A Black Cat Called Brexit

6th April 2018

Let us assume that you are superstitious and you follow Brexit. Brexit has become like that black cat that is about to cross your path but decides to come and sit in your path instead, refusing to decide whether it will cross or not. Go right and it has already crossed, go left and it may still cross. The only difference between you and the British is that you didn’t put the black cat there!

Here’s a quick update if you don’t follow. On 23rd of June 2016, a public referendum was held in order to determine whether the UK should remain or leave the European Union (EU). With the ‘Leave’ campaign’ winning by an underwhelming 51.7% versus the 48.1% of 30 million UK voters having voted ‘Remain’, David Cameron was replaced by former home secretary and current Prime Minister, Theresa May without an intra-Conservative party vote to contest the position.

The Brexit negotiations have evolved to become one of the most complex negotiations in recent history. The number of agreements prior and post Brexit are immense, it is predicted that at least 759 agreements post Brexit would have to be renegotiated to define the country’s relationship to 168 others. Intricacy lies not only in the numerous stakeholders, but also in that Article 50 has never been invoked before and that fundamental questions for a Brexit deal were meant to be resolved by March 2019. Regardless of Mrs. May’s vote to remain in the EU in 2017, she enacted Article 50 of the Lisbon Treaty in March 2017 when David Cameron resigned- giving the UK two years to negotiate its withdrawal from the EU.

We are now passed the two-year negotiation mark and if you have the patience, these are the facts so far. Article 50 has not been invoked, the EU’s patience appears to be wearing thin, and as it stands, the Prime Minister’s government has been granted a ‘short extension’ until the 12th of April. Had a deal been passed already, the EU would have granted Britain an extension to the 22nd of May (a day before the European parliamentary election). Three of Mrs. May’s deals have been dismissed in parliament, and MP’s have rejected the possibility of a no-deal Brexit by a majority of one. Mrs. May and Jeremy Corbyn are now in cross-party deals to avoid a no-deal exit, and more it seems; to avoid a deeper fracture within their own parties. The very fact that nearly half the country voted differently implies a serious divide in interests, which means there is no ultimate win-win scenario overall.

So it seems like the black cat still sits. For many European leaders, the UK appears to have developed an overly ambitious plan with a lot of take for little give. While maintaining that “Brexit means Brexit”, Mrs. May has since had to expand the pie while trying to placate those at home. Compromise on key terms includes conceding full access to the EU market which comprises of over 40% of the UK’s export market, influence from the ECJ post-Brexit, and the inability to lower regulatory standards for some of its goods. Brexit is becoming what it always was, a domestic issue.

Closer to the home are key issues concerning the domestic position of the U.K. These include the border status with Northern Ireland, the fact that Scotland voted overwhelmingly to remain in the EU, and economic issues such as funding sources for scientific research, as well as a loss of financial and banking agencies headquartered in London. Thus, without a clear strategy but with the intent to fulfil a set of priorities the UK’s bargaining position is partly determined by Figure 1.

Analysis

Perhaps, the black cat is here to stay. At one level, the negotiations include key stakeholders representing the UK and the EU Commission within a larger political forum (see Figure 2). To further analyse the multi-stakeholder setting of the EU with respect to the U.K, Table 1 aims to demonstrate the different positions that inform a zone of possible agreement between the UK and the EU.

Below, Figure 3 illustrates how funding contributions and trade interests inform multiple sub-level games between EU countries and the UK, without diminishing the fact that there are trade opportunities and simultaneous agendas with other stakeholders in other international forums such as the USA.

Additionally, a complex multi-level game is occurring at different levels and involves different stakeholders, such as the supranational level between the EU, the European Atomic Energy Community, the European Court of Justice), the national level (e.g. aforementioned governments), amongst public bodies (e.g. health and education bodies), amongst private bodies (e.g. financial services, SMEs, MNCs) and citizens (of the U.K, EU).

As depicted in Table 1, the UK is a key trading partner of several powerful EU member states and is the second-highest contributor to the EU budget (and 17.5% of the EU’s GDP in 2015). It is home to an estimated 4 million EU citizens and a key security partner for countries resisting Russian pressure as well as neighbouring countries like France and Ireland.

Wait, where do you go when there are black cats everywhere? The bundling and leveraging of any deal involves a vote from all individual member states. Based on Table 1, a high number of the remaining 27 states have strong trade links with the UK and may have interests for a softer Brexit, but it appears that most would prioritise the single market over trade with the UK. The EU has already made clear that an exit of the single market will also imply the exit of the EU customs union, and that there are no exceptions to existing legislations on the free movement of people. Hence, it is fair to assume that Mr. Barnier’s bargaining range is governed by an inability to move outside a range that prioritises the integrity of a single market and the status of EU citizens in the UK.

As a representative of the EU, Mr. Barnier also holds veto power over any possible agreements that do not represent his larger constituency. Then there’s Mrs. May, who can offer resignations, three to a dozen, but cannot turn away from core promises that have been having driving her commitment to the ‘leave-side’.  In essence, a zero-sum game exists, where even some compromises will result in loss, especially for the UK.

I. No Deal

In early 2017, May clearly stated that ‘no deal was better than a bad deal’ in which a ‘Hard Brexit’ was preferable to a non-achievement of the strict red lines she had laid out for the outcomes of the negotiations. However, due to the detrimental effects it would cause for the EU, but more so the UK, May has clearly had to bend on this approach. While preparing for the worse alternative to a negotiated deal (WATNA) such as this, Mrs. May’s government must ensure it does not fall into a sunk-cost fallacy trap by allocating too many resources to considering new international trade deals. Thus, after Article 50’s enactment, the UK’s best and worst alternatives to a negotiated agreement (BATNA) can be determined by the bargaining range illustrated in Figure 6.

While it is certainly clear that certain negotiated scenarios like ‘Brexit, No Deal’ or ‘No Brexit, Status Quo’ are not preferential for the UK, the high uncertainty about how such a scenario may evolve (for example, given the need to renegotiate major trade deals in the former) makes it difficult to assign probabilities to outcomes.

II. Soft Brexit

It is also evident that international trade links are a key priority for the UK as it cannot establish new partners before officially leaving the EU. Furthermore, the perception that a new, ‘outside of the Brexit negotiations’ deal much like that of the Comprehensive Economic and Trade Agreement (CETA) recently provisionally applied between Canada and the EU, will be struck efficiently is doubtful with CETA having taken eight years to negotiate. Since countries like Japan have already expressed an interest in maintaining the single market and the UK is formally blocked from internal discussions amongst other EU states, inferences will have to be made about core Brexit issues. Hence, it seems that the agenda of negotiations are geared towards a dialogue with the EU that is framed by offering some concessions that appear to be cheaper than others, (e.g. maintaining common fisheries for market access).

Retrospectively, the black cat could have been avoided. Triggering Article 50 in March appears to have been a good strategy after some initial stonewalling as it may have made the EU negotiating position harder. Perhaps pressure tactics framed by loss-aversion could drive discussions to secure key terms (e.g. the UK’s position as a critical export market for EU countries is attached to the strength of the Euro). Moreover, given a lack of clarity from key actors within the EU, the UK may actually act flirt in the forums of other trade partners like the USA in a way that creates some inconsistency for the EU.

Then there are marriages with no black cats, like Norway and the EU. It’s full of compromises. Norway is currently a member of the EEA, which means that it falls under the jurisdiction of single market of the EU, but is exempt from specific regulations regarding agriculture (Common Agricultural Policy) and fishing (Common Fisheries Policy). However, it contributes more to the EU financially than any other member state does and furthermore, they have aligned all their trade laws accordingly without having a say in their formulation. Therefore, if the UK pursues a Norway-approach to integration, it would defeat one of the main motivations for leaving the EU, financial sovereignty.

III. Pushing a Vote on ‘Final Brexit’

Black cats or not, a bad marriage can’t be reversed. To reverse Article 50, would entail admitting a form of political defeat for Theresa May both on a home and international front, after having come so far into the negotiations process. It would affect the UK’s political stance within the EU, would diminish public trust, and would be viewed as an attempt by the government to keep casting votes until their view of the ‘correct’ verdict has been achieved.

Since ‘no deal’ is not a viable option, May could try to steer the negotiations to produce another obviously poor deal for the UK, and have it voted on. Following such a strategy is likely to lead to a deal being voted against by an ‘apparently’ knowledgeable but divided group of people- the parliament perhaps- and May would have tried to handle the black cat called Brexit. Wait, this just happened.

Conclusion

The black cat has always been there, and yet the UK remains on course to meet it. The country has no deal, no new formal international trade agreements in place, a divided government and seven days to exit the EU. As it stands, Brexit is a lose-lose situation, but a range of possibilities still exist. Chatter about the possibility of a general election- a new Prime Minister- a new deal- a shift towards a harder Brexit policy- it’s abound. Yet there are many steps forward and none to retrace. Even a general election requires a two-third majority in the Commons or political suicide for May; tabling in a no-confidence vote in her own leadership. Then there is the European election, in which the UK will have to partake if granted an extension, which is also likely to cause political instability.

There is also the possibility of the 2011 Act or a ‘final say vote’ still looms as May could call for a democratic vote to override Brexit. While this may significantly injure the political stance of her party, it would also diminish the inconvenience of Brexit altogether. Finally, May and Labour party leader, Jeremy Corbyn may come to parlance prior to her departure for Brussels on the 10th of April, offering a fourth and victorious vote on her (already) defeated deal. Is this as likely as the black cat going poof, leaving no trace of bad luck? Probably.