Something significant has changed in the Brexit calculus in the last few months. The euro-zone economy has run into the buffers, with the latest data showing that Germany was flirting with recession in the second half of 2018. This ups the stakes considerably, as a no-deal Brexit would deliver an economic hit which the European Union economy can ill afford, in addition to the heavy price it would impose on the UK and Irish economies
This means that if a deal is not tied up by the end of March and the UK asks for an extension in article 50 and thus a delayed exit, it will probably get it. The other 27 EU countries would need a reason to agree to an extension, but the bar will be lower than it would have been if the big economies were in better shape. Anything which lessens or delays the economic price of Brexit will be grabbed, unless the politics make it simply impossible to do so.
The extent of the slowdown in the euro-zone economy in recent months has been both striking and surprising. The German economy recorded no quarterly growth in the last three months of 2018, hit by falling demand in China for its big manufacturers and by the woes of its car industry, still trying to get to grips with the diesel emissions scandal. For this year, the threat by Donald Trump to push ahead with tariffs on EU car imports is a major worry, as is the uncertainty in the Chinese economy.
In 2017, Germany might have been more willing to shrug off a no-deal Brexit. Now, this is all more difficult.The Halle Institute for Economic Research recently estimated that a no-deal exit would cost Germany more than 100,000 jobs, with the car and tech industries the most exposed. For comparison, the institute reckoned that about 20,000 jobs here could be lost, though this would be about 1 per cent of the workforce here, compared with 0.24 per cent in Germany. All the other EU economies would also be hit, with France forecast to lose more than 50,000 jobs.
There is still a lot of guesswork in calculations such as this.But the big EU powers are now well aware of the economic damage of a no-deal Brexit and have a significant incentive to try to avoid it. So too does the UK where figures out this week showed GDP growth fell to 1.4 per cent last year, the slowest since 2012 – and initial estimates suggest a particularly bad December.
These economic dangers mean the EU side is trying to give Theresa May time and some cover. It was notable, for example, that the EU agreed to signal last week that negotiations would continue. In reality, everyone knows there is nothing to negotiate until the UK can decide what – within the realms of the possible – it wants.
The EU side has signalled that it is open to discussing ways forward – within certain limits – but the chaos in the UK means they will sit on their hands for now. There is no point in offering something to the UK when the prime minister, weakened by another House of Commons hammering, has so little negotiating credibility and would struggle to deliver a majority for any conceivable concession. This stand-off – and a risk that time just runs out to sort something – means that a no-deal Brexit is a real risk.
But as the two sides are finally forced to confront the chaos that will be March 2019, the huge economic cost of a no-deal will be front and centre. No one is even vaguely ready for this, despite all the talk of no-deal preparations. Your guess is as good as mine as to how UK politics will respond, but it remains the case that the only majority is one against a no-deal exit and a parliamentary vote later this month may even oblige May to seek an extension if a deal is not done.
The EU would need some cover to do this – but would try to oblige. At best, it might give time for more talking, albeit at the risk of another cliff-edge deadline in a few months, or to finalise an emerging agreement and legislate for it. At worst it gives more time to prepare for a no-deal exit, though the idea that this could be “managed” to limit most of the cost is fanciful.
Whether, as this plays out, Ireland might come under pressure at some stage to agree to some adjustment to the backstop plan will be on the mind of the Government here. There has been no “ask” so far, just – it appears – some background discussions on where flexibility might lie. But the Irish tactic of maintaining that a backstop is needed while simultaneously arguing that there are no plans to put a border in place in the event of a no-deal exit could face increased questioning.
However, if this week’s events have shown anything it is that this is about much more than the Irish border backstop, which is really just the flashpoint indicating huge uncertainty in the UK – with little more than a month to go – about what kind of Brexit it actually wants.
“Brexit means Brexit,” May is fond of saying, but she still can’t say what Brexit actually means. We are still waiting to hear. It looks as if this Beckettian period will go on for a few weeks yet, to be followed by a massive hullaballoo in March. The economics argue for a deal, and if not, for a delay. But with the mad politics of Brexit, who – in truth – knows what will actually happen.