On kicking the Brexit can down the road
24 July 2019
Boris Johnson today becomes the UK Prime Minister after campaigning on a platform to deliver Brexit, and to leave by October 31 ‘do or die’. But as with all campaign promises (and particularly from Mr Johnson), I take this with many grains of salt. Indeed, he gave this commitment in the same interview that he said his hobby was painting old wine boxes to look like buses...
My assessment is that the UK will still be a member of the EU on November 1, and for some time after. There are many domestic political challenges to delivering Brexit. It is not clear that there is a majority for any option in the House of Commons, and it is doubtful that Parliament will be prorogued to allow for a hard Brexit to be rammed through. Although the default legislative option is for Brexit to occur – deal or no deal – by October 31, I doubt it will come to this. There is awareness that a hard Brexit would be very costly, in part because of the absence of any serious planning.
And in addition to the complex economic and political issues that have to be navigated to deliver Brexit, my sense is that the political incentives facing the new PM are to kick the Brexit can down the road for a while longer.
My assessment stems from drawing an analogy to Mr Trump’s behaviour with respect to the US/China trade tensions. There are many similarities between Brexit and Trump. The Brexit vote in June 2016 and President Trump’s win in November 2016 were driven by similar sentiments: ‘take back control’ and ‘make America great again’. But these are more powerful political slogans than the basis for governing. And Mr Trump and Mr Johnson have similar styles: bombastic, loose with facts, improvising with no particular strategic coherence, and entirely politically driven.
More fundamentally, it seems to me that there are weak political incentives to resolve either Brexit or the US/China trade tensions. In a recent op-ed I wrote that ‘There is political value to Mr Trump in keeping the issue live. An actual deal, which would necessarily include concessions, would be open to public scrutiny. This would be politically risky… Any deal would be criticised. In contrast, keeping the trade tensions unresolved allows for tactical escalation and then resolution – as we have seen multiple times, with President Trump claiming credit for resolving tensions that he has created. The bilateral relationship with China was one of the issues that Mr Trump campaigned on successfully in the 2016 Presidential election... There is an element of political theatre in these trade negotiations: economic diplomacy as reality TV’.
The ‘art of no deal’ applies as much to Boris Johnson and Brexit as it does to Mr Trump. Mr Johnson has built his brand and his (journalistic and political) career on attacking Brussels and the EU; and his case for Prime Minister was built on being a believer in Brexit who can do a better job than Mrs May on the basis of optimism and charisma.
The minute that there is a Brexit deal, which involves compromise and hard choices, it will be open to scrutiny and criticism for not being tough enough – or too costly and constraining – as the withdrawal agreement that Theresa May negotiated was. Similarly, a disorderly hard Brexit on October 31 would impose substantial economic and political costs on the UK. And progressing Brexit one way or the other would deprive Mr Johnson of the issue against which he has defined himself: it is not clear what his political brand would be without it.
So faced with a choice between agreeing to a (cosmetically modified) deal before October 31, a hard Brexit, or a further delay, I expect that Mr Johnson would choose a further delay (and the EU would likely agree to a further extension). This would allow for ongoing Brexit posturing by Mr Johnson. In this sense, the tight political constraints that the new PM faces are helpful – because he can point out that his hands are tied, and blame someone else (Brussels, opposition in Parliament, and so on). The absence of progress can then be used as the basis for preparing for a general election, in which he would be a dominant figure.
I don’t have a strong view on the ultimate likelihood of Brexit happening, given the number of moving parts. If forced, I’d put it at around 50/50. And I certainly think it highly unlikely that Brexit will happen soon. Mr Johnson is unlikely to be a Brexit hawk, despite his campaign rhetoric.
If this is right, the pressure that the GBP has been under because of the heightened risk of a hard Brexit will alleviate. The next few months and beyond will undoubtedly be bumpy, but I think that too much pessimism has been priced in by markets. Similarly, for exposed markets such as Ireland, there is some upside: the costs of Brexit will be delayed and Ireland can benefit from increased investment inflows due to Brexit uncertainty.
Dr David Skilling
Director, Landfall Strategy Group