Theresa May: Britain will definitely leave the EU

British Prime Minister Theresa May set out details for her vision regarding the UK’s relationship with the EU In a speech today that will please those that campaigned to leave the EU. The Prime Minster, as expected, made clear that this will be a ‘hard Brexit’ because there will be no attempt by government to maintain Britain’s access to Europe’s single market. SHe also made clear that immigration controls will be a crucial issue as the UK negotiates to leave the EU.

The biggest piece of news in her speech was her acquiescence to a vote by Parliament on an EU deal. This is not something that pre-empts a decision by the high court on the government’s ability to use Royal prerogative to bargain on the Queen’s behalf. Instead, it is a vote after negotiation, with an imminent British EU exit on the horizon.

The real question now is what kind of deal the EU can get and what Theresa May’s backup plan will be if she doesn’t get a good deal. My commentary below

Here are the broad strokes: Theresa May, a Prime Minister who campaigned to keep the UK in the EU, has been tasked with executing Britain’s departure from it. She has decided to govern as if the referendum to exit was the final word of the British electorate on the matter and that it is her duty to exit under all circumstances. In deciding how to do so, she has deliberated for several months and come to the realisation that there is no special carve-out that the UK can obtain in negotiating an exit. Therefore, she will lead negotiations for a clean break, cognizant of the downside risks inherent in such a negotiation.

While Theresa May spoke optimistically about Britain’s future, she also spoke at length about the potential for the EU to inflict self-harm by taking a vindictive strategy toward Britain’s exit in order to discourage others from following the UK’s path. I believe she is doing this to both maintain confidence in the UK economy and to lower the EU’s perception of its own best alternative to a negotiated agreement (BATNA). Moreover, because the UK’s exit from the EU is so dependent on the UK’s having a good BATNA, I believe that Theresa May will focus heavily on securing alternative free trade deals over the coming two years, with a US deal a principal objective. 

Now, in terms of timing, here is what we have. First, the UK government will want to invoke Article 50 of the Lisbon Treaty to formally apply to exit the EU. Whether they are legally permitted to do so is still being decided by the British High Court. Theresa May did say that she would put a prospective EU-UK deal before parliament for vote after negotiation. But this is something that would occur in 2019 with the only alternative being exiting the EU without a deal. MPs who still want the UK to remain in the will want to force a vote on triggering the formal exit procedure, and the British High Court will soon decide whether they can do so.

If Theresa May gets the go-ahead either from the High Court or MPs, she would trigger Article 50 with a formal application to leave the EU, at which point the clock begins ticking, giving the UK two years to secure a deal with the EU on how to depart. If no deal is reached, the UK would be forced out of the EU without any agreement in place and would then fall back on international laws and the WTO to deal with its relationship with EU countries.

The concept that the UK government would negotiate for two years and present a deal to Parliament for vote under the pressure of imminent departure from the EU doesn’t make sense for MPs who voted remain. They will say that this leaves them with effectively no say whatsoever. They will fight to have greater say much earlier in the process.

Theresa May said today that no deal is better than a bad deal. But I suspect this is just a negotiating position. The reality is that she wants a deal with the EU. And we know this because she was at pains to point out how having no deal would be terrible for the EU, for EU jobs and for EU companies. She spoke about specific economic sectors in France, Germany and Spain in doing so, hinting at deep as well as broad economic harm to EU countries, where she noted that unemployment is high, from the EU’s not doing a deal with the UK.

By contrast, May said that Britain would do ‘whatever it takes’ to make a success of leaving the EU. First, she noted that the economy had performed better than expected after the Brexit vote. But then, echoing Philip Hammond from yesterday, she also said that Britain was prepared to alter its economic model to deal with any economic trauma associated with an exit from the EU.

Now, a journalist from Spain asked the Prime Minister whether her talk of a change in Britain’s economic model was a threat and she indicated it was not. But it is a threat. And the threat is explicit according to Die Welt, which is the German newspaper, with which the UK government first broached the topic. Die Welt told Hammond that “the impression on the European continent is also that your government sees the future business model of the U.K. as being the tax haven of Europe. May’s Chancellor responded by saying:

“most of us who had voted Remain would like the U.K. to remain a recognizably European-style economy with European-style taxation systems, European-style regulation systems etcetera. I personally hope we will be able to remain in the mainstream of European economic and social thinking. But if we are forced to be something different, then we will have to become something different.”

What Hammond is clearly saying is that the UK COULD end up becoming not a “a recognizably European-style economy with European-style taxation systems, European-style regulation systems etcetera”. He is saying that, if we don’t get what we want and this ends up harming us – as it will also harm you – we will make changes. And those changes could put the UK outside of the European norm on tax and regulation, effectively a tax haven.

Ireland should see this as a big threat to the Irish economic model, which is the closest to tax haven status of EU countries outside of Luxembourg. The UK would, in the event that the EU doesn’t do a deal with it, become a country with a regulatory and tax regime that would rival Ireland’s but also not be subject to EU dictates. That would make the UK a good place to set up shop for many international businesses. It would also stop many businesses from leaving the UK. And if the pound Sterling sank as well, it would make the UK very competitive for trade.

On trade, I would note that, yesterday, incoming US President Donald Trump told the Times of London that, in contrast to outgoing President Barack Obama, who said that the UK was at the back of the queue on trade, he wanted to do a trade deal with Britain as soon as possible. The EU’s Federica Mogherini said in response that the UK could not do any trade deals while a part of the EU i.e. before it has formally exited. But this is absurd. First of all, what kind of leverage does the EU have to stop the UK from negotiating a deal? We’re not talking about actually doing a deal but negotiating one that can be signed on day one of the UK’s departure from the EU? None that I can think of. But more importantly, if the EU tries to stop the US and the UK from doing a trade deal, it will be seen by everyone as an act of sabotage. And the consequence will be to empower anti-EU political forces within EU member states.

Here’s one last issue: immigration. Nowhere in Theresa May’s speech did she make any promises about EU workers. She was asked explicitly about whether EU citizens would get a special deal on work rights, if not in general, then at least for specific important sectors of the economy like financial services. The Prime Minister patently refused to make any assurances on that matter. This is clearly a negotiating tactic, designed to remind EU negotiating partners that the UK has leverage because of the immigration issue.

The bottom line: barring something unforeseen, the UK is going to leave the EU by 2019. What that means for Scotland and Wales and the integrity of the UK remains to be seen. Theresa May’s negotiating position is now clear; she wants the UK to remain a friend and partner of Europe, with decidedly European values, social systems and economic norms. And she is approaching the negotiation with the explicit expectation that this stance will be met in kind with positive gestures from EU officials.

Nevertheless, May has made clear that come hell or high water, the UK is going to exit the EU and that it will do whatever it takes to make sure it protects both UK sovereignty and economic interests. In order to give bite to this stance, May has made no guarantees to the EU on work rights, she has made plain that she will seek trade deals with other countries, and she has threatened to put Britain out of step with EU norms on taxation and regulation, if necessary. Her speech, therefore, not only set out her vision but did so in terms that specifically painted Britain’s best alternative to negotiated agreement in positive terms and the EU’s BATNA in negative ones.

The die is now cast. Let’s see what EU officials do in response.