What does Britain's election mean for brexit

15 June 2017

Garvan Walshe

Forget everything you’ve heard about Britain being a boring, stable country

Since 2014, we have had a referendum on Scottish independence, a general election, a referendum on EU membership and now, another general election. A further referendum on Scottish independence is likely. Historians will look back on the second half of the 2010s as a period of extraordinary political volatility.

Theresa May called this snap election for a very simple reason: the opinion polls showed her to be so far ahead that she is sure to win it. The hapless Labour leader of the opposition, Jeremy Corbyn, is running on an extreme left platform and the consensus of opinion among pollsters is that the Conservatives will win a parliamentary majority of at least 100 seats.

In normal circumstances, a Tory majority of 100 would guarantee five years of economic stability and a solid probusiness government. These are not, however, normal political circumstances. Brexit has changed the political landscape.

The vote to leave the EU was concentrated disproportionately among elderly voters with low levels of education, many of them traditional Labour supporters. The Conservatives believe Labour’s weakness with them will allow them to win these traditionally left wing voters over. Because Labour’s support among the elderly working class has collapsed, the Tories believe they can scoop some of those votes up.

As well as relying on her image as a strong leader (she repeats her slogan “strong and stable leadership” at every available opportunity), and pledging to reduce immigration to below 100,000, Theresa May is reaching out to her new supporters with illiberal economic policies. At the time of writing, the Conservatives’ manifesto has yet to be published, but informed speculation expects it to include restrictions on foreign company takeovers, estate taxes and other measures out of step with the liberal economic model that the United Kingdom has operated since the early 1980s.

But the most important issue that she will face is of course Brexit. It is well known that there are perhaps 50 Conservative MPs who take the extreme position that the UK should leave the EU unilaterally, without reaching an agreement. Optimists hope that a big victory will allow her to ignore this section of her party, and conclude the “deep, comprehensive and special partnership” with the EU, but such optimism is not warranted.

Since the referendum, the same optimists have argued that the UK would be able to retain access to the Single Market while restricting immigration, and then, when that proved impossible, that special sectoral single market access for important UK industries such as cars and financial services could be secured. In fact, statements of the UK negotiating position make it clear that deals like this are not even being sought.

The UK has set out two red lines: taking control of its own immigration policy, and leaving the jurisdiction of the European Court of Justice, and hopes to negotiate a trade deal that will satisfy these requirements. This is incompatible with the EU’s position. Brussels has made clear that it will only countenance a trade agreement if the ECJ can oversee the rights of EU citizens currently living in Britain. British and European political imperatives are moving in opposite directions.

Though there is scope for an agreement to continue tariff-free goods trade between the UK and EU, a deeper compact will prove difficult indeed. The most positive likely outcome at this stage is a “transition” period that will delay the effects of Britain’s separation for a number of years.

It is therefore important for businesses with investments in or trade with Britain to make plans for the following scenarios for the economic relationship between the UK and EU:

• A Canada-style trade agreement with zero tariffs on goods trade, but little services liberalisation
• An agreed transition to “thirdcountry” status, with trade governed by a WTO framework only
• The breakdown of negotiations without an agreement

Since the negotiations started, Britain has exaggerated the strength of its negotiating position. Its leaders have chosen to believe the Leave campaign’s propaganda that “they need us more than we need them,” and even that the EU was an institution on the point of collapse. Emmanuel Macron’s decisive victory in the French elections has shown the opposite is true. Theresa May’s likely equally decisive victory in the British, will not change that balance. It is the EU, not Britain, that holds the cards, and the EU’s, not Britain’s, negotiating aims that will be met. Businesses need to put aside hopes for an agreement based on mutual economic interest, and plan for significant disruption to their operations.

Dr. Walshe is a former National and International Security Policy Adviser to the UK Conservative Party, and CEO of Brexit Analytics.

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