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Reality Bites? The Political Economy of May’s evolving Brexit policy

Patrick Holden, University of Plymouth

The role of economic forces in shaping the UK’s Brexit policy seems to have been a classic case of ‘the dog that didn’t bark’. However, business has upped the pressure on Theresa May significantly in the last six months and the Prime Minister has moved towards a more realistic accommodation with EU law in her Chequers proposal and White Paper. Even this relatively modest move towards a softer Brexit has been attacked by many Brexiteers who are presented with the (all too likely) scenario that their referendum victory will actually lead to less real sovereignty than before.

May’s minority government was rocked by resignations while multiple splits emerge, even within the Brexiteers camp which ranges from grudging acceptance of May’s new approach to vitriolic hostility. At this late stage the UK government appears trapped. In terms of its negotiations with the EU it could step up preparation for no deal in the (unlikely) hope that the EU would blink, but this further alienates business and risks a capital flight. In some ways the UK has become to resemble a developing country (or a Eurozone bailout country) as it struggles to deal with more powerful economic forces while its internal political upheavals leave it open to ridicule. In many respects of course the British position has been risible and most of its current leaders have vastly misjudged their leverage. Nevertheless, it’s not exactly true that the British ‘don’t know what they want’. They did know what they wanted, they wanted to maintain most of the current market access arrangements within a much looser legal and institutional system. Once the EU held firm in rejecting this they had to deal with the trade-offs and have been unable to do. The extent to which a leading world power (with the 6th largest economy in the world, the largest defence budget in the EU and a permanent seat on the UN Security Council) has been humbled by the Brexit crisis has been striking. It reveals much about the overarching regional and global power structures, so misunderstood by most Brexiteers. In fact the compromises UK has begun to make are not surprising and for many academics it was the initial hard Brexit position of May’s government (to leave the Single Market and Customs Union) that was the surprise.

It now seems that the latent economic power of business is making itself felt but is it in fact too late? The assumption of many political economists would have been that the influence of large businesses and the financial sector would steer the government towards a softer Brexit. In the era of globalization it has been generally felt (for better or worse) that transnational economic forces were more powerful than all but the largest states. As such it was hard to imagine a government, especially one as economically liberal as the UK, taking a position directly contrary to the interests of transnational business (of course some businesses and prominent business people favour a harder Brexit but these are in the minority). Throughout Cameron’s ill-fated re-negotiation with the EU the concerns of the City of London were paramount (at least as important as migration, as Sir Ivan Rogers has revealed). Many Brexiteers also advocated staying in the Single Market, come what may. However, on taking office May took a policy stance (leaving the SM and Customs Union) that would inevitably lose the beloved financial passport for the City and threaten the business model of many companies. In the intense political atmosphere after the referendum May’s team distanced themselves from economic lobbyists to privilege the interests of the Brexit-supporting electorate and the Conservative Party in particular. As such Brexit reminds us of the autonomy of politics (or what Marxists call the ‘relative autonomy of the state’). Governments (and this is a good thing) do not automatically follow economic interests, which cannot always articulate themselves effectively at specific points in time. (James and Quaglia analyse the relative impotence of financial sector interests post-Brexit in this article).

As noted above the autonomy of the state from economic classes and forces is relative and May’s government has come under gradually increasing pressure. The Japanese government articulated very explicit demands for market access to Europe on behalf of its companies and has been increasingly strident about the threat of Japanese companies leaving the UK. The Confederation of British Industry (strongly pro-Remain) has tread carefully but gradually articulated more forceful demands concerning the needs of business. Financial companies have relocated and restructured although not yet with a massive influence on jobs. May’s government has found itself in an especially weak position as the Article 50 process, with the prospect of cliff-edge exit after two years, is designed to put pressure on the departing state. The EU has made clear that the kind of market access that many UK-based companies need (frictionless, without checks/delays) is only available within the Customs Union and Single Market. May has gradually compromised on almost everything (the sequence of the talks, money, citizens’ rights, Northern Ireland and the application of EU law during the transition period) to move to stage 2 of the talks and reassure business. Time itself is against the UK government as the withdrawal date is by now well within the near-term planning of businesses and they will have to activate contingency plans soon, if they haven’t done so already. June witnessed the strongest statement yet by a massive UK employer (Airbus), which signalled a reduction in investment and possible withdrawal altogether. This has been followed by other companies (BMW, car manufacturers more generally and Philips).

The UK desperately needs a transition agreement now but this has been delayed by the (quintessentially political) issue of Northern Ireland. May could only sign up to the proposed ‘backstop’ if she can credibly claim that it would never be used. For that she needs the EU to agree a relatively strong political declaration on frictionless trade between the UK and the EU in the withdrawal agreement. The Chequers agreement and White Paper were clearly designed to address this. These articulate a semi-credible vision of a single market lite in goods (although still including unrealistic demands). If the EU could agree to something like this in the political declaration this gives May the political cover to sign the backstop and agree the transition. However, May and the Brexiteers know that in practice this common rule book would be firmed up in the future negotiations until the UK was much more firmly embedded in the EU legal system. As resignations and other challenges multiply the question is, does the PM have the ability to get the agreement over the line? The Tory Party membership as a whole is increasingly hard Brexit but most MPs (increasingly aware of the economic consequences of no deal) are willing to support her it seems. If this centre can hold an agreement is still possible, but May will have to give more ground to Europe and this will threaten her position.

Much depends on the individual calculations of Brexiteers. Are some willing to relinquish their dreams of radical deregulation in the face of harsh economic reality? Are they willing to let May do the dirty work of signing a poor Brexit deal but at least confirming that the UK will leave? Or are they willing to precipitate a political crisis with unpredictable consequences? The Tory party has been historically maligned as being in the pocket of big business. It is somewhat ironic that many on the centre left who wish to minimise the rupture with the EU now have to hope that this is true. The next few months will be (if nothing else) a fascinating real-time case study of the interplay between economics and politics.

Dr Patrick Holden is an associate professor in the school of Law, Criminology and Government in the University of Plymouth.

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