work is already underway to have registered traders fill out details of consignments electronically, so that trucks can get through customs without hindrance and tariffs can be levied with the help of fintech. He writes:
Most just say there will be a cliff edge without having a clue why. There is no cliff. The day after we leave French farmers and German car makers will still be sending us their exports. In return, we will still be selling things on the continent. The cliff edge has all the potency of the Millennium Bug.
I think the EU Commission could attempt to disrupt trade unnecessarily unless they receive a substantial divorce settlement.
It is possible that Mr Redwood is under-estimating the European Commission’s bloody-mindedness. That is why Mrs May said in her speech to the Tory Party Conference: It is our responsibility as a Government to prepare for EVERY eventuality.
For my own part, I think the EU Commission could attempt to disrupt trade unnecessarily unless they receive a substantial divorce settlement. Mr O’Leary even thinks that flights will be grounded on D-Day because the Europeans will not allow us to fly through their airspace. I say: bring it on – and that’s another good reason to short RyanAir (LON:RYA). The great British public spent about £100 billion on foreign travel last year. If just half of that were redirected to staycations, that would boost UK GDP by over two percent.
Why are the Europeans so touchy about the divorce bill? Because they are already approaching a budget crisis of their own.
There are numerous things that would keep Herr Juncker awake at night if he didn’t take a sturdy night-cap. The violence meted out to Catalan citizens by the Spanish Guardia Civil last Sunday night (01 October) is emblematic of a deeper malaise. It is as if the mask slipped, in a moment revealing the hideous visage concealed behind it.
Poland is refusing to take its quota of migrants foisted upon that country by Brussels. Accordingly, the EU Commission is preparing sanctions against Poland. The Hungarian PM, Mr Orbán, has said that his country might be better off by forgiving the Russians and doing a deal with Mr Putin. And the wall is now complete. Not USA-Mexico; rather Bulgaria-Turkey.
The migrant problem is only set to get worse. According to the BBC’s Panorama[iv], the EU is actually paying people smugglers to go into business if they desist – and the word has got round in Africa. Various NGOs have actively assisted the flow of migrants.
Plus: Greece’s current bailout package expires next year. It will be interesting to see how the new German Finance Minister tackles that one. And the Eurozone’s third largest economy, Italy, is finding the task of structural reform impossible.
Yet the federalist train moves on. President Macron is a man with a plan. He wants a Eurozone Ministry of Finance which sets the European budget and has the power to levy taxes across the EU. But the Germans have given the plan a fairly cool reception thus far. Basically, they think that they will be the ones who end up writing the cheques. (And who can blame them?)
Mrs May said in Florence that no European government would be out-of-pocket thanks to Brexit. But the Germans don’t believe that. Their main concern is the effect of Brexit on the European budget when the UK’s net subsidy to the EU of €11 billion a year (according to my recent calculations) stops.
I’m not saying that all these factors will precipitate a market crash this October: but do keep your eyes open for that falling whale. The Spanish constitutional crisis will not end happily. And the idea of a robust European Union is illusory. The inherent flaws in the currency union – analysed over the last two years by myself and Jim Mellon in these pages – will not be cured by a temporary economic upturn. There will be another Eurozone crisis – the question is when.
The British people will come to understand that we just escaped in time. Had we stayed, we would have been compelled to join the Euro. (The Maastricht Treaty opt-out expires in 2022.) And we would have had to hand over our two new world-class aircraft carriers to foreign command.
After the European Army…the Single European Police Force. (I will reveal soon that this is actually in the planning stage.) Then, I suppose, in the event of an “unauthorised” IndyRef2 in Scotland, we could rely on Spanish militias to thrash Scottish pensioners with their batons and fling people down staircases…
If you should run into Nicola, Matthew, Chuka, Ken or Vince anytime soon – please don’t hold back.
Post-script: American odyssey
As this article goes live, I’m heading for New York. I don’t do holidays – though I am keen on personal development and research, which involve plenty of down-time. (Just don’t call me a tourist.) I’m going to cross the mighty USA from sea to shining sea, travelling through about 15 States of the Union.
I want to get the pulse of America in this perplexing age; and I want to enquire from where the next technological revolutions are likely to emerge. I shall try to work out if the S&P can continue indefinitely to defy gravity, reaching daily new highs. And I want to gaze back, from what is still, for now, the centre of the world (until displaced by the much more ancient Middle Kingdom), to the older continents: Europe to the left and Asia to the right. How do they look today from the perspective of the Big Apple, the Windy City and La La Land?
I’ll keep in touch.
[i] The falling whale was of course first generated by the Improbability Drive in Douglas Adams’ classic Hitchhiker’ Guide to the Galaxy (1978).
[ii] The Spectator, 30 September 2017, page 21.
[iii] John Redwood’s Diary, Friday, 29 September. Available at: http://johnredwoodsdiary.com/2017/09/30/preparing-for-no-deal/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+JohnRedwoodsDiary+%28John+Redwood%27s+Diary%29
[iv] Africa’s Billion Pound Migrant Trail, BBC1, 18 September 2017.