The future customs arrangement between the U.K. and the E.U.

Talks between the European Union and the United Kingdom over Brexit the latter's exit from the former have stalled. The impasse is the result of heated debate within the British government over how much control over Britain's policy if any to cede to Brussels once the country has left the pan-European bloc.

A UK/EU crisis foretold

In June 2017, Britain held a snap general election which backfired badly on the woman who had called it, Prime Minister Theresa May. She had expected to win by a landslide, against an opposition Labour party riven by splits between its left-wing leadership and centrist backbenchers. May miscalculated, and the result was a hung parliament that required her Conservative party to ally with Northern Ireland's Democratic Unionist Party (DUP) to govern. The British media was almost universal in its belief that the election result made a so-called soft Brexit inevitable in other words, that May's government would be forced to keep Britain inside the E.U.'s institutional orbit, akin to countries such as Norway and Switzerland that remain outside the E.U.-proper while accepting its de facto control over their trade and regulatory policies. A2 Global took the opposite view: our Monthly Insight of June 2017 was entitled Britain's election increases hard Brexit risks. We noted that the election left May very much in thrall to legislators in the House of Commons and that this vastly reduces her ability to compromise with negotiators in the E.U. over the terms of Brexit. We noted that the government's dependence on the DUP, for instance, constricted its room for manoeuvre on the fraught subject of trade across the Irish border. One possibility would have been to create a new customs border in the Irish Sea, but we predicted that the DUP is likely to reject the north's effective incorporation into the Republic's customs zone. One year later and the accuracy of these predictions is now evident. On 14 May, the E.U.'s chief Brexit negotiator, Michel Barnier, reported that there had been little progress in the discussions since March. Little blame can be ascribed to Barnier on this score; at the moment, the British government is negotiating with itself.

The issue at hand

May's cabinet is split between Conservative ministers who advocate ceding sovereignty to Brussels in order to preserve frictionless trade with the E.U., and those who see this as a quasi-colonial humiliation in which the U.K. becomes a vassal state of the European Union. In the first camp is the Chancellor of the Exchequer, Philip Hammond, the business secretary, Greg Clark, and May herself. In the second is Boris Johnson, the foreign secretary, Michael Gove, the environment minister, and David Davis, the minister in charge of Brexit negotiations. As Cabinet disputes are meant to be private, the sides views are articulated by backbenchers; on the soft side ex-ministers Kenneth Clarke and Dominic Grieve, and on the hard side, by the M.P. Jacob Rees-Mogg.
Over the past year, the balance of power has shifted in favour of the hard camp, as the soft side has been plagued by a series of ministerial resignations unrelated to Brexit.
Over the past year, the balance of power has shifted in favour of the hard camp, as the soft side has been plagued by a series of ministerial resignations unrelated to Brexit. In November, defence secretary Michael Fallon resigned over allegations of sexual harassment, and a month later May was forced to dismiss Damian Green, a close ally and effectively her deputy, after he admitted lying about pornography on his office computer. Green was followed in April 2018 by the resignation of Home Secretary Amber Rudd, who fell on her proverbial sword over a scandal relating to the deportation of legal Caribbean migrants. In doing so Rudd protected May, who was arguably more culpable, given her long stint in the Home Office before becoming prime minister after the 2016 referendum on leaving the European Union. Fallon and Rudd's replacements are Gavin Williamson and Sajid Javid. Both appear to have calculated that there is little to be gained by championing the soft Brexit position, given that the Conservatives electoral base is ever more committed to the hard version, a view entrenched by the strong tendency of Conservative-supporting newspapers to push the vassal state line. More importantly, the campaign against Brexit was very heavily premised on economic forecasts of severe and immediate economic damage. A Treasury analysis published a month before the referendum suggested that, within two years of triggering Article 50, the Brexit starting gun, the U.K. would see unemployment increase by between 500,000 and 800,000, and a year-long recession. Sterling would depreciate by some 12 to 15 per cent, prompting inflation to rise by 2.7 percentage points. Article 50 was activated by parliament in March 2017.
This strengthens the hand of the hard camp, who accuse their opponents of exaggerating the economic risks of exiting the E.U.'s trade system.
Sterling did indeed collapse against the dollar and the euro after the referendum, by 12 and 20 per cent respectively in the 14 months following the vote. And this did indeed translate into higher inflation. However, both effects now seem to be dissipating. The pound has recovered somewhat, and inflation peaked at 3.1 per cent in December 2017 before falling to 2.5 per cent by April 2018. Far from worsening, unemployment has fallen steadily since the referendum, reaching a 43-year-low in March 2017. Real wages are rising for the first time since 2015. Unless the U.K. undergoes a very rapid reversal in its economic fortunes in the six-month outlook, the Treasury forecasts for the two years post-Article 50 will prove inaccurate. This strengthens the hand of the hard camp, who accuse their opponents of exaggerating the economic risks of exiting the E.U.'s trade system. As March 2019, the month the U.K. will officially withdraw from the E.U., draws nearer, opposition to the government by both pro-E.U. and pro-Brexit politicians is likely to increase. An example of the increasing opposition to the government's Brexit plans has been a series of defeats in the House of Lords, the upper chamber of parliament, on the E.U. Withdrawal Bill, which will repatriate legal powers from Brussels to Westminster. On 8 May, the House of Lords voted for an amendment to the Bill, which called on the U.K. to remain in the single market. In an earlier vote, lawmakers in the House of Lords voted for the U.K. to stay in the customs union. While the votes can be overturned by the House of Commons, these could encourage pro-E.U. members of the ruling Conservative party to vote against the government when the bill returns to the lower house of parliament. Losing such a vote would deal a considerable blow to Theresa May and intensify calls for her to resign. If May were to resign, it is likely that a snap election would follow shortly after, since a new Conservative party leader would seek to obtain a clear mandate from voters particularly as negotiations with the E.U. will be at a decisive stage.