Strong winds blowing up nervous gales over Brexit

Strong winds blowing up nervous gales over Brexit

by Miles Saltiel
article from Wednesday 25, October, 2017

OCTOBER famously brings strong winds, so it’s no surprise that the weather between here and Europe should turn stormy. This was always on the cards, given the European Commission’s diary-date to hear Barnier’s progress, and the coincident onset of the minimum period required for British contingency planning. This last explains the recent polemical fury about “no deal”, becoming more than negotiating rhetoric with every day that passes.

The EU has rolled out a Brexit process which deliberately or accidentally impairs success: it brings to the fore the three toughest issues - money, Ireland and dispute resolution (hiding behind citizens’ rights). This undermines rather than cultivates mutual confidence. M Barnier lacks any wriggle-room and so far Mrs May’s request for flexibility has fallen on deaf ears. 

It is dopey to argue that the EU benefits from any amount of British weakness; Brussels needs just enough for May to deliver the deal it wants. In fact she is signalling she is close to becoming too weak for this, with the negotiator’s staple “I can’t sell this back home”. This prompts a roseate thought: is the Cabinet’s conspicuous disunity a device intended to strengthen May’s Brexit hand? Sadly, it is less of a stretch to believe in chaos. Regardless, it is hampering domestic administration by holding up the Great Repeal Bill, while the inflammatory sound of “no deal” has given new fire to Remainers and a tactical gift to Corbyn. Then again, the EU faces wild cards of its own - Catalonia, Austria and Merkel; plus the current ration of global turmoil - Trump, Iran and North Korea. 

The EU has maintained unity and it would be mistaken to expect (eg) German manufacturing to bolt the lead from its government. On the other hand, economic voices always end up driving trade negotiations and eventually they will make themselves heard. These will include manufacturing exporters and participants in integrated supply chains - eg, BMW, Airbus and Guinness (who knew?); public service contractors - eg, EDF, Veolia and Deutsche Bundesbahn; plus nations which export labour - Poland and its southern neighbours; or are economically close - Denmark, Ireland and the Netherlands; or otherwise hanker for special treatment - Spain seeking fishing access in return (say) for continued benefits for Costa retirees.

September’s headline topic, an implementation or transition period, has been almost forgotten. There is sense in this as the two sides are getting nowhere on an agreement about a destination: Barnier is unable formally to discuss it, but other EU figures are taking turns to trash the UK’s strap-line about a “new, deep and special partnership” as insufficiently specific. In fact the destination is more or less binary: unless there are similar trading and regulatory arrangements to those now prevailing (save for arms-length dispute resolution), there is little to discuss. This leaves unresolved the private sector’s reasonable requirement for regulatory certainty. What with one thing and another, the odds on “no deal” continue to shorten. If this becomes policy, it provides certainty of sorts, also foregrounding three thorny problems. 

A)  Integrated supply-chains; B)  Queues at Dover and Harwich; and C)  Cross-Ireland stability. 

The solutions are (you heard it here first):

1.   Free Trade Zones at Cowley (BMW), Filton (Airbus), Belfast (Guinness) and no doubt elsewhere;

2.   Working-level deals (eg, between the Port Authorities of Calais and Dover, Harwich and Hook of Holland, Dublin and Holyhead), relieving all concerned of the embarrassment of state-to-state relations bypassing EU competencies; and

3.   A hard-ish internal border between Northern Ireland and the island of Britain. The precedent for political purposes would be the agricultural inspections at (eg) Needles on the California-Arizona border. Curbing untoward traffic across the Irish Sea would mean beefing up harbourmasters, Coastguard patrols and maritime radar.

This is a tough time for those who prefer their politics to be measured. Brexit negotiations have reached their first crisis - it may not be their last. At home, unreconciled politicians, commentators and journalists are taking the opportunity to weigh in with every kind of inflammatory material. Best to recall that tempers become heated in negotiations; and that the view we’re getting is distorted by a moment of acute domestic disharmony.

Last week’s summit of EU heads of government ended in teeth-clenching amity. EU27 leaders jostled each other to declare that “no deal” was unthinkable; Merkel spoke of her hope to “reach the second phase (ie, trade talks) in December”; and May agreed to revisit the EU’s financial claims “line-by-line”. Three explanations are in the air.

-  May’s hints in Florence and subsequently of a concession on money have eased relations.

-  Her weakness is alarming Brussels which fears she won’t be able to deliver concessions.

-  The talk of “no deal” in the UK has concentrated European minds.

The only sensible thing to say is that none of these explanations excludes the others and all played their part. And the last of these is more than just the talk of Brexit zealots.

It’s all about timing. The intersection of the date of Brexit (March 29 2019) with the annual cycle of company operations is important. Although the largest fraction follows the calendar year, a sufficient number chooses other periods for the front of the queue to vary according to events. It is June year-enders who must budget first for the post-Brexit period and that they will be doing so from January 2018.

Since the referendum result, institutional investors have been willing to see public companies follow their house views on capital expenditure and M&A activity - some defensive, some opportunistic, many simply stalling. Now however, we are reaching a confluence of crunch-points. Investment banks are looking overseas for operations likely to be regulated from Europe. This combines with the prospect of a government inspired by Wedgewood Benn and Hugo Chavez to spook mobile professionals, unbalancing the supply of skilled labour. And the threat of Corbyn is leading proprietors to realise flight capital from private companies and real estate.

In such fractious times, public company chairmen will be mindful of the risk of shareholder suits, leading them to nudge their Boards toward stances that are definite and defensible. Between now and Christmas, one of three alternatives will emerge as action-guiding:

-  Brexit talks move on to trade amid credible political assurances which Boards take as justifying budgets assuming general levels of continuity.

-  A Standstill Agreement (for a planning or implementation period) is made or strongly signalled, also warranting budgets based on continuity.

-  Neither of the above, which will be taken as calling for budgets recognising a de facto outcome of no deal.

In the absence of clarity, fiduciary responsibility will be taken as obliging Boards to assume the worst, flowing through to CEOs instructing their finance directors and head offices schooling their divisions. Policy will then herd, as budget decisions flow through to suppliers of goods, services, labour and capital, amplified through the investment community back to other companies, and ultimately coming to govern HMG’s own planning. M Macron may well huff and puff that, “At no moment has Theresa May ever raised a ‘no deal’ as an option. If there are noises, bluff, false information by secondary actors or spectators to this discussion, that is…just life in these matters, or in the media. But in no case is it part of the discussions.”

But this is to affirm what he denies. For ‘no deal’ is not a matter of bluff, but a consequence of the inexorable timetable of the corporate calendar and directors’ appetite for certainty, coming to a head in three months’ time.

For the next eight weeks, the stakes will be at their highest. Lobbyists will weigh in with ponderous warnings; parliamentarians will be at their most fractious and opportunistic; polemics at home and abroad will attain climaxes of fury; and journos will dial up the heat to temperatures which melt iron. And for those of an apocalyptic cast of mind, there is a further possibility: May herself may trip or her government may fall. On 22 November, it must present its own budget, with Hammond under pressure from all sides and neither him nor his boss having much of a record on gala occasions. Strong winds indeed.

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