Early days on a Northern Ireland Brexit solution?

The quote ‘Never believe anything in politics until it is officially denied’ has not only been attributed to Otto Van Bismarck, but more recently to Jim Hacker in the British sitcom ‘Yes Minister’. This is good advice. Initial denials from 10 Downing Street last week that Boris Johnson was not considering Northern Ireland-only solutions clearly don’t ring true. The Financial Times reported last week the ‘UK strategy is to hold talks with the EU on “all island” issues’ and that ‘Mr Johnson wants the Northern Ireland Assembly to have a say on new EU rules in the region’. Despite denials from the Democratic Unionist Party (DUP) it seems clear that the debate is moving in this direction. Over the weekend, both Priti Patel and Stephen Barclay insisted progress was being made in negotiations and they were still hopeful for a deal.  

As the debate around Northern Ireland only solutions has matured the perceived likelihood of a ‘no-deal’ outcome has reduced. Betting odds now imply only an 18%* probability of a ‘no-deal’ outcome in 2019, down from a peak of 44%. Sterling has also benefitted, gaining value, with the exchange rate against the euro falling below 89p on Monday September 16^th for the first time since late July. However, we still think the betting odds place a too sanguine low risk on a highly disruptive ‘no-deal’ Brexit.

What are these new Northern Ireland solutions?

Boris Johnson initially signalled the strategy of regulatory alignment for agri-food could be extended to other sectors to avoid a hard border. To bring unionists onside there could be some oversight by the Stormont Assembly. Of course, the assembly is currently closed, but in any EU/UK withdrawal agreement there would be time during the ‘transition period’, when the UK remains inside the EU single market (perhaps out to end-2022) to reconstitute the Northern Ireland power-sharing institutions. However, these proposals clearly fall well short of a fully-fledged, legally binding, workable alternative to the Northern Ireland backstop that the Irish government can accept.

Even if a deal is forthcoming it will almost certainly require at least a short extension of Article 50 to implement – which would be a difficult climbdown for Boris Johnson. Indeed, in an article published on Monday September 16^th in the Daily Telegraph Boris Johnson said, ‘if we cannot get a deal – the right deal for both sides – then the UK will come out anyway’. Johnson could still find a loophole in the Hilary Benn bill intended to avoid a ‘no-deal’ Brexit, requiring the Prime Minister to apply to the EU to extend article 50 to January 31^st. More radically, some voices have suggested Johnson might simply break the law so that the UK leaves in any case on October 31st.

It is hard to know how genuine the UK government initiatives may be? The report that Dominic Cummings’ said the UK’s negotiations are ‘a sham’ is still fresh in the mind. It is clear some elements within the Conservative party and perhaps even the British government are actively seeking a ‘no-deal’ outcome. The impression Johnson is just blustering his way forward with no clear strategy cannot be ruled out. That said, parliament has frustrated Johnson’s desire for an early mid-October election – snookering his strategy to push for a ‘people versus parliament’ election before October 31^st. Rather than risk an election contest in November, whilst the UK could be suffering from the disruption of ‘no-deal’ Brexit, there may well be pressure now within the Conservative government to find a deal.   

The next key event is the UK Supreme Court’s decision on Tuesday whether the decision to ‘pro-rogue’ parliament was illegal. Courts in Northern Ireland and England have already found the decision was not illegal. However, the Scottish Court of Session found Johnson had misled the Queen, and hence the decision is illegal. Even if the UK Supreme Court finds the decision was legal under English law, it may be illegal under Scottish law, in which case parliament will be reopened quickly.

Meanwhile in Ireland...

Minister for Finance Paschal Donohoe has confirmed that he will base the October 8th Budget for 2020 around a ‘no-deal’ economic scenario where Gross Domestic Product growth flat lines in 2020, creating a €6bn deterioration in the public finances (or a deficit in the range of 0.5%-1.5%) – which he would expect to close over 2-3 years. This approach clearly signals to the UK that Ireland is prepared should the clock run-down to the October 31^st deadline. In addition, it will allow the Minister for Finance address some of the criticism from the Irish Fiscal Advisory Council (IFAC) that public spending has been allowed to grow too quickly and should be reined in.

Finally, the appointment of Phil Hogan as EU Trade Commissioner in the new EU Commission announced by Ursula von der Leyen last week places him in a key position, crucially to ensure that the outcome of any future EU/UK trade negotiations does not conclude with a hard border in Northern Ireland. It’s worth noting Hogan has been one of the more vocal critics of the UK government – often in colourful language. In August, Hogan said “Prime Minister Johnson’s hero is Winston Churchill and he seems to view himself as a modern-day Churchill. However, in the event of a ‘no deal’ Brexit, the UK government’s only Churchillian legacy will be: Never have so few done so much damage to so many”.

*Source: betdata.io, 16th September 2019.