A Tragedy of Errors

The Weekly Standard, January 26, 2018

In July 2016, Theresa May won the Tory party leadership contest, and thus became the U.K.’s prime minister, for one simple reason. There was no one else. It was less than a month after the Brexit referendum had upended Britain’s political order. The only thing her predecessor, David Cameron, was running for was the exit. Her sole credible rival, Boris Johnson, long the party’s darling and the most prominent Conservative to campaign to leave the E.U.—May had been a tactically tepid “Remainer”—was the favorite for the job. But he was felled in a botched coup by his most important ally, Michael Gove, a Leaver with laughable dreams of 10 Downing Street himself.

And the lack of a credible alternative is why May is still at her post. In April 2017, she called a snap election intended to strengthen her hand in advance of Brexit negotiations that instead cost her the modest majority she had inherited from Cameron. The Conservatives can now govern only thanks to the support of Northern Ireland’s Democratic Unionists. But Johnson remains tainted by the referendum’s rancid aftermath and has not shone in his role as foreign minister. No other electorally plausible challenger has emerged.

“She’s just not up to it,” one former Tory M.P. told me over Christmas—and he is far from alone in that thinking. To be burdened both by a second-rate leader and the complications of minority government would be hard going for the Conservatives at the best of times. These are anything but. Brexit is an immense economic, legal, and diplomatic task made infinitely more difficult by a political environment for which May must take the lion’s share of the blame.

By squandering the Tories’ majority in an ill-planned and tin-eared election campaign, May not only turned the parliamentary arithmetic against her but also trashed the aura of authority that had come with her leadership victory just the year before. A lame duck who is allowed to limp on remains a lame duck. Most ominously of all, the Tories’ poor performance made a mockery of the assumption that a Labour party led by the far-left Jeremy Corbyn was unelectable and has only accelerated his takeover of Britain’s main opposition party. In Britain, the opposition is rarely more than a recession or a fiasco away from government. With a bungled Brexit offering the prospect of both, betting against a Corbyn premiership would be unwise.

Brexit, the reversal of over 40 years of ever-deeper integration with the E.U., will be easy enough to bungle. Those four decades cannot be wished away. The Gordian solution, simply quitting the E.U. and trading with the bloc under the rules set by the World Trade Organization, is not as straightforward as the hardest Brexiteers are wont to claim. Such an arrangement would not, said the director general of the WTO in November, be “the end of the world,” and he should know. Nevertheless, its impact on the country’s intricate connections with the global economy would come with consequences that no one should wish to see.

Besides, it’s unlikely that such a stark break is what the majority of those who voted for Brexit wanted. The question posed by the referendum was deceptively simple: “Should the United Kingdom remain a member of the European Union or leave the European Union?” A vote to leave was a vote to leave, just that: It said nothing about the relationship that the country should maintain with Brussels after Brexit. The polling on this topic is muddled, and plenty of politicians have their own self-serving interpretations of what the voters “really meant,” but in the end it has been left to May’s government to resolve what Britain should aim for.

A starting point might have been recognition of the extraordinary rancor that the referendum has left in its wake. The vote was close: 52 to 48. Many Remainers— the more upscale voting bloc, with a higher percentage of those Britons used to getting their way—believe that they were robbed. A referendum, they argue, was not the way to decide such a complex matter, and the case for Brexit was dishonestly made. A smarter government would have acknowledged the strength and persistence of Remainer sentiment as it decided its next move.

That’s not what May did. To the extent that the Tories’ post-referendum strategy consisted of anything more than bickering amongst themselves (they are divided over the nature of the deal that should be cut with the E.U.), soundbites (“Brexit means Brexit”), and wishful thinking (claiming that countries were “queueing up” to do trade deals with Britain), they behaved as if 52 percent was a much larger slice of the pie than conventional arithmetic would suggest.

The most obvious solution was the “Norway option,” a shift to the status enjoyed by Norway, Iceland, and Liechtenstein, who are outside the E.U. but inside the “Single Market.” This is the plan that might have eased the anger of many Remainers. But May ruled it out, fearing trouble from her party’s hard Brexiteers and, perhaps even more, that accepting “Norwegian” immigration rules risked alienating blue-collar voters—especially those she hoped would follow up on their support for Brexit by switching more permanently from Labour to the Tories.

Despite encouraging noises from Brussels, there were some decent arguments against pinning too much hope on the Norway option. Perhaps the most important stems from the conflict between the E.U.’s insistence on the free movement of workers and British unease over immigration. Theoretically, the Norway option offers a significant exception (essentially an “emergency brake”) to the right of residents to move between Single Market states, which is not available to E.U. members. A British announcement that it was prepared to take full advantage of that exception might have sold the Norway option back home—though equally might have sunk it in Brussels. May’s speedy rejection of the Norway option means that we will never know. As so often during Britain’s long European entanglement, it was hard to avoid the suspicion that its government did not know what it was doing.

May’s failure to reach out to at least some of the 48 percent cost her party dearly in last year’s election. The Conservatives were hit hard by the defections of aggrieved Remainers in the affluent south, defections that lost them more seats than the number they gained due to increased support from Leave voters elsewhere. There’s been no recent British election more necessary not to get wrong. Instead, the Conservatives have set the stage for a drama in which their weak parliamentary position could easily combine with a bad Brexit deal and the growing strength of the hard-left Labour opposition to create a historic catastrophe.

There are many paths to disaster, but the central concern must revolve around the lack of a Conservative majority. May can insist on little in London and less in Brussels. And time is not on her side. When she filed notice under Article 50 of the Treaty of Lisbon on March 29 last year, formally beginning the U.K.’s exit from the E.U., she did so without any clear notion of the type of Brexit she either wanted or could realistically expect to negotiate. Nonetheless, she started the clock running. She should have waited until she was ready: If the U.K. has not finalized the terms of its divorce from Brussels and (not the same thing) agreed on the basis of at least an interim relationship with its ex by March 29, 2019, it will crash chaotically out of the E.U. The economic and political damage would take years to clean up.

That said, in December, Brussels and London agreed that they had made “sufficient progress” on a divorce settlement to turn the discussion to their relationship after Brexit. They reached this milestone by coming to agreement on the rights of E.U. citizens in the U.K. (and, up to a point, vice versa) as well as a basis for calculating how much the U.K. must pay (probably around $55 billion) to satisfy its existing obligations to the E.U. They have also found sufficiently vague and sufficiently optimistic wording to keep alive the fantasy (made more fanciful still by the rejection of the Norway option) that the whole of the U.K. can quit both the Single Market and the E.U.’s customs union without the necessity of reintroducing a hard border between Northern Ireland (part of the U.K.) and the Irish Republic (an E.U. member). Such a border would not only be economically disruptive in its own right but also cut through the blurring of divisions on the Emerald Isle that British and Irish membership in the E.U. had made possible and, as such, could represent a threat to the hard-won peace enjoyed since the 1998 Good Friday Agreement. More prosaically, it could trigger an Irish veto of a deal on the U.K.’s future relationship with the E.U., which will have to be approved by all the member countries.

Yet this is to assume there will be something to veto: But there is no chance of the U.K.’s both agreeing on and implementing its post-Brexit relationship with the E.U. by the 2019 deadline. At this point even the simpler Norway option couldn’t be adopted in time. As a result, the E.U. and U.K. are discussing a “transition period” during which Britain will be a de facto member of the E.U. without having any say in how it is run. It will be a rule-taker, not a rule-maker, which will infuriate harder-line Brexiteers, and not only them. May will have to watch her M.P.s carefully.

Quite when the basis of this transition agreement will be settled is unclear (the U.K. is hoping by the end of March)—as is what is required before it can enter into legal force. What does seem to be agreed is that it will last about two years. To think this will be time enough—trade deals are complex beasts, and this one has to be agreed on by 28 countries—is optimistic. It is just as likely that all the transition will achieve is to push the cliff’s edge two years into the future.

If Britain fails to close a mutually satisfactory deal by this new deadline, it’s uncertain whether it will be permitted to linger on in that humiliating transitional status while it renews its efforts to work something out. Britain’s increasingly uncomfortable position (and an approaching general election) might well mean that it is forced to accept the alternative identified by the E.U.’s chief negotiator last year, some variation of the bloc’s free-trade deal with Canada, the Comprehensive Economic and Trade Agreement (CETA)—a deal, incidentally, that took seven years to negotiate.

A “Canadian” solution would still have to be squared with the Irish border conundrum and would raise tricky legal and political issues arising out of the “most favored nation” status that various countries, including Canada, enjoy as a result of their E.U. trade deals if the U.K. tries for a sweetened deal. And it will: CETA’s benefits include eliminating some 98 percent of tariffs, knocking down barriers on bidding for public contracts, and easing rules on temporary transfers of workers, but it doesn’t have much impact on non-tariff barriers to traded goods, nor will it liberalize the trade in services, two areas of particular British concern.

The precise form an improvement might take remains elusive. More than 18 months after the referendum Britons know what May doesn’t want (Norway or Canada) but are left to guess at the nature of the “bespoke and comprehensive” deal she is looking to wrest from Brussels. Nervous about divisions within her party and unwilling to explain to the British public how hard a hard Brexit could be, May has been long on platitudes (a “deep and special relationship,” our “strongest friend and partner”) and short on precision.

Within her cabinet, the key division is between those, such as finance minister Philip Hammond, who want a deal effectively based on maintaining close regulatory alignment with the E.U. and those, such as Johnson, looking for a broad agreement that nevertheless gives the U.K. freedom to diverge from the E.U.’s regulatory structure. David Davis, the underwhelming “Brexit minister,” has recently edged closer to the Hammond camp. He has previously called for “Canada plus plus plus,” and an “overarching” deal. If that remains his goal, fairly close regulatory alignment will be part of it.

Where all these approaches overlap is in the desire to include services in any deal and to make trade with the E.U. as “frictionless” as possible. The latter ambition recognizes that potential barriers to trade can extend far beyond tariffs. They can, for example, include regulatory roadblocks and literal ones too: That long line at customs can wreak havoc.

As for the former, it’s not hard to understand: Services account for some 80 percent of Britain’s GDP and made up 38 percent of its exports to the E.U in 2016. The U.K. reported a $19 billion trade surplus in services with the E.U. the same year. It’s worth noting, because they will be a major presence on any British wish list presented to Brussels, that financial services, even narrowly defined, make up roughly 8 percent of the country’s economy, and that’s before the boost they give to other businesses, such as law, accounting, real estate, and, naturally, restaurants. Meas-ured by the trade surplus it generates, finance is the U.K.’s most successful services export.

London clearly accepts that any agreement will involve trade-offs (less alignment means less access and so on). That’s realistic enough, but the British government’s insistence that a favorable special deal is within the U.K.’s reach is not.

The E.U. sells many more goods to Britain than it imports: a surplus of $133 billion in 2016. This ought to offer an incentive to strike a more attractive deal with the U.K. (the sixth-largest economy in the world, after all) than Brussels is suggesting, including sufficiently generous provision for services. But to many members of the E.U., Britain’s negotiating stance looks like an attempt to have its cake and to eat it. Seen through continental eyes, infamously perfidious Albion is trying to grab privileged access to the Single Market without meeting the obligations that go with it, including, of course, the rules governing who can settle on the skeptic isle.

For the E.U. to accept such a regime would be regarded as a wasted commercial opportunity (especially the chance to take business from the much envied, much resented City of London). But the political hit would be worse, and in the trudge to “ever-closer union,” politics trumps economics. The notion that “the four freedoms”—the free movement of goods, capital, services, and labor—underpinning the Single Market are indivisible is, to Brussels, an essential element in the building of a united Europe. Its leadership won’t want to set a precedent by handing the Brits a deal that might encourage other malcontents to head for the exit ramp.

Those who ask why this should count for so much to Britain—many countries trade quite happily with the E.U. without being part of the Single Market—need to remember that the E.U. is the U.K.’s closest neighbor and largest customer (in 2016 it accounted for 43 percent of U.K. exports). If Britain leaves the Single Market, its access to it will, by definition, deteriorate. That’s a very different trading challenge from the one faced by a country like, say, the United States, which has long since learned to make do with an imperfect trading relationship with the E.U. The suspension in 2017 of negotiations on a possible U.S.-E.U. free-trade deal, the Transatlantic Trade and Investment Partnership, may have been a setback for free trade, but it didn’t make life any more difficult for American companies.

By contrast, Brexit will change Britain’s economic relationship with the E.U. for the worse (and this, whatever hard Brexiteers might believe, will not be compensated for by expanded trade elsewhere any time soon). This is not just a matter of British companies risking a decline in their business in Europe. Over the decades, the U.K. has successfully exploited its comparatively deregulated economy to be a useful conduit for international companies wanting frictionless—that word again—expansion into the E.U. and a valued host to a valuable part of increasingly integrated European supply chains. Much of this business is well enough established to survive even a somewhat unsatisfactory Brexit deal, but it will struggle to grow.

All of this is good news for Labour. The weaker the economy, the greater the chance that Jeremy Corbyn can win a general election—the next is set for 2022, if the Tories can hang on that long. And the greater the chance that Corbyn will win, the less confident business will become, weakening the economy still further in a vicious circle that, with every turn, brings an extremist closer to 10 Downing Street. Labour is already polling slightly ahead of the Conservatives. The economy is slowing (GDP growth is forecast to decline to 1.4 percent in 2018, after approximately 1.6 percent last year), in part, I suspect, due to worries over Brexit, worries that the current confusion is doing nothing to alleviate. The Tories’ approach to Brexit is giving the entirely accurate impression of a party that is both divided and incompetent. Meanwhile, Remainers remain enraged, and the closer the end of the transition period comes to 2022, the fresher that rage will be. The hard left is licking its chops.

If Labour does prevail, there will be little that is moderate about the way it governs. Scarcely two years since Corbyn unexpectedly became its leader, the party has been transformed. An eccentric fanatic, he may not be the brightest, but he and his coterie have shown a sharp grasp of how to make the most of the opportunity he was so carelessly given. What mattered, they realized, was to take control of the Labour party, long the principal alternative to the Conservatives, and wait for the election victory that will come its way when voters want the Tories out—as one day they are bound to. Much of the party’s organization, including its commanding heights, has been taken over by the hard left. There has not so much been a long march through the institution as a blitzkrieg. The large number of new members who joined the party either to vote for Corbyn or to rally behind him have stood by their man, and Labour moderates in Parliament (still quite a large group) have largely been reduced to unhappy acquiescence.

Whatever he said in 2016, Corbyn, the leader of a party that supported Remain, has always favored withdrawal from the E.U. His halfheartedness during the referendum campaign, in one of the many ironies of that vote, almost certainly put Leave over the top. To Corbyn, the E.U. is an obstacle to socialism, and these days he is barely bothering to conceal what he really thinks (unlike an overwhelming majority of Labour party members, he opposes remaining in the Single Market). Despite his party’s commitment to “respecting” the referendum result, Labour has—through mood music, creative ambiguity, and the occasional tantalizing hint—managed to retain much of its appeal to Remainers. It is the Tories who are tarred with Brexit.

Many Conservatives who defected last year to punish their party for Brexit may be worried enough about the possibility of a Corbyn victory to come home the next time round, but that’s unlikely to be enough to save the day. In particular, under-45s have turned on a Tory party they see as old-fashioned (to many of them Brexit is an exercise in ill-judged, and probably racist, nostalgia), out-of-touch, and uncaring. Throw in wage stagnation, a housing market that makes it prohibitively expensive to buy, and an absence of historical memory of where the hard left, including Jeremy Corbyn, were trying to take Britain in the late 1970s, and it’s hard to see them changing their minds by 2022. That’s something of which business is also well aware, with the result that the vicious circle will make yet another turn.

Under the circumstances, if the Tories continue to handle Brexit in the way they are now doing, Britain will be Corbyn’s for the taking. Whether he would give it back is an interesting question.