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Over the past few weeks the world has appeared to be in a form of stasis but behind the scenes many things are rumbling along. The lights are kept on, vital supplies are delivered to where they’re most needed and the UK’s withdrawal from the EU continues.
The vast bulk of the issues relating to our withdrawal were broadly remedied by the Withdrawal Agreement struck by the Prime Minister back in October however the basis of our future relationship with Brussels remains a work in progress. Negotiations on the latter got off to a rather good start with both sides clearly outlining their objectives and swiftly getting down to brass tacks until the Coronavirus put a slight fly in the ointment.
Early momentum was quickly hampered by the distraction brought about by the pandemic and matters were then made worse by both chief negotiators having to self isolate after exhibiting symptoms of the virus. Further negotiating rounds were cancelled and officials had to make do with phone and video conferencing.
Despite this discussions have continued and with those on both sides affected by the virus now recovered things are starting to get going again. The EU’s Chief Negotiator, Michel Barnier, even broke the recent silence on Friday with a press conference where he revealed the current state of play, many areas of agreement but the critical sticking points remain.
Absent any imminent breakthrough in the talks and with the current crisis taking up a considerable amount of bandwidth there have been some some suggesting that extending the transition period may be a prudent move. Initially I thought this could be the pragmatic thing to do but as time has gone on and the more I’ve thought about it the less receptive I have become to the idea.
For starters extending the transition isn’t quite as simple as it was in the previous phase of Brexit. Under the Withdrawal Agreement any decision to prolong our transition has to be reached by 1st July and as any extension intrudes into the next EU budget period UK financial contributions for that time would have to be negotiated by then as well.
This is no simple matter so just nailing down the details would consume both negotiating teams until then. The actual substance of our current talks would have to be put on hold, it would also undermine the strengths of our negotiating position because going down such a path would put us at the mercy of the EU. Brussels would be able to prevaricate to their own advantage and eventually name their price which we would have to accept. We would lose months of potential progress in our trade negotiations and be lucky if we only ended up having to cover a fraction of their budget shortfall.
There are also other looming financial risks on the continent that should make us wary of an extension. The economic stress of the pandemic has resulted in the problems of the Euro to resurface and disagreements over how to tackle this issue is greatly dividing Eurozone leaders.
The Southern European nations are pushing for an agreement to allow the European Central Bank to issue mutualised debt instruments (colloquially known as “Coronabonds”) for the whole Eurozone and via the EU budget institute fiscal transfers to the poorer and harder hit nations. This is of course being fiercely resisted by the more fiscally conservative Northern European nations especially since a series of support measures involving the European Stability Mechanism and the European Investment Bank have already been agreed.
Unfortunately these measures don’t go far enough as they only have a value of ~€500bn, for comparison the recent pandemic stimulus package in the United States amounted to $2.2tn. It’s also rather counterproductive as the money mostly comes in the form of loans and many of the countries that will be receiving these loans are already heavily indebted. For example Italy currently has a debt to GDP ratio of 134%, a dangerous level for a country with no control of monetary policy or a lender of last resort.
This is a recipe for further bailouts down the line and being under the auspices of the EU we will get dragged into it one way or the other. As members we had to (indirectly) contribute to the previous bailouts of Greece, Spain and Portugal but now we are no longer part of the club we shouldn’t take the risk of having to pay for their inability to reform the single currency.
Another aspect we need to consider when weighing up the merits of an extension is how we go about recovering from the current pandemic. Being beholden to EU rules as we are now presents us with limitations and as we will be practically rebuilding our economy from the ground up we need as much freedom to act as possible.
To kick start our economy once the virus passes we need to be able do what we want. We need to regulate (or indeed deregulate) where we see fit. We need to be able to give whatever fiscal support we deem necessary to whatever part of our economy that requires it. We need to be free to cut tariffs at will or prevent exports of strategically important resources. We need to be free to shape all aspects of government policy to meet our priorities and not have to get special approval from Brussels. Flexibility has been a key component to the success of our economy in the past and in a Post-Coronavirus world it will be more important than ever.
Some observers have however suggested that a longer transition is actually preferable as exiting without a trade deal would result in an additional economic hit at just the wrong time. The reality is that any economic impact due to such an outcome would be minimal if there wasn’t a pandemic on and any effects of leaving without a trade deal would merely overlap with the infinitely greater effects of our current situation, they wouldn’t be additive. One of the biggest threats we were told of a “No Deal 2.0” was a disruption of supply chains, well they’re disrupted now and we have no difficulty getting food, medicine and other things. We’re more than capable of finding a way through.
Though there are also other options to limit any possible trade disruption beyond extending the transition. The UK and the EU could declare their intention to negotiate a free trade agreement to the WTO and lodge a GATT Article 24 compliant standstill agreement for their approval. This would however only cover trade and not other areas that the EU are being insistent on such as fishing and the “Level Playing Field” but if the EU is even remotely serious about reaching an agreement with the UK then they should at least consider it.
Taking everything into consideration, extending the transition period makes no sense. It doesn’t actually achieve anything, it would expose us to some not inconsiderable financial risks that we would have very little control over and it would tie our hands at just the wrong moment.
2020 is turning out to be a huge reset for just about everything. As we emerge from this pandemic and begin to rebuild why on earth would we want any vestiges of the ancien regime holding us back?
