May’s Brexit and NI

Her speech did not come with surprises, and still, it was quite astounding to hear what she plans for the future of the UK. Any negotiation starts with wishes for the moon. May wished for the moon even before negotiations started. We know by now what we figured out in advance: Given the absolute priority of immigration control and the project of a ‘global Britain’, the UK will leave the Single Market as well as the Customs Union. So far, so good. She also wants to get either sector special deals or a free trade agreement with the EU, and she wants this fast. This is the delusional part of the speech as latter will not happen quickly, even if there would be a strong political will on the side of the EU and the member states. A free trade agreement – and this will never be a ‘free’ trade agreement, think only about fisheries and agriculture – needs time to negotiate and to find adequate compromises. CETA needed more then six years for an incomplete ratification. There is no reason to believe that an agreement with the UK will be done faster.

May also made clear that the UK would walk away if no good agreement will be tabled. This threat complements nicely the threat by her Chancellor Hammond who stated that any deal offer that would not be seen as good by the UK will be responded with by turning the UK into a low tax jurisdiction for private business. Such a race to the bottom would create a extremely difficult taxation environment for EU-27. At the same time, it would also create problems within the UK. Turning the UK into a low tax jurisdiction may be a way to compensate for the WTO-tarrifs that would reign between EU and UK if no satisfying bespoken deal will be achieved. However, reducing corporate tax rates may be not sufficient to attract the kind of investment that actually successfully deal with the key problem of the UK economy: low level and low growth frost of productivity. Chances are that the UK attracts the kind of fdi that only pushes the exchange rate upward but does not a bit to solve the productivity problem.

The hard May-Brexit will create enormous unity challenges for the UK, its particular in regards to Northern Ireland. First, a hard Brexit implies a hard border between the Republic and Northern Ireland. The negative economic effects will be very strong due to the simple fact that Northern Irelands is very trade-dependents from the EU, i.e. from the South with which NI trades a lot. The imposition of a border would hurt NI enormously. This is the more severe as NI already is the laggard in the UK, and Brexit will add more economic burden to NI. Second, a hard border will make the ‘common travel area’ to a difficult arrangement to manage. As a result, much of the positives of the Good Friday Agreement will be in jeopardy. Third, an economically isolated NI economy will stay the bead house of the UK, cut off vroom critical inks with the Republic and depending from financial transfers from London.