The Northern Ireland Protocol (NIP) remained a dominant issue in Brexit-related news and commentary in the past week. Beyond Northern Ireland, the impact of Brexit on the UK labour market, investments and the public finances of the devolved authorities stick out as conspicuous issues.

The NIP: The command paper and the EU’s appeasement strategy

Lord Frosts ‘command paper’ published last week, has led many commentators to try and understand what it means for the future of the NIP. Katy Hayward aptly pointed out that Frost’s “way forward is to take considerably large steps backwards,” by putting on the table ‘solutions’ that have been discussed two or three years ago and were rejected, as Chris Grey also noted last week. 

Unsurprisingly, the EU’s response to the basic request of the command paper – to reopen negotiations of the NIP – was a quick and resounding ‘no’. More surprising was the news that transpired on Tuesday that the EU Commission was halting its legal action against the UK over the unilateral extension of ‘grace periods’ on exports of certain from Great Britain to Northern Ireland. The freezing of legal action was one of Frost’s requests in the command paper and was deemed ‘pretty hopeless’ by experts of NI politics. The gesture was particularly unexpected, because of reports the previous week that the EU was preparing to escalate the legal cases.

There are three ways of interpreting the EU’s decision to grant Frost his wish for a freeze of ongoing legal actions less than a week after having announced it would escalate them.

The first interpretation – quite prominent in many online comments on the matter – is that the EU is attempting to show that it is the reasonable party. This could be aimed at undermining the Brexiteers’ well-known strategy to portray the EU as a bully and the UK as a victim to thus justify breaches to previously agreed terms. That interpretation is probably too far-fetched, because the victimhood discourse is mainly targeted at the UK public and the EU does not have much to gain from undermining that discourse now that Brexit has happened.

The second interpretation is that the EU is pursuing an appeasement strategy to create the best possible conditions for negotiating solutions to the issues arising from the NIP and its implementation (as opposed to renegotiate the protocol). Indeed, Dublin called the Commission’s step “a genuine goodwill gesture.”

The third interpretation, is that the legal action simply will not achieve much. As I noted before, despite the fact that in all likelihood the UK is currently breeching the terms of the NIP, there is not that much the EU can do in the short run to stop the UK from doing so. The legal process will take a long time during which the UK can continue to refuse carrying out the necessary border checks and controls. If the EU were to impose retaliatory tariffs without legal basis, that would send a strong signal, but would not solve the problem of UK goods that are not conform with EU regulations possibly entering the Single Market via NI. Finally, the ‘nuclear options’ of imposing a border either on the Island of Ireland or between the Republic and the rest of the EU is simply politically not acceptable. So, negotiating around the existing terms of the NIP is indeed the only option the EU has. Dropping the – most likely not very effective – legal action for the time being does hence seem like a reasonable concession.

The key question, however, is how will the UK government react to the announcement of a suspension of legal action?

Frost and the UK government may very well interpret this decision as a sign of weakness and confirmation that their hardball strategy is working. Given previous instances where any compromise from the EU side is used to make even more demands rather than compromise in return, suggests that this is what may happen this time too. Chris Grey noted this week that rather than a negotiation strategy aimed at getting the most from the EU without actually achieving the stated demands, Frost may actually believe that what he asks for in the command paper can be obtained. That is an illusion – not just because the EU will not agree to any of it – but because the government’s insistence on a hard Brexit necessarily means there has to be a border somewhere between the EU and the UK. Once this is accepted, it quickly becomes clear that the Irish Sea is by far the most likely place for that border, because the alternatives of the land border between NI and the ROI or between the ROI and the EU are - as the UK government knows  – unacceptable to the EU. Ultimately, the UK government will have to accept that an Irish Sea border is the price to pay for a hard Brexit.

The solution to the issue is hence either more flexibility from the UK side (e.g. by accepting a Swiss-style agreement on Sanitary and Phytosanitary Standards (SPS) that would mean alignment with EU rules but would very considerably reduce the need for border checks between GB and NI), or a different type of Brexit than the current hard Brexit (e.g. membership in the EEA or the Single Market), which is currently politically not realistic. It is unlikely that these solutions will be found under the current UK government composed of hard Brexiteers.

What will happen next then is most likely a prolonged conflict over the NIP. The EU will most likely not budge on the big issues – such as Frosts’ proposal to have dual regulatory regime apply to NI – and Frost will most likely reject any technical solution (such as a Swiss-style SPS agreement) as insufficient or inacceptable. He may even trigger Article 16, but that will not solve anything either. So, the most likely short-term fix is to extend the current situation – including grace periods – until there is movement on the UK side.

The domestic implications: Divisiveness as a political strategy

That may not be a bad outcome for Frost and Johnson. A smouldering – but not escalating –  conflict with the EU over the NIP serves the Johnson government’s political strategy very well. Prof. Grey may be right that many commentators overestimate the strategic nature of Frost’s approach to NI when they suggest his hardball approach is driven by posturing for the domestic audience. Prof. Grey suggests instead that Frost actually believes that his approach can be successful. Similarly, Prof. Hayward notes that the whole command paper “hints at a ‘zero-sum’ interpretation of the situation” in NI. That again suggests that in Lord Frost’s world view compromise is indeed not an option – not for strategic reasons, but as a matter of how the world works. This suggests by implication that he does indeed not see any space for compromise and therefore puts forward his proposals in a genuine belief that they are the only possible solution.

This interpretation implies that Lord Frost does not understand that the hardball strategy is bound to fail and that his asks will never be accepted by the EU. I am genuinely struggling to accept that someone who holds such an important position at such a crucial time in our country’s history would be so delusional. But then, I was also not willing to accept that a UK Prime Minister would call a simple ‘in-out referendum’ on the EU membership question before a clear plan for what would replace EU membership was in place. So, I will trust the real experts here and assume that Lord Frost adopted this strategy in a genuine belief that he can succeed.

Nevertheless, beyond the individuals involved, like any populist ideology, Brexitism inherently needs the ‘ us v. them’ divide to surviv. Willingly or unwillingly, the Brexit government will therefore always be drawn towards confrontation and grandstanding rather than cooperation and compromise. That is the case for its relationship with the EU, but also its approach towards people who disagree on its vision for British society (‘war on woke’), its attitudes not just to refugees crossing the channel in dinghies, but also to highly qualified immigrants who have made Britain their home. Creating, reinforcing, exploiting division is the natural instinct of Johnson and his government. A protracted conflict with the EU over the NI question, while belying Johnson’s claim that he ‘got Brexit done,’ would provide Brexit ultras with a welcomed source of division that can be reignited when the domestic political situation requires it. Academic studies show that frustration over established parties’ international commitments that limit its domestic policy choices is a key driver of support for populist parties. From that perspective, flouting the terms of the NIP, taking the flak from the EU for it, and shouting it from the roof tops, does seem like a possible strategy to maintain popular support for a government that – as not just the Guardian, but even Tories seem to accept – fundamentally does not care much about Northern Ireland.

Of course, there is a risk that the situation gets out of hand. For instance by reigniting sectarian violence in Northern Ireland. But this is a government that has come to power by playing with fire, or rather by actually starting a conflagration. There is little hope that it will stop short of making things worse, if it serves its political purposes.

Brexit-induced austerity

Seven months into Brexit, then, there is still a major festering wound poisoning the relationship with the EU and between communities in NI. Yet, that is not the only area where Brexit is all but done. There is a lot of evidence that the UK government was simply utterly unprepared for the end of the transition period on January 1st, 2021. One important example is the replacement of EU funds for the devolved authorities.

This week, Vaughan Gething economic minister of the devolved government in Walse, warned that Wales was on the path to austerity after losing £375m a year in EU economic aid because of Brexit. The UK government has promised to make up for these losses through the Shared Prosperity Fund (UKSPF). Yet, with EU money now running out, the UKSPF has not yet been set up.

In the meantime, devolved authorities can bid for money from the Levelling Up and Community Renewal Funds. Yet – in another sign of re-concentration of power in Westminster after Brexit – these funds are not new money, are not guaranteed but subject to competitive bidding, and are administered by Westminster and not like EU funds directly by the devolved authorities.

Devolution may become another victim of Brexit and the Welsh another group betrayed by Brexit promises.

Brexit and Foreign Direct Investment (FDI)

Brexit also continues to have a major impact on many aspects of the UK economy.

Unsurprisingly, the Express is jubilant about the state of the British economy. It recently ran the headline “Brexit: Project Fear smashed! Top economist hails UK as Europe investment powerhouse.” The basis of the article were statements attributed to Tej Barrick, chief economist at the Institute of Directors, to the effect that the UK remains an attractive place for foreign direct investment due to its ‘strong industrial base,’ backed by a ‘strong legal and regulatory framework,’ ‘world-class universities,’ and the government’s industrial strategy published in 2017.

Of course, what the Express would not tell you is that the very same regulatory framework is not under attack from within the government, its world-class universities are cut-off from the Erasmus+ student exchange scheme (which makes them less attractive for students) and have to deal with a myriad of new bureaucratic hurdles in research, student, and staff recruitment, and the ‘Industrial Policy 2017’ was scrapped by business secretary Kwasi Kwarteng earlier this year.

It is probably not the last time that I am commenting on an article in the Express or a similar pro-Brexit news outlet to try and rebut bold claims about the positive impact of Brexit on the economy that are based on wishful thinking rather than any rigorous interpretation of actual data.

Fortunately, this task will become easier with time, because with every passing day, we have got more data that will allow us to carry out methodologically solid and scientifically rigorous studies on the impact of Brexit on the UK economy.

Regarding the veracity of the claim that the UK remains a ‘investment powerhouse’ in spite of Brexit, a recent study can shed some light. Randolph Bruno and colleagues use a new dataset from UNCTAD that allows them to analyse FDI inflows across 142 countries and over a long period of time (1985-2018). They find that deeper economic integration leads to more investment. Membership in the EU’s single market, as the world’s most deeply integrated economic area, leads to an increase of 50% of FDI from other countries in the block and 60% from countries outside the block. This effect can be attributed to the single market with some certainty, because the study shows that the effect did not occur in the EU before 1992 when the single market was realised.

Suggesting, as the Express does, that the fact that there is still some – or even a lot of – FDI into the UK after Brexit somehow proofs ‘remainers’ wrong is of course simply dishonest. No Remainer will ever have claimed that FDI will completely stop after Brexit. Many of the factors attracting investors to the UK have not changed with Brexit. But one of the most important factors that made the UK a very attractive investment location – unhampered access to the EU Single Market – is now gone. Which means however much FDI flows into the country post-Brexit it would probably have been a lot more without Brexit. Randolph Bruno and colleagues estimate the decline in FDI to be as much 37.5% when exiting the Single Market. So, to put it a bit crudely, every time the Express cites a big FDI project as proof that Remainers were wrong, we should remember that the project might have been nearly 40% larger were the UK still a member of the single market.

Brexit and wages

Another front on which the pro-Brexit press declares victory over ‘project fear’ concerns the impact of free movement of people on British workers’ wages. This week, the Express quoted a column penned by Jonathan Portes, professor of economics at King’s College London. The Express suggests that Prof Portes had admitted that economists were wrong about the impact of EU membership on wages in Britain. Recent media reports about labour shortages and wage rises in the hospitality and retail sectors seem to suggest that – contrary to predictions – the impact of the end of free movement on wages was non-negligible. Referring to these reports, prof. Portes asked ‘are we now being proved wrong?’

The Express of course only quotes the question, but not the answer that Prof. Portes gives in the column. The answer is best summarised as: ‘It’s complicated!’ Indeed, the column points out that some anecdotal, headline-grabbing examples of wage rises in the middle of the double shock of the pandemic and Brexit can hardly be a reliable basis for judging the long-term impact of Brexit on wages. This double shock has led to the fastest drop in staff availability on record in the UK, which is likely to have a short-term positive effect on wages in the worst affected sectors.

However, in the long term, whether or not British workers in low-skilled jobs will significantly benefit from the end of freedom of movement will depend on many things. Assuming that EU workers do indeed not return after the pandemic and that they are not being replaced by immigrant workers from non-EU countries, there could be a long-term reduction in labour supply while demand is likely to increase post-pandemic. Yet, more and better paid jobs for British workers who replace the abundant EU-workforce is only one possible result from this situation. The others are that employers could compensate for the reduction in the work force through increased productivity (producing more with fewer workers), or a reduction in output and number of businesses. Portes suggests that the latter possibility is probably the most likely one. Even if wages in some sectors with labour shortages increase, the increased wages may be passed onto consumers via increasing prices – thus reducing real wages of workers in other sectors who buy these products. The key point, however, is that this all remains speculation as we do not have enough data yet to know for sure.

A hostile environment

What all these problems mentioned in this blog post – Northern Ireland border issues, finances of the devolved governments, FDI, and wages – have in common is that these are, with the exception of wages perhaps, not pre-existing problems that were affect by Brexit. Rather, these are all problems that we did not have before but were created by Brexit! Indeed, it is dispiriting to see not only the absence of any ‘Brexit dividends,’ but the myriad of new problems Brexit has created that waste enormous amounts of government time and resources without solving any of the old ones. Worse still, things will probably have to get a lot worse before any change of direction can happen.

Earlier this month, David Runciman was asked by a member of the audience of the Talking Politics podcast what the chances were of Labour adopting a ‘pro-jobs Brexit’ strategy (as opposed to the current government’s ‘sovereignty first, f**k business’ strategy) that would involve campaigning for re-joining the single market or even just the customs union. Runciman pointed out that such a strategy would only become politically viable if the UK experienced a massive unemployment crisis so that the negative effect of Brexit became undeniable and unbearable for the majority of the population.

While we are – fortunately – not there yet, there were some signs this week that in some areas Brexit has already gotten bad enough that the opposition starts building a political strategy on correcting it. While I wrote last week that Labour seem to have accepted Brexit and do not seem prepared to fight it anymore, this week shadow chancellor Rachel Reeves struck a somewhat different tone. She promised to ‘repair’ trade relationship with the EU and even explicitly hinted at Labour being willing to pursue new agreements with the EU on SPS (implying accepting regulatory alignment with the EU) and on mutual recognition of professions. She also explicitly promised to address the hurdles preventing UK musicians and theatre companies from touring the EU freely.

Reeves’ statements are significant in the sense that they may be a sign that we are moving into a new phase of Brexit where enough Brexit damage has been done to make an electoral strategy based on correcting Brexit viable.

Yet, the sad fact remains that we now live in a country where the government has an interest in stoking division to maintain popular support, while the opposition may be hoping for Brexit to do maximal damage to make its emerging strategy viable. It feels like the Tories’ ‘hostile environment’ strategy has spread beyond the area of immigration and now infects the rest of our society. A German citizen who was wrongly denied entry by UK border control was quoted in the FT as saying ‘It made me feel incredibly vulnerable and just like a toy in the hand of the government.’ Sadly, there may be more and more of us who feel that way on a daily basis.