Finance: Research, Policy and Anecdotes

A few years ago I compared the Greek debt crisis to a Groundhog day scenario – reliving the same situation again and again, with the can of resolving the Greek sovereign debt crisis being kicked down the road.  Now, we can see something similar happening in the UK with the government refusing to clearly state its position on the future relationship between the UK and the EU.

Ultimately, it all comes back to what I called the Brexit trilemma – out of three objectives – no hard border in Ireland, no border in the Irish sea and the UK leaving the customs union and Single Market – only two can be achieved at the same time.  The backstop solution now proposed by some in the UK government (the UK as a whole staying for a transition period in the customs union and maybe even Single Market for goods) seems like a reasonable compromise until a miraculous technology has been found to guarantee a soft border in Ireland with the UK having its own custom regime, but it violates red lines in Brussels that a non-EU member cannot pick and choose only some of the four freedoms (goods, services, capital and people). More importantly, it seems rather unacceptable to the hardcore Brexiters who fear (correctly!) that such a transitional arrangement might turn into a permanent state, ultimately making the UK a “vassal state” of the EU.

One can interpret the kicking the can down the road in different ways.  One is that Ms. May still sees the need to keep negotiating within her own cabinet and shifting the consensus slowly towards the option mentioned above. Another is that she wants to kick the can so far until it hits a wall, in the sense that the EU will force her to sign whatever is considered reasonable by the EU lest the UK crash out of the EU (for which it is not prepared in any way). It might be a politically cheap way out for Ms. May, as she can deliver Brexit (selling anything the EU forces her to sign as transitory) as promised next March, delaying any further discussions on the permanent settlement between the UK and the EU for later (possibly after her premiership).  A final interpretation would be that we have an incompetent government trying to muddle through, from one day to the next, from one deadline to the following. It is a scary thought, but probably the most realistic explanation!

8. Jun, 2018