Brexit — Looking Forward to 2017

In October, I wrote my first blog — “Brexit — A Way Forward”. I said that despite a position of apparent strength, the Government’s approach to Brexit had a number of key weaknesses which would become increasingly evident. As a result, I argued that there was a national imperative for the Government to “reset” its approach to Brexit. In particular, I advocated that the Government consider the following: the rebalancing of its prioritisation of immigration control versus the economy; much fuller engagement with Parliament; and, the recognition of EU citizens’ rights.

Perhaps unsurprisingly, much of my advice fell on arid, if not barren, ground.

The Government has remained intent on pursuing its net migration manifesto pledge. Although David Davis has been clear that no one “intends” for Brexit to harm the UK sectors that need European workers, he has also stated that immigration control is non-negotiable.

Greater engagement with Parliament has occurred but more as a result of the Government’s defensive manoeuvring than deliberate policy. Keir Starmer has led the cross party Brexit opposition and proved highly effective. Time will tell whether his hard won “plan” will have been a meaningful concession.

Mrs. May at least tried to settle the matter of UK/EU citizens’ rights but was reportedly firmly rebuffed by Mrs. Merkel. None of the parties involved have come out of this brief but painful skirmish with any great credit.

At the same time, a number of the factors that I had previously identified as weaknesses, have continued or worsened.

The divisions in Cabinet do not appear to have gone away. It seems that at least two Brexit factions are alive and well — the “Ideologues”, led by Messrs. Johnson and Fox and the “Pragmatists” championed by Mr. Hammond. David Davis seems to sit somewhere in the middle. And the Prime Minister? “Brexit means Brexit”.

In Europe, the EU has strengthened its opposition to a “soft” Brexit. The Foreign Secretary’s “have cake and eat it” strategy has not traveled well and the UK Government is perceived to be naive at best. The dismissive tone of Donald Tusk’s letter regarding citizens’ rights was noteworthy.

Although the economy has continued to perform well, the fall in value of the £ and related inflation concerns have become real and newsworthy issues. At the same time, the OBR’s forecasts for the Autumn Statement highlighted the potentially negative effects of Brexit on the UK economy, including the economic cost of reduced immigration.

Meanwhile, other problems have emerged.

The Government’s decision to appeal to the Supreme Court may have other repercussions. Even if the Government wins, its lawyers’ disavowal of the constitutional validity of the Sewel Convention has risked sweeping away years of devolution related political compromise in one court session.

If the Government loses, the least worst consequence would be putting a Bill through Parliament. Arguably, this might well have happened anyway. Any ruling that the devolved administrations must have a formal Brexit role would be a major issue for the Government’s Brexit approach.

Elsewhere, the Brexiteers outside of Government seem restless as they sense the possibility of their Brexit vision being compromised. Conservative MPs have taken to writing directly to Donald Tusk and preparing the rhetorical ground for a “clean” Brexit.  

It would of course be wrong to conclude that everything has gone against the Government.

The Conservative Party’s opinion polling remains at close to its historic high. Teresa May’s personal popularity is largely undiminished. The Richmond by-election result was a blow for the Conservatives but, for much of the country Brexit has not yet had much impact, either positive or negative.

Meanwhile, the Labour Party has not covered itself with glory. As Keir Starmer forensically harries the Government, John McDonnell calls Brexit an “enormous opportunity”. This reflects, to put it kindly, a communications problem. More fundamentally, the “we demand a plan but will not block Article 50” position is one of dubious logic. And as for the opinion polling — to quote David Allen Greene (out of context), “Well”.

At the same time, the blurred shape of the Government’s Brexit position has begun to emerge from the “no running commentary” fog. There appears to have been a startling, if partial, outbreak of realism. For example, the Government seems to have accepted the notions of a transitional period and ongoing payments to the EU as at least possible negotiating elements.

As we look towards 2017, we can draw some forward looking conclusions from this complicated picture.

1- The Government’s objective to proceed smoothly to Article 50 notification is highly unlikely to happen. Either the Supreme Court will rule against the appellant, in which case a Bill will be required. Or, at a minimum, the Government will have to produce and debate its promised “plan”.

2- As the pressure mounts in the run-up to Article 50 notification, political opposition will increase. We can safely conclude that the various opposition factions will not be satisfied with the promised “plan”.

3- We can also expect that the elements of Brexit compromise the Government may pursue (e.g. immigration, ongoing payments and transition period) will be vigorously attacked by the more purist Brexiteers, who will increasingly agitate for a “clean” break. In this fractious environment, it is not unreasonable to imagine a cabinet resignation or two.

4- What will the general public make of it all? As noted above, opinion polling suggests that the public has not yet changed its Brexit view in any material way. Given the experience of this year, I’m not sure that any manner of Brexit related political back and forth will be especially impactful. This should not be a surprising conclusion. From a political perspective, there has been an unbroken continuum since the referendum — Brexit means Brexit — with no event yet material enough to change the status quo.

5- However, we can reasonably expect next year to be different. If the economic forecasts are to be believed, and we should at least expect them to be directionally correct, we can anticipate slower economic growth and the related impact on already strained public services. At the same time, the impact of the £’s decline on inflation will become more apparent in the shops with food and petrol prices especially affected.

6- As common sense dictates and polling reflects, we can and we should make the assumption that only a minority of the electorate will support policy decisions that make them poorer. As a result, it would be prudent to assume that changing economic circumstances will have an impact on the public’s opinion of Brexit.

7- We have only seen the bare bones of the EU’s negotiating strategy. In all of the criticism of the Government’s apparent lack of a plan, the EU’s position has been much less scrutinised. What is the EU’s principal objective? To secure an amicable and mutually beneficial “divorce” or to “punish” the UK as an example to others? We can hope for the former but the reality is that we don’t know. It’s also worth bearing in mind that the various European elections will affect the EU’s approach.

8- We can also expect the tone of political discourse to become even more fractious as the Brexit shadows lengthen. A New Year wish is for all parties, politicians on every side, newspaper editors, writers of blogs, all those tweeps, to think carefully about how they express themselves. Words matter.

In conclusion, we can expect 2017 to be another tumultuous and unpredictable year of Brexit. All parties are best advised to retain sufficient flexibility to respond effectively to those inevitable “events” and ever changing situations.

This small finish brings me neatly to Jolyon Maugham’s Article 50 revocability case in Ireland. “Brexit means Brexit” has been the dominant political reality since the referendum. As a result, the possibility of another dramatic change of course has not been sufficiently considered.

Don’t overly discount this scenario.

 

After the Article 50 Ruling — Two Political Scenarios

 

The High Court’s ruling in favour of the Claimant’s case for a Parliamentary vote prior to notification per Article 50 (2) had a seismic impact.

Like all great and surprising events, it punctured the political equilibrium and fractured developing views regarding the Government’s approach to Brexit.

It is a certainty there will be other events (the recent US election is an example) that require the various Brexit factions and stakeholders to rethink their positions and strategies.

Anyone expecting a smooth, linear progression to an imaginary point of exit from the EU will be sorely disappointed.

Meanwhile, the great constant of the referendum vote itself is unaltered.

But how should we think about the near term progression of Brexit following the court ruling?

I have outlined below two political scenarios and their related considerations for Government, the Opposition, the financial markets and business.

I have made two principal assumptions.

1.  The Government’s appeal to the Supreme Court is not successful.

The fact of the initial judgment and the clarity and unambiguity of its decision suggest that the Government will not find it straight-forward to over-turn the High Court’s decision.

2.  The question of the revocability of Article 50 will not be referred to the ECJ.

There are good legal arguments for referral but, purely as a simplifying assumption, I have ruled this out. In this regard, a referral, would, of course, create great political volatility. I also assume that the Government will not change its case to assume that Article 50 is revocable.

Scenario 1 — Calling a General Election in H1 2017

•   I note that Teresa May has expressly ruled out holding a General Election before 2020. However, in a situation where the Prime Minister feels that she cannot credibly deliver a Brexit consistent with the Government’s interpretation of the Brexit referendum, her position is eminently changeable (subject to the mechanics of the Fixed Term Parliament Act (“FTPA”)).

A.  Key Events

•   Two situations can be envisaged. In the first, Government determines in advance of attempting to pass an Article 50 Bill through Parliament that this will either not be possible or would be so materially amended of delayed that it would not be considered consistent with the Government’s objectives.

•   Alternatively, Government attempts to pass a Bill through Parliament but is unsuccessful for the reasons mentioned above. In this circumstance, it is worth noting that the political legitimacy of the Government’s position may be enhanced through having tried to pass a Bill.

•   In both situations, Parliamentary opposition to the Act would be the result of either (i) a majority of Parliamentarians objecting to Article 50 notification itself, or (ii) a majority of Parliamentarians wishing to amend / delay the Bill to the extent that it is no longer consistent with the Government’s objectives.

•   I would consider (i) to be highly unlikely. Notwithstanding the majority of Parliamentarians who voted to Remain, the referendum result was “clear” and, for many English and Welsh MPs, voting against notification would be easily construed (rightly or not) as acting against the “will” of the majority of their constituents. I also note that Labour has specifically ruled out “blocking Article 40 notification.

 

•   In my view, (ii) is much more likely. Recent events suggest that a substantial proportion of Parliamentarians, more likely in the Lords and perhaps in the Commons, will want at least to debate the Bill (and some will want to amend it) to attempt to alter the Government’s apparent inclination towards a “hard” Brexit. At the least, this could materially delay Article 50 notification.

B. Considerations

I.      Calling a General Election is not Straightforward

•   The FTPA proscribes only two paths to an intra-term election (i) a vote of 2/3 of the House of Commons, or (ii) a vote of no-confidence with no new government able to be formed in the following 2 weeks.

•   (i) is a difficult choice for the Labour Party (at least). Given the Conservative Party’s current level of public support, it would be a courageous decision to support a vote for a General Election.

•   (ii) is not straightforward for the Conservatives. While a suitably contextualised vote of no confidence might be straightforward to achieve, the issue is what could happen during the succeeding two weeks. There would be a risk of an opposition led coalition, supported by Conservative MPs from Remain constituencies, forming a government with a “softer” Brexit platform.

•   To fight a general election, the Conservative Party would need to define in greater detail its approach to Brexit — especially if we assume that Labour campaigns for a “softer” Brexit. This is fraught with intra-party political complication (see below).

•   In addition, the contentiousness of a Brexit focused election should not be underestimated and the decision to embroil the country in a General Election would not be taken lightly. Brexit is a subject of such strong views that the possibility of public turmoil would need to be considered.

II. The Labour Party would need to Develop its “Soft Brexit” Platform

•   A General Election would require the Labour Party to develop a much more substantive position on Brexit. At present the Labour Party has no appetite for campaigning against Brexit. As a result, Labour would need to develop a clear and detailed platform, presumably for a “softer” Brexit, that is sufficiently differentiated from the Government’s position.

•   Given Labour’s current polling, the development, over time, of a centrist, pro “softer” Brexit political party is an alternative. However, this is unlikely in the near term given both logistical challenges and the difficulty of clearly differentiating versus the established parties. As a partial alternative, there is certainly a case for Lib / Lab non-compete agreements for selected seats.

III. Exposure of Intra Party Divisions

•   There are “soft” and “hard” Brexiteers in the Labour and the Conservative parties, as well as a number of MPs who do not support leaving the EU. As a result, it will be difficult for either party to develop a more substantive Brexit platform that does not result in divisive, internal debate.

•   In the event of a General Election fought on the basis of a “hard” vs “soft” Brexit, we can expect further Conservative (and potentially Labour) resignations.

IV. Financial Markets and Business Volatility

•   A General Election that focuses on “hard” versus “soft” Brexit alternatives would be badly received by the financial markets. We can expect further volatility in the value of the £, U.K. focused equities (although not the FTSE100 given its foreign revenue exposure) and Gilt yields.

•   On the basis of financial markets performance during and shortly after the Conservative Party Conference, we should also expect that a decisive “hard” Brexit outcome would likely result in further falls in value (all other things being equal), notwithstanding the increase in directional certainty.

•   For the reasons mentioned above, a General Election would be an uncomfortable event for business. In addition, while business is generally reluctant to express clear political preferences,  an election focused on “soft” versus “hard” Brexit outcomes would likely provoke a greater level of engagement by business in political debate.

Scenario 2 — Article 50 Notification Bill Passed by Parliament

A. Key Events

•   Either (i) Government passes a short “one line” Bill though Parliament and “dares” MPs and Lords not to block, amend or delay it. The Bill is successfully passed through both Houses with support from a large proportion of the Labour Party. In this case, Article 50 notification prior to the end of March is achieved.

•   Or (ii) Government produces a more detailed Bill, which is more thoroughly debated and potentially amended and then passed with support from much of the Labour Party. In this case, Article 50 is most likely delayed due to the time required to prepare and debate.

•   The Government will almost certainly pursue (i) — the most expedited Parliamentary process possible. The Government has its self-inflicted end of March deadline to meet, as well as the “no running commentary” approach to navigate around.

•   However, this approach presents two issues.

1.     While the decision to vote against an Article 50 Notification Bill would be a very significant step for most Conservative and Labour MPs, they can of course debate and seek to amend irrespective of the length of the Bill. Liberal Democrat and SNP MPs will certainly seek to block / amend the Bill (I note that in (i) actual amendments would likely not be achievable in practice).

2.     Although the passage of a simple Bill without material obstruction might be possible in the House of Commons, it may well be unachievable in the House of Lords, who can at the least delay the process.

•   Consequently, while the Government would almost certainly pursue option (i), we can expect there to be at least sufficient opposition to ensure that the process will involve more debate and be more time consuming than the Government would like.

B. Considerations

I.  More Substantive Brexit Debate Likely

•   A key Labour’s weakness is its inability to define in any detail its Brexit approach. For example, to what extent would Labour be prepared to compromise migration control, if not absolute numbers, for greater market access? In this regard, Labour’s current policy positions can seem not much more substantial than “Brexit means Brexit”.

•   Notwithstanding the redoubtable Keir Starmer, the SNP and Liberal Democrats are at present a much more likely source of substantive opposition. The SNP has a self-defining imperative and the Lib Dems have, at least, set out a clear opposing position.

•   The onus is on the Government to produce its more detailed Brexit plans first. However, even disregarding the largely specious “no running commentary” argument, it may in practice be politically difficult for the Government to explain more fully its Brexit position.

•   It is likely that potential aspects of the negotiation — for example post Brexit payments to the EU or an extra-sovereign arrangement to settle future trade disputes — will be sufficiently unpalatable to the “harder” Brexiteers in the Conservative Party to preclude a more detailed discussion

•   We can think of the Prime Minister’s “no running commentary” as a negotiating tactic whose principal utility is to protect against opposition from the harder Brexiteers in the Conservative Party. As a result, we can expect further intra-party divisions.

II. A Dilemma for the Labour Party

•   The Labour Party’s approach to an Article 50 Bill would not be straight-forward. A key theme from Labour’s various statements since the Article 50 ruling is not being seen to “frustrate the will of the people”.

•   Keir Starmer said the following during the Today Programme on November 7th.

“We will not frustrate the process by simply voting down Article 50, but we are absolutely clear that before we get to that stage the government must put its plan before Parliament.”

•   John McDonnell said the following on November 15th.

“This means we must not try to re-fight the referendum or push for a second vote and if Article 50 needs to be triggered in parliament Labour will not seek to block or delay it.”

•   On this basis of these somewhat confused messages, we can assume that the “official” Labour position is to vote for Article 50 notification without amendment. We can also assume that Labour expects there to be a detailed debate of the Government’s plans in advance a vote.

•   A key consideration for Labour is what it would do should the Government not be prepared to discuss its Brexit plans in sufficient detail. Equally, there are likely to be a significant number of Labour MPs and peers that are not entirely supportive of John McDonnell’s position.

•   It would be politically inadvisable for Labour to effectively concede the Article 50 notification process (as John McDonnell seemed to indicate). A majority of Labour supporters voted to remain and recent polling (e.g. the recent ICM poll for Avaaz)) suggests that most people in the UK are supportive of greater Brexit disclosure.

•   As a result, Labour will face a difficult balance between pushing for satisfactory debate and not being viewed as obstructive, while at the same time significant number of its Parliamentary members may attempt to amend and/or effectively delay the Bill.

III. Financial Markets and Business Impact

•   The financial markets’ reaction to the Article 50 ruling was positive — £ rose in value, Gilt yields fell and the FTSE declined (due to its foreign currency exposure). As a result (and all other things being equal), an initial conclusion is that the greater the level of parliamentary engagement, the more positive this will be for UK specific asset values.

•   However, we can argue that much of the improvement related to the ruling was a short term “relief rally” correcting for some of the impact from the Conservative Party Conference. In addition, other subsequent events, the US election in particular, have proved to be more dominant market considerations.

•   Consequently, further material increases in asset values would require tangible evidence of a more economy friendly approach to Brexit — an increased focus on the need for a transitional Brexit arrangement would be a good example. As a result, in the absence of further material directional evidence (and other events of course), it’s reasonable to expect the markets to remain volatile but range-bound from a Brexit perspective.

•   For business, this scenario implies a longer period of uncertainty (especially if Article 50 notification is delayed) thereby suggesting further delays to investment decisions and arguably precipitating early business movement decisions from impacted businesses (e.g. parts of UK based financial services).

•   However, in this scenario there is also a good case for impacted businesses to delay their decision making. A Brexit Parliamentary engagement scenario widens the distribution of possible outcomes. As a result, in this scenario, business may wish to pause and wait for more evidence.

Brexit — A Way Forward

When Teresa May embarked on her walking holiday, the government seemed in a virtually unassailable position with regard to the implementation of Brexit.

The Conservative Party had acted quickly and effectively to address the political turmoil in the aftermath of the referendum by making the most appropriate candidate Prime Minister.

In turn, Teresa May had quickly formed a new cabinet that seemed to provide a sensible balance between Leavers and Remainers.

The Prime Minister’s rhetorical barriers — “Brexit means Brexit” and “no running commentary” — were effective as at least temporary deflections.

Although the £ had lost some value in the immediate aftermath of the vote, financial markets stabilised and the short term economic gloom predicted by the Treasury did not materialise — consumer spending in particular proved robust.

While the EU was understandably concerned about the referendum vote, there seemed to be a growing consensus to make the best of it with some moderate European voices advocating an at least “smooth”, if not necessarily “soft”, Brexit.

In Parliament, while Labour focused on its internal battles, opposition was, to be polite, limited. Parts of the Labour Party seemed at best equivocal about some aspects of EU membership.

If a week is a long time in politics, then the last few months seem like an age.

While the fact of the referendum mandate to leave the EU remains unarguable, almost all the factors that had strengthened the Government’s position have either weakened or become weaknesses.

The Government’s continuous recourse to protecting its negotiating position as a rationale not to answer Brexit questions in detail is now often interpreted as a lack of unity, direction and planning rather than pragmatic manoeuvring.

The Cabinet has seemed at times fractious and divided — not by Brexit itself but by the shape and manner of its implementation. Periodic newspaper leaks of Cabinet discussions have undermined the Government and made a mockery of “no running commentary”.

The impression has been created that the Government is a collection of disparate individuals with markedly different views rather than an executive intent on making a collective success of Brexit.

Parliamentary questioning has become more organised and forensic and has at times coalesced into a cross-party movement — for example, with respect to Parliamentary engagement, the redoubtable Keir Starmer complemented by Anna Soubry, Steven Philips, Nick Clegg and others.

In addition, some concerns have also emerged from a number of prominent Leavers with regard to the Government’s positions on immigration and the rights of EU citizens resident in the UK.

Although the economy has continued to perform reasonably well since the referendum (and much better than expected), the collapse in the value of £ has generated negative commentary and will, without correction, result in a highly visible and painful reduction in living standards.

If the economy weakens, the Government and Bank of England have limited room for manoeuvre. Interest rates are at a historic low and the scale of the budget deficit precludes any material fiscal intervention.

The complexity of Brexit implementation has become ever more apparent as the Government attempts to chart a course between its interpretation of the views of the referendum electorate and the economic consequences of policy alternatives

Meanwhile, recent polling (e.g. YouGov or Ipsos MORI) suggests that the public is becoming more concerned about some of the potential economic consequences of Brexit.

As common sense dictates and polling reflects (e.g. Eric Kauffmann’s post), we can and we should make the assumption that only a minority of the electorate would be even notionally willing to endorse policy decisions that would make them poorer.

In Europe, the EU has displayed a rare degree of unanimity with respect to its hardened opposition to a “soft” Brexit. The much vaunted interests of German car makers (et al) have been subsumed by the EU’s dominant objective (at least for now) to preserve and enhance its political integrity.

Other problems have emerged.

The combination of devolution and regionally disparate referendum voting presents a potentially existential problem for the UK. While the Scottish referendum provided a decisive “remain” vote, Scotland voted even more decisively “remain” in the EU. In “hard” Brexit scenarios, the First Minister may feel that from a democratic perspective she has no choice but to call for another referendum.

In addition, the current court case regarding parliamentary approval for Article 50 notification may, if successful, result in a delay to the Government’ current timetable. The case has also highlighted two other thorny issues — the abrogation of individual rights that would likely result from leaving the EU and the potential revocability of the notification itself.

In summary, the Government is currently failing to convince a majority in Parliament, much of business, the financial markets and many of those those that voted in the referendum that it has a plan to implement Brexit sensibly, thoughtfully and successfully.

As a result, there is a real risk that the Government will find it increasingly difficult to proceed in a rational and effective direction as uncertainty persists, opposition grows and especially if the economy begins to falter.

There is a national imperative to get Brexit right and the Government should implement the following actions, which, taken together, would, I believe result in a judicious and timely “reset” to the current situation.

1. Allow Parliament to debate and vote on the Government’s Brexit objectives and negotiating plan prior to Article 50 notification

A principal reason for the development of Brexit related opposition has been the Government’s refusal to engage substantively with Parliament. Unless there is a material change in this approach, opposition will become more intensive and vociferous.

The “no running commentary” on negotiations defence has been neither convincing nor effective. There seems no good reason why the principal Brexit contours can’t be revealed without this materially impacting the UK’s position. At the same time, it is both appropriate and pragmatic to ensure that key considerations, for example the economic trade-offs for different alternatives, are thoroughly debated in detail.

Ironically, the Government’s failure to engage substantively with Parliament has actually weakened the UK’s negotiating position by providing the basis for the development of cross-party opposition. Conversely, strong Parliamentary support debate would materially strengthen the UK’s position.

The recent announcement of Brexit related debates is a helpful development. However, these debates need to be much more substantive than a discussion of “high level principles”.

The most tangible indication of parliamentary engagement would be a debate and vote prior to Article 50 notification. As, for example, Hilary Benn has commented (Andrew Marr, October 23), the focus should be the UK’s objectives and negotiating position rather than Article 50 notification itself.

2. Change approach to immigration

The Government has stated that while both immigration control and EU market access are key objectives, the former is a priority versus the latter. In addition, the Government has also said that materially reducing the absolute number of immigrants is a key objective.

The Government’s focus on immigration has materially concerned business and has not been helpful for the UK’s relationship with the EU. It has also unsettled the financial markets — the various statements at the Conservative Party Conference regarding immigration and the economy were a principal reason for the fall in value of the £ during and after.

While the short term political benefit of controlling and reducing immigration is clear, this objective should sit alongside rather than in priority to EU market access and the health of the UK economy.

In this regard, I see no reason why a sensibly considered and sensitively expressed immigration policy that enables “control” can’t be conceived and effectively communicated (e.g per William Hague in The Telegraph, 3 Oct 16).

A more balanced and nuanced approach to immigration would stand a much better chance of being compatible with greater EU market access. It would also enable the financial markets to attribute a greater likelihood to the Government’s inclination to negotiate pragmatic solutions to complicated problems and a higher probability to the likelihood of an “intelligent” Brexit. This would have a positive impact on the value of the £, thereby reducing near term pressure on the government.

3. Guarantee the rights of EU citizens resident in the UK

There are both moral and practical reasons to press ahead with guaranteeing the rights of EU citizens resident in the UK. The argument that the UK cannot at present do this because these citizens will be an important factor in future negotiations is not neither helpful nor substantive.

The Government’s position has little, if any, negotiating value. From a practical perspective, it is difficult to envisage a situation where we would not guarantee EU citizens’ rights and conversely where the EU would not guarantee UK citizens’ rights. The outrage caused by any other outcome would thoroughly destabilise the entire negotiation process.

The maintenance of the most co-operative and cordial relationship between the UK and the EU is fundamental to the well-being of both. It is also vital to the success of the Brexit negotiations.

The UK’s guarantee of the rights of EU citizens would be very widely supported and well received in Europe. There’s no reason why a similar statement from Europe with regard to UK citizens could not be announced at the same time.