How Covid-19 Has Made Brexit Even Harder

(Bloomberg Opinion) -- It came as no surprise that a fourth round of trade negotiations between the U.K. and the EU has produced no big breakthrough. Once again, there is talk about Britain separating from the EU in December without a trade deal in place; Bank of England Governor Andrew Bailey told banks this week to prepare for just that..Why hasn’t the coronavirus pandemic changed the Brexit narrative, forced an outbreak of reasonableness between U.K. and EU negotiators or at least made compromise more likely? It’s a fair question. The Scottish, Welsh and Northern Irish administrations have all said they would like Prime Minister Boris Johnson to extend the current one-year transition period through 2021 or 2022, which he can legally do if he makes the request to the EU by the end of this month. On Wednesday, the Scottish government said that without an extension, Scottish gross domestic product could be up to 1.1% lower after two years, costing 3 billion pounds ($3.8 billion) of lost activity..Polls have suggested the U.K. public would favor an extension. Given the enormous costs of dealing with the pandemic — which in Britain’s case involves one of the world’s most generous furlough schemes — you would think the U.K. would seek to avoid the increased costs and uncertainty of forgoing a trade deal and moving to World Trade Organization terms..Perhaps the U.K. will come around eventually; these negotiations never really reveal themselves until the eleventh hour. Germany’s ambassador to Brussels suggested as much this week. But, crucially, he noted that a breakthrough will require the U.K. to accept some loss of sovereignty. .The idea that the pandemic might moderate U.K.-EU trade talks was more plausible a couple of months ago. If the virus produced an economic crisis in Europe, or undermined the unity of the 27 member states in the negotiations, then that might have changed the balance of forces. But Europe seems to have weathered both the health care crisis and the economic consequences far better than many predicted. And so far the bloc seems determined to hold the line, even if it means no deal is possible by the end of the year..There are also several reasons why Johnson and U.K. negotiators are unwilling to compromise. One is political: Johnson owes his job and his popularity (even if it has been dented by his virus response) to Brexit. That, ironically, may limit his room for maneuver now. The U.K. officially left the EU on Jan. 31, but Brexiters are still highly suspicious of any delays to Britain leaving the EU’s single market and striking its own trade deals, which Johnson promised would happen at the end of this year. An extension would require the U.K. to continue paying funds into the EU budget, something that is not likely to go down well with either Parliament or public..And that’s before considering the other compromises required. There is no deal Britain can strike that doesn’t involve giving up some control, in order to accept some EU rules and regulations and retain access to its single market, as political risk consultant Mujtaba Rahman has argued. Britain could give ground on EU demands for continued access to U.K. fishing waters — the U.K. fishing industry is symbolically important but tiny, and sells 80% of its catch to the EU market. But Brussels’ insistence that the U.K. commit to following EU rules on workers’ rights, social and environmental rules and other so-called level-playing field commitments is seen by Brexiters as undermining the whole point of leaving the EU..There is no doubt that leaving the EU’s single market at the end of this year will bring costs. But camouflaged by the pandemic’s effects, and mitigated by the huge upswing of debt-fueled government spending, Brexiters may argue there is no better time to bite the bullet. The coronavirus pandemic is forecast to hit GDP over 13% this year, while the economic impact of Brexit has been estimated to result in foregone growth of 8% of GDP over a 15-year period..The range of issues on which the U.K. and the EU are negotiating also go far beyond fisheries, financial services and level-playing field provisions. There are disagreements over, among other things, the recognition of professional qualifications, procurement rules, the sharing of data and information for security purposes and the implementation of the Irish Protocol, the key part of the divorce deal that preserved an open border between Northern Ireland and EU-member Ireland. There is no way this range of trade issues can be resolved, with even the best of intentions and no pandemic crisis, in the limited time available. The U.K. and the EU will be working through their new normal for years to come, whether or not they strike a deal at the end of this one..Several realities might compel Johnson to strike a limited deal and dress it up as a victory. With unemployment rising, and companies taking on debt and furloughing workers, the pressure on Johnson to prevent manufacturers like Nissan, Britain’s largest carmaker, from shutting down will only intensify. Many of these companies are in precisely the parts of the country whose blue-collar, former Labour-supporting voters handed Johnson the December election..The idea that both Brexit and the pandemic would provide Britain with the opportunity to reshore some production, as well as shift supply chains away from the EU, sounds fine, but it won’t be straightforward. Reshoring will take significant investment and time. For companies whose balance sheets have been loaded with debt, that investment may be difficult. Given U.K. labor costs and environmental and social regulations, reshoring will also mean higher costs up the value chain. Energy costs, the availability of skilled labor, planning restrictions and other barriers will also slow things down..The possibility of a rupture in U.K.-EU trade negotiations — leading to customs barriers and other uncertainties for which Britain is not well prepared — might concentrate minds toward the end of this year. But so far, the pandemic hasn’t made getting a Brexit deal any easier..This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners..Therese Raphael is a columnist for Bloomberg Opinion. She was editorial page editor of the Wall Street Journal Europe..©2020 Bloomberg L.P.

Bloomberg

Company

Financial Products

Enterprise Products

Media

Customer Support

Communications

Industry Products

Media Services

Follow Us

Bloomberg Customers

BloombergQuint

BloombergQuint

How Covid-19 Has Made Brexit Even Harder

Bloomberg Quint