Brexit Briefing 65: Game theory and the risk of self fulfilling prophecies

MayJuncker

 

It has been a quiet week in Brussels as most EU officials have already headed home for Christmas.  However, they have been keeping a keen eye on the ongoing parliamentary process in the United Kingdom which will ultimately decide the final result of the Brexit process.

The Prime Minister visited Brussels to meet with EU leaders last week. Her clash with Jean-Claude Juncker, the European Commission president, dominated the visit after his claims that the Brexit debate in the UK had been “nebulous”.

The meaningful vote on the Withdrawal Agreement will now take place in the middle of January, giving the government an extra month to try to win over MPs who are still sceptical of the deal.

Postponing the vote, however, does not change the fundamental challenges that the government faces. There remains opposition across the House of Commons towards the agreement, while the EU insists it will not reopen the negotiations.

We are now entering an episode of game theory, which is likely to be pored over by academics for years to come.

The British government appears to be using the fear of both a no deal Brexit or no Brexit at all to persuade errant MPs to come on board whilst the European Commission also this week published their position on key areas in the event of no deal.

The message from both sides is that this is the best deal possible and that holding out for something better could expose you to something much worse, much like in the Prisoners Dilemma example of game theory.

It is an approach that might work, but it doesn’t distract from the problems with the deal on the table, which the PM effectively accepted when she went to Brussels last week to try to get a legal ability for the UK to exit the backstop unilaterally.

The other problem with this approach is that by offering two diametrically opposed alternative outcomes, it offers heart to both sides that by rejecting the deal they may get their wish. Telling Brexiteers that no Brexit is an option emboldens those who want a new referendum.

Saying that that no deal is an option if the vote falls emboldens Brexiteers who want a no deal at the end of this.

It remains to be seen therefore if the delay in the vote will have any effect on the outcome, or what will happen if the deal is voted down. A no deal Brexit remains far from likely.

However, this week the rhetoric over a no deal was ramped up on both sides and that begins to give us some idea of what a no deal Brexit would look like.

The European Commission is taking a fairly flexible approach, in many areas giving the UK some enhanced access for a limited period of time. For example in the financial sector, EU banks will be able to use derivatives clearing houses in the UK for a further 12 months. This is not out of charity for the UK, it is because cutting off immediate access to the UK in this area will hurt EU banks and the wider EU economy and therefore it is a sensible move to limit the disruption to the EU and give European banks a bit of time to relocate. 

Whilst the UK has guaranteed the rights of EU nationals to stay in the UK, (subject to a fee and an application) even in the event of no deal, the EU has not offered to do the same. In reality the Commission has no legal power over national immigration policies when it comes to non EU nationals, which UK citizens will become after Brexit, however they have asked EU countries to take a generous approach. There is no guarantee they all will do and this could, in theory, mean that UK citizens are expelled from EU countries

However the Commission has taken a more positive approach  with regards to travel, proposing that UK citizens will benefit from Visa free travel for 90 days in the EU. The vast majority of British travellers to the EU will therefore not see a radical change in the event of no deal. In addition the Commission’s proposals envisage temporary provision of some air services between the UK and EU for 12 months to allow time for a new air service agreement to be agreed. While this will probably allow most existing EU to UK flights to continue, it will block UK airlines from offering flights within the EU, (for example Paris to Frankfurt) which will likely make UK airlines less competitive in the European market.

Haulage

Road haulage is another area where the Commission is being less rigid than it could be, offering temporary access to UK operators to carry goods into the EU. Once that temporary period is over however UK operators face significant restrictions, with only around 4,000 permits available for use in the EU for some 40,000 British registered trucks which currently travel to the EU.

In all of these areas the EU position is dependent on the UK reciprocating access, which the UK almost certainly will.

There are further problems in the area of data, where an “adequacy agreement” which allows data to flow from the UK to the EU can only be negotiated after the UK has left the EU and can take up to four years. Despite the UK already being fully compliant with EU data protection law, the EU is unlikely to deem the UK officially compliant for some time. This doesn’t mean that data can’t flow to the UK (the internet after all has no national boundaries) and data still flowed to the US even after the privacy shield was struck down, but it does mean legal uncertainty on all sides.

In addition, Gibraltar has been excluded from all the EU’s contingency measures which is likely to mainly impact its financial services industry.

There are further position papers to come from the Commission in the coming weeks, as a no deal scenario would effect virtually every aspect of the economy.

It is clear that the EU will only take action to avoid the worst outcomes in sectors where the EU will be badly hurt if it doesn’t. They will only grant these favours until the EU has reinforced itself sufficiently and then they will cut off UK access.

This also demonstrates the biggest irony of the no deal scenario. It is portrayed as the scenario by which the UK is best able to take control. However ,the reality is that in the immediate aftermath the fate of countless British industries will be solely in the hands of the European Commission, as their actions will dictate how severe the impact will be on the British economy.

Paradoxically though such planning from the Commission also opens the door to a future trade deal because it demonstrates the areas that the EU appears vulnerable and if they are prepared to keep access open, even in a no deal scenario, it does suggest that even in the worst case, the EU and UK will be able to agree preferential trade relations.

However a no deal scenario still remains potentially existential for the UK and will leave the UK in a much worse trading position with its largest and closest trading partner, with unknown repercussions on the economy as a whole.

Factory

For that reason it remains a very unlikely scenario, however there is a risk that it becomes a self-fulfilling prophecy. By preparing for it, both sides are putting in place the processes to blunt the worst of it and mentally imagining such a scenario taking place. That in itself increases the prospect that it could come to pass. 

It only becomes a realistic proposition if the deal is rejected in mid-January. However if that is the case, a second referendum also suddenly becomes a realistic proposition, which could lead to no Brexit at all.

Given the uncertainty that would prevail in such a circumstance it is unlikely that there would be the political will for no deal. There is certainly no majority for it in the British Parliament .

However whether that political will can manifest itself into concrete parliamentary and legislative action before the 29th March to avoid no deal remains to be seen. Therefore, in a time of political stalemate, the legislative status quo (that the UK leaves without a deal at all) could, possibly, accidentally become reality. 

We are now in the “business end” of the Brexit process, it was always going to be the most turbulent political time. Yet to date, despite all the turbulence, very little has changed. British politics is far more stable than it appears on the surface. The question is if this stability remains as we reach the point of no return, which will come in February and March if the deal has not been confirmed by Parliament.

The Brexit briefing will take a small break over the Christmas holidays and will be back in the New Year, to chart the final stages of the Brexit process.