What a week in politics! On Friday the UK Government agreed detailed proposals for its Brexit negotiations with the EU at a country house awayday (the "Chequers proposals"). On Sunday night, David Davis, the minister leading Brexit resigned; followed by the Foreign Secretary, Boris Johnson, yesterday.
In today's blog I look at three questions I have been asked on social media in the light of this:
- what do the Chequers proposals mean for negotiations and likely outcome of Brexit?
- what should we make of the cabinet resignations? And
- how can any business plan for different scenarios?
In essence the UK Government is now proposing that the future UK-EU trading relationship should apply the EU single market to products and goods in all but name; a new customs arrangement that applies every possible way of minimising cross-border friction (essentially a combination of the two previous customs models - with the UK collecting tariffs for the EU and lots of new technology to smooth border movements); and no free movement of people but a new "mobility framework" to enable people to easily travel and work between the UK and EU. For services, there will be more "friction": no passporting for financial services and greater divergence of UK regulations from the EU.
It is important to remember that the Chequers agreement is the conclusion of a negotiation within the UK government. It sets out a position that the coalition of views within the cabinet can agree - at least now Boris Johnson and David Davis have resigned. It is not the outcome of the negotiations with the EU. And it is unlikely to be so.
What matters is how the EU responds. They will see these proposals as a British proposal to redesign the single market. They may offer some concessions but are unlikely to shift far from their offer of a standard Trade agreement like the one with Canada plus a backstop that involves Northern Ireland staying in the single market. The alternative is EEA membership - the Norwegian model. Ultimately, the UK may have to choose between these two: one (Norway) achieves the UK government’s economic aims (plus political solution to Northern Ireland); the other (Canada) achieves its political aims (except for Northern Ireland). If neither of these is acceptable then the only other option may be no agreement at all (the No Deal - WTO option).
What do the cabinet resignations mean?
Looking at the three broad scenarios (No Deal; Canadian style trade agreement; or Norwegian style EEA membership), one can argue that the Westminster shenanigans of the last week leave these outcomes as balanced as ever.
The cabinet resignations may make No Deal more likely because we have lost more time in the negotiations as the clock ticks down to March 2019 and we are no nearer to a deal. There are also indications that increasingly the hard Brexit group of 80 or so Conservative MPs (‘the European Research Group') may vote down any deal in Parliament in the autumn - perhaps alongside Labour MPs.
Equally, the cabinet resignations mean Theresa May now has a cabinet that is more united than it has been since 2016. She can also demonstrate to the EU that she has pushed the envelope as hard as she can within her own party and they now need to make some concessions. That may make a Trade Agreement more likely - albeit it is unlikely to be as favourable on goods as the Chequers proposals.
Finally, one can also see these developments as leading to the UK accepting EEA membership - perhaps as a form of extended transition that never ends. The direction of travel of the UK negotiating position is towards an ever-softer Brexit. Now that Theresa May has called the bluff of the ERG group of MPs (even if they challenge her leadership she looks likely to retain the confidence of a majority of Conservative MPs) she may be free to take a softer approach.
In other words, there remain three basic scenarios for March 2019, all of which are equally possible for now - and we are unlikely to see this resolved until October at the earliest, leaving just 5 months or less to prepare for Brexit day on 29 March 2019. The one certainty for now is political instability and volatility: expect the unexpected. For business, that means contingency planning and building resilience.
How can a business plan for such different scenarios?
That leads me to the question someone asked me on twitter last night. It is a fair question: No Deal, a trade agreement or EEA membership look very different. So how can anyone plan for all three? How can we chunk this down?
First, organisations should plan for No Deal. The cabinet itself concluded this in its public statement after the Chequers awayday on Friday night. No Deal is potentially the most disruptive scenario and could happen soonest - March 2019 without any transition period (and could also happen even if an initial agreement is reached but talks on the detail then collapse after March 2019). This is a significant, critical risk to most businesses.
Second, planning for EEA is relatively easy as it involves least change (but note there may be some tax implications plus any agreement is likely to require some limits on free movement of people, and customs issues still arise if it is not accompanied by continued membership of the customs union).
Third, once you have planned for No Deal and for EEA, a trade agreement is largely a combination of the two. For many of the clients I have worked with, the trade agreement contingency plan is a milder form of No Deal but over a longer period and with a reduced economic impact.
Of course this takes time. Large companies have teams of people and Brexit task forces to develop their Brexit plan. That means that large corporates will, by and large, be ready in March 2019. Smaller businesses can apply the same techniques. The difficult bit is the background research working out what each scenario means for every aspect of a business. That is something that my colleagues and I have done here at Grant Thornton and we have developed a methodology that gives any business the same tools as their largest competitors. We have honed our approach so that in half a day with a management team (our own mini Chequers awayday) we can take a client through scenario planning for three outcomes, identifying risks, opportunities and action plans.
I was running one of these workshops yesterday with a client, in the midst of cabinet resignations. Their leadership team emphasised that they had to plan fully for No Deal - as the most disruptive possibility and in the face of continuing and every increasing political volatility.
Never mind the politics, here's the contingency plan...
there remain three basic scenarios for March 2019, all of which are equally possible for now - and we are unlikely to see this resolved until October at the earliest, leaving just 5 months or less to prepare for Brexit day on 29 March 2019. The one certainty for now is political instability and volatility – expect the unexpected. For business, that means contingency planning and building resilience.