“No Deal Brexit” Looks Likely Again, and No One Can Figure Out Johnson’s Strategy

By John Banks

Over the past two weeks or so, the British pound has seen a sharp decline against all major currency pairs. For the month of September 2020, thus far, the pound is down notably against the dollar, the euro, the yen, and the Swiss franc.

Relative to the euro, the British pound is the weakest it has been in years. If the move accelerates, the U.K. will have reason to worry. Unfortunately, this could easily happen, as the phrase back on everyone’s lips is “no-deal Brexit.”

Earlier this month, the U.K. government, led by Prime Minister Boris Johnson, took Brexit negotiations in a bizarre direction. (Brexit is the process by which the U.K. formally leaves the European Union.)

With the clock for a Brexit trade deal running out, Johnson’s government demanded a change to the Brexit withdrawal agreement. This is a treaty that had already been negotiated with the EU. For the U.K. government to change it, without the EU’s consent, would be a violation of international law. 

The details involve Northern Ireland, a country that is governed by the U.K. but shares an open border with the Republic of Ireland, a country within the EU.

To make a long story short, Europe wanted customs checks on goods that flow into Northern Ireland, to make sure that unexamined goods couldn’t pass from Northern Ireland to Ireland, where no hard border exists, and thus sneak into the EU’s single market through a backdoor.

The Brexit withdrawal agreement stipulated terms saying that a joint EU and U.K. body would decide, together, which goods coming into Northern Ireland needed customs inspection.

Earlier this month, Johnson’s government introduced a bill, known as the Internal Markets Bill, that essentially scrapped that joint decision-making plan, implying the U.K. would decide by itself.

To Europe, this was akin to leaving a back door wide open, which wouldn’t be fair to other EU producers. It was also a breach of international law, since the two parties had already agreed to the treaty.

Nobody can quite figure out why the Johnson government has done this. The move was so strange, and so legally perplexing, that the top legal counsel for the U.K. government decided to quit rather than stick around to sort it out.

Then, too, all five of the former U.K. prime ministers who are still alive have spoken out against the Johnson government’s move — three of them Tories and members of Johnson’s own party.

A big part of the problem is that, if the U.K. is seen as willing to breach treaties after they are signed and violate international law, it isn’t clear who will be willing to trust the U.K. in the future. 

But the move gets weirder still because, if the U.K. jeopardizes the Northern Ireland peace agreement, it also closes off the possibility of a separate trade deal with the United States.

“This bill is an abomination on almost every level. I mean firstly, it breaks international law. The government has admitted that. It makes the prospect of a hard border in Ireland all the more likely. But it is also a no-holds-barred, full-frontal assault on devolution…”  

“Devolution” is the term used to describe self-governance by Scotland and Wales, even as both countries remain a part of the United Kingdom.

The nature of the bill Johnson’s government wants to pass — and remember, the U.K. government’s top legal counsel quit rather than wade into this mess — would not only violate international law, it would threaten to remove important self-governance safeguards from Scotland and Wales by default.

This increases the odds that Scotland, having tried for independence in 2014, will try again, with even more ferocity the next time, and will seek to join the EU as soon as they can. And if Scotland is successful in joining the EU, Wales would be strongly tempted to follow.

Nobody really understands what the Johnson government is doing here, unless they have somehow calculated that a no-deal Brexit is the best way to go, and presenting the EU with a deal it can’t accept is a way to lay the blame for no deal at the feet of Europe.

Still, though, the no deal calculation makes little sense to the extent the U.K. is greatly jeopardizing the odds of a trade deal with the United States, and has also made itself look erratic by violating a treaty it had already signed, and which Johnson himself had praised as good in the past.

Given the potential severity of a no-deal Brexit — and the fact that Johnson himself moved the deal deadline earlier, to Oct. 15 — the British pound could have a lot farther to fall.

If the U.K. truly crashes out of the EU with no trade deal, it will have to renegotiate an impossible number of goods and services agreements, one by one, all at once — or else see a huge flow of commerce simply grind to a dead stop.

The “no deal” result is, quite literally, an economic nightmare scenario, and Johnson seems to be going for it full speed ahead on the assumption the EU will blink. Except it isn’t possible for the EU to blink this time, because they can’t give in to what Johnson is demanding.

We’re still scratching our heads trying to figure out the rationale for this move, and we can’t do it. To our comfort, it seems nobody else can, either.

If the British pound goes into freefall, though — and the U.K. becomes a country without a major trading partner in the same neighborhood — it will present some intriguing opportunities, both long and short.