A guide to Brexit shenanigans or what the hell is going to happen now?

May the gambler

Prime minister Theresa May has finally shown her Brexit hand, although in truth the likely outline of the transition deal had been clear for some weeks – if not to half the cabinet; and in terms of the final future relationship with the EU there is not that much substance in the agreement. She does not appear to be holding many trump cards. Nonetheless, call it resilience or obstinacy, despite the almost universal opprobrium heaped on her hard won deal from all sides of the debate, on she plods, determined to push it past an unwilling parliament. She is gambling that a combination of concerned businesses contemplating dire outcomes under a no deal scenario and the wish of the general public just to get the thing done will put enough pressure on MPs when they take soundings in their constituencies to win the day. Can she do it?


A numbers game

According to Daily Telegraph research there are up to 100 Tory MPs likely to vote against Theresa May’s deal; with nearly all the opposition, well, opposing, the numbers appear to be 218 for the deal and 421 against. That’s quite a lot of arm twisting to do! When I was thinking about this earlier in the week, I thought there might be a route to get close: in the first place your average conservative MP is at heart a loyalist and here there is the added incentive of not risking handing over the country to Jeremy Corbyn. It is quite likely that offers of preferment together with pressure from businesses in their constituencies might be enough to turn quite a few waverers. It is also the case that despite a lot of huffing and puffing, the hard Brexiter wing of the party has so far failed to muster 48 of their number prepared to write letters of no confidence to precipitate a leadership election. Possibly they are not so hard after all.


Pedigree chums

I reasoned therefore that when it really came down to it, the Brexiters might muster only 40 or so rebels; and on the remain side, it seemed to me likely that many might follow the Ken Clarke line, of ‘it’s a dogs dinner’ but for the sake of compromise and not flirting with disaster, and, holding their noses, vote with the government. I thought rebels from this side might be as few as five. Assuming that the ten DUP members from Northern Ireland can be persuaded to abstain – chuck em another £1billion or so – and counting up to 15 Labour MPs who being Brexiters think this is the best they are going to get, the numbers could be 296 for, 334 against. If these are the sort of numbers the prime minister may be emboldened to push on with a second vote in Parliament on the deal to see if she can get it over the line, possibly with a little tweaking.

However, recent events suggest if anything a hardening of opposition on the Tory remain wing. Science and universities minister Sam Gyimah has resigned, lobbing some fairly explosive grenades at the deal as he did so. The nub of his argument is that, as illustrated by the UK’s treatment over the Galileo satellite system and with so little of the proposed future relationship with the EU actually nailed down, the country is either going to be frozen out of all the interesting things or have to accept a degree of vassalage which most would deem unacceptable. Better to be fully out or fully in; framed in terms of the kind of sovereignty argument that was used so effectively against them in the referendum, this might appeal to remainers looking to turn the tables, although it also chimes with Brexiter opinion. All of this follows on from Jo Johnson’s earlier resignation of course.


Breaking the Impasse?

If May’s deal is defeated, can MPs unite around something else? And even if they can, will this solve the ‘between a rock and a hard place’ issue that is the Irish border. The point being that unless a hard border with Ireland is avoided, it is unlikely that the Irish government (who effectively can operate a veto over any deal) will agree; hence, the hated backstop which effectively means that the UK stays in the Customs Union until some other way can be found of avoiding a hard border.

In the following table (Table 1) we set out five main views represented in Parliament (and the country) and using the Treasury’s latest analysis, attach an economic cost in terms of GDP per capita (ie the wealth created by the country divided by the population) relative to the current situation of being in the EU. This is over the long term, at least 15 years; it is important to stress that these are not forecasts but likely scenarios of the relative reduction in wealth from pursuing different courses.

Table 1: Reduction in GDP per capita over long term of five main options

Supporters Arrangement % reduction (central estimate) Per Capita

(£) reduction

Solves Irish border
Extreme Brexiters No deal (1) -8.1% -£2,385 Presumably not
Moderate Brexiters Average FTA (2) -5.4% -£1,590 Presumably not
Theresa May’s (likely) deal May’s White Paper (3) -2.7% -£795 Backstop
Norway plus (Nick Boles) EEA-type (4) -1.4% -£412 Possibly
Strong Remainers In the EU 0.0% 0 Yes

Source: EU Exit, Long-term economic analysis, November 2018


(1). A no deal scenario, based on an assessment of average Non-tariff barrier (NTB) costs between countries trading on non-preferential World Trade Organization (WTO) terms and applying EU Most Favoured Nation (MFN) tariffs.

(2). A hypothetical Free Trade Agreement (FTA), with zero tariffs, reflecting average NTB costs such as standard customs arrangements with the EU, regulatory and other costs.

(3). The policy position set out in the July 2018 White Paper, “The future relationship between the United Kingdom and the European Union”, as amended to reflect reality of likely outcome – half way between May’s ideal and an FTA.

(4). An European Economic Area (EEA)-type scenario, which reflects the UK being outside of the Customs Union, reflecting the average NTB costs, such as of standard customs arrangements with the EU. Zero tariffs are applied.

The EEA includes EU countries and also Iceland, Liechtenstein and Norway. It allows them to be part of the EU’s single market.

The Nick Boles plan may in fact be slightly less costly than the numbers shown here.

It is also important to note that these numbers only look at the long term effect and ignore any disruption in the short term.

Table 2 shows the break down of the different contributors to changes in GDP (not GDP per capita so the numbers are slightly different to Table 1, because of migration assumptions) under the four options compared to the status quo.

Table 2: Compared to today’s arrangements (percentage change in GDP)

No deal FTA May’s (likely) deal EEA Type
Trade contribution:  
Tariffs -1.4 0 0 0
NTBs -6.5 -5.1 -2.3 -1.5
New trade deals 0.2 0.1 0.1 0.1
Total Trade impact -7.6 -4.9 -2.2 -1.4
Additional regulation and migration contributions
Regulatory flexibility 0.1 0.1 0.1 0
Migration (no change) -0.2 -0.1 0 0
Migration (zero net inflows of EEA workers) -1.8 -1.8 -1.8 N/A
Overall Combined impact
UK GDP (no change to migration) -7.7

(-9.0 to -6.3)


(-6.4 to -3.4)

-2.1 -1.4

(-2.4 to -0.9)

UK GDP (zero net inflows of EEA workers) -9.3

(-10.7 to -8.0)


(-8.1 to 5.1)

-3.9 N/A

Source: EU Exit, Long-term economic analysis November 2018

A few points jump out: by far the largest costs arise from non-tariff barriers (NTBs) and these are biggest in a no deal scenario. NTBs include checks at or behind the border and other regulatory costs. Regulatory flexibility and new trade deals (much vaunted by Brexiters) appear to have little positive impact: in the first case this is because the UK is already reasonably flexible in terms of regulation – in 2013, the UK was second in the rankings of the OECD Product Market Regulation indicator and holds the ninth position in the World Bank’s Doing Business ranking.

As regards new trade deals, the potential gains versus the current situation are just not that big: The analysis assumes that all EU trade agreements with third countries are transitioned in their current states to UK-specific arrangements, including those EU agreements that are provisionally applied or agreed but not yet ratified. The analysis also assumes that, in the long run, the UK secures new trade agreements with international partners. These agreements are assumed to cover a broad range of potential trading partners, including the United States, Australia, New Zealand, and other members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. The analysis assumes that the UK will be free to pursue new independent trade deals with the rest of the world following EU exit. Other factors could support or constrain the UK’s trade with the rest of the world, which are not modelled. The truth is that the UK economy is not going to be suddenly transformed into one which is making things that other parts of the world want to buy.

The other point concerns migration: if we get to a situation where there is no net migration from Europe this has a much more significant negative effect on GDP than any positives from regulatory flexibility or new trade deals.

Now, of course, many will quibble with this analysis by the Treasury – rubbish in means rubbish out etc. – but most independent analyses (eg. NIESR) agree with the negative impacts although clearly there may be differences in quantum. Those who label the Treasury report a rerun of ‘Project Fear’ overlook the fact that the Treasury’s pre-referendum forecasts were largely correct in the direction of harm; but the economy benefited from the much stronger than expected global economy and the injection of massive liquidity by the Bank of England.

Table 3 below looks at the increase in costs for the main sectors of the UK economy under the different options.

Table 3: Compared to todays arrangements (percentage change in trade costs-central estimate)

Sector No deal FTA May’s (likely) deal EEA Type
Manufactured goods 13% 8% 4% 5%
Agri-food 35% 13% 7% 6%
Services 12% 9% 8% 2%
Financial services 13% 13% 9% 1%
Networks 9% 5% 3% 1%

Source EU Exit, Long-term economic analysis November 2018

It is notable that the largest difference between the damage done by increased costs between May’s deal and an EEA type arrangement relates to Services, which also happens to be the largest part of the Economy (60%), with 51% of trade in Services done with the EU.


Towards Armageddon?

The Bank of England also produced scenario analyses (not forecasts!) last week looking at short term impacts, in response to a request from the Treasury Select Committee. These did not make very happy reading in the event of no deal and no transition (see Table 4):

Table 4: Comparison of Brexit scenarios with no agreement and no implementation period

  GDP Unemployment Inflation House prices Commercial property Ave bank rate Peak bank rate
Disruptive -3% 5.75% 4.25% -14% -27% 1.50% 1.75%
Disorderly -8% 7.50% 6.50% -30% -48% 4% 5.5%
BOE 2018 stres tests -4.75% 9.50% 5.5% -33% -40% 3.25% 4%
Global financial crisis -6.25% 8% 4.75% -17% -42% 2% 5.25%

Source: Bank of England, EU withdrawal scenarios and monetary and financial stability

This is explicitly meant to be a ‘worst case’ scenario(s). The ‘disruptive’ scenario is less negative than the ‘disorderly’ scenario because it excludes four of the most severe assumptions:

  •  The UK loses existing trade agreements that it currently has with non-EU countries through membership of the EU.
  • The UK’s border infrastructure is assumed to be unable to cope smoothly with new customs requirements for some time.
  • There is a pronounced increase in the return investors demand for holding sterling assets given a rise in perceived risks.
  • There are spillovers to other financial markets resulting in fire sales of some assets.

David Smith writing in the Sunday Times (02.12.18) puts it like this: ‘if you take the Mad Hatter, a field full of March hares, a box of frogs and the pop group Madness, a no-deal Brexit is madder than all these combined.’



From the start of the EU debate it has been clear that there were going to be trade-offs: chiefly between the amount of (possibly illusory) sovereignty that was being gained and the amount of economic cost that was going to be suffered. You cannot cut yourself off from your closest trading partners with whom you have become increasingly intertwined over the last 40 years, without some pain. Equally, it was clear that the Irish border question was insoluble without staying in the customs union. In seeking to solve the insoluble and achieve some sort of compromise, Theresa May has achieved quite a feat: her deal has the potential both to damage sovereignty and weaken the economy. That is why it is so unpopular with both sides.

If her deal is rejected by parliament, surely MPs will nonetheless coalesce around avoiding complete disaster. In the absence of consensus around a second referendum, a Norway style deal may gain momentum as a plan B. Its latest incarnation was described by Nick Boles (FT 28.11.18) as ‘Norway Plus’: ‘It involves accepting Mrs May’s withdrawal agreement in full – but renegotiating the political declaration to specify that, after the transition, the UK will join the European Free Trade Association (EFTA) and move into the EFTA pillar of the EEA. We would also remain in a customs union until new arrangements have been agreed. Britain would need to swallow the Irish border backstop as drafted, but should ask for an explicit commitment from the EU to support the UK’s accession to EFTA and facilitate our transfer into the EFTA pillar of the EEA by December 2020, so that it never needs to be activated.’ Sounds like a plan, sort of; but like everything to do with Brexit, it is fiendishly complicated to negotiate and has some evident drawbacks. We are possibly getting to the point where, bad as further uncertainty will be, the government needs to buy more time and postpone the exit point.