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Boris Johnson’s Brexit Challenge

He seems intent on leading his country toward the worst-case scenario.
January 16, 2020
MANCHESTER, ENGLAND - APRIL 15: (EDITOR'S NOTE: Alternative crop of image #521392588) London Mayor Boris Johnson addresses supporters during a rally for the 'Vote Leave' campaign (Photo by Christopher Furlong/Getty Images)

Following Boris Johnson’s recent electoral triumph on a “Get Brexit Done” slogan, the British electorate could be forgiven for believing that the country’s drawn-out Brexit saga will soon be behind it. Unfortunately, they are in for a rude shock.

As Winston Churchill might have said, Britons will soon learn that they are not at the beginning of the end, but only at the end of the beginning of the Brexit process.

To be sure, Johnson’s large parliamentary majority makes it all but certain that the U.K. will leave the European Union on January 31 as promised. However, having left Europe, the more difficult task of negotiating a permanent EU-U.K. economic relationship will still lie ahead.

In the terms of the Brexit Withdrawal Agreement, upon leaving Europe on January 31, the Britain will enter a transitional period lasting until the end of 2020. During that period, the U.K. will seek to negotiate its permanent economic relationship with Europe. Until it does so, U.K.-European economic relations will continue to be governed by the same rules as they are at present, with one important exception: The U.K. will not be at the table in deciding upon those rules.

Failure to reach an agreement on a permanent U.K.-European economic relationship could result in Britain crashing out of Europe without a deal at year-end. That is, unless Johnson were to ask for an extension of the transition period by July 2020.

Seeming to have learned little from last year’s Brexit withdrawal negotiations, in which the U.K. was forced to make major concessions to Europe on the Northern Ireland question, Johnson has again put his country in a weak negotiating position. He has done so by “categorically” ruling out any notion of asking for an extension. This once again gives the Europeans every reason to run down the clock in the negotiations and to extract additional concessions from Westminster as the U.K. approaches the no-deal Brexit abyss.

Johnson also appears to be highly unrealistic in the forthcoming negotiations, thinking that they can be concluded within the next 11 months, and signaling that the U.K. will be free of European rules yet continue to have unfettered access to the European Single Market.

Johnson is choosing to ignore his European counterparts’ insistence that continued access to the European Single Market will require a British commitment to abiding by European economic rules. He is also choosing to ignore their repeated warnings that the more the U.K. chooses to diverge from the European regulatory framework, the more protracted and meticulous the forthcoming negotiations will be.

The recently negotiated EU-Canadian Free Trade Agreement suggests that Johnson’s belief that a EU-U.K. free trade deal can be struck by year-end is unrealistic. It took no less than seven years to finalize that deal as it ran into significant difficulty obtaining approval in various European capitals. Since the U.K. seems to wish to end up where the Canadians are now in their economic relations with Europe, there is little reason to believe that the U.K. will be much quicker than the Canadians were in striking a free trade deal with the EU.

All of this does not bode well for the British economy.

Since the June 2016 Brexit referendum, the British economy’s performance has been hobbled by investor uncertainty about the country’s future European economic relations and by fear that the country could crash out of Europe without a deal. By insisting that the U.K. will not seek an extension of the transition period and by refusing to relinquish unrealistic beliefs about how quickly a trade deal can be concluded, Johnson is doing little to allay the market’s fears of the worst-case, crash-out scenario.

Some reason for optimism is that Johnson enjoys a comfortable parliamentary majority and he is not known for policy consistency. Last year, he kept insisting that he would rather die in a ditch than seek an extension in the Brexit withdrawal negotiations. Mercifully, in the end, he did seek an extension and he did not die in a ditch.

Hopefully, this time around he will come to his senses quicker than last year and he will seek the extension in the negotiating period that his government needs to avoid crashing out of Europe. If not, the U.K. should brace itself for continued rough economic sledding.

Desmond Lachman

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund's Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.