Headwinds for a 'soft' Brexit

As winners celebrated their shock victory and losers retreated to lick their wounds, there was a curious calm in the immediate aftermath of Britain's European Union referendum. Trains ran on time, the FTSE 100 stumbled briefly but soon regained its pre-referendum footing and business in the City of London carried on as usual.

Sterling took a beating, but this served to boost summer tourism and, for Brexiters, seemed to herald an imminent golden age for British exports. Team GB in Rio surpassed its medals tally from the London Olympics and some questioned whether Brexit would really happen.

In the autumn, reality began to set in. Remainers who had found solace in the idea of a "soft" Brexit - the United Kingdom would remain part of the European single market and there would be minimum disruption to business as usual - had a rude awakening. Days into the Conservative Party Conference early this month, it had become clear that the new administration saw the June 23 referendum as primarily a protest against immigration. In her first conference speech as prime minister, Mrs Theresa May set out her view that control over immigration and the UK's sovereignty over lawmaking must be secured at all costs.

The implication was that she was prepared to accept the price of a "hard" Brexit - an end to UK membership of the EU single market. In summarily dismissing such an approach, liberal cosmopolitans and business interests, most of whom had belonged to the "remain" camp, had failed to recognise that any other outcome would fail the two critical political tests Mrs May had set on immigration and sovereignty.

The events of the last month have been a sobering wake-up call, both to businesses which believed the government was bound to protect their interests, and those in Britain and on the continent who doubted the government's resolve to break with the European market. In the bold rhetoric of the Prime Minister's speech and in the tenor of new policies such as the "naming and shaming" of businesses that employed foreign workers, the current administration seemed to put deliberate distance between itself and cosmopolitan, business interests. The realisation that Mrs May was leaning towards a "hard" Brexit over a "soft" one sent sterling to new lows.

So what happens now? Mrs May is not the only one laying down an ultimatum. The position of the other 27 EU states has been clear: The four fundamental freedoms of the EU are indivisible; if the UK chooses to draw red lines under migration and sovereignty, it cannot expect to retain its current privileged status in the single market.

Mrs May's speech met with a stiff response from French President Francois Hollande and German Chancellor Angela Merkel: Brexit will come at a price. The rumblings of euroscepticism across the continent require them and other European leaders to take a hard line. Other factions are mobilising.

Shortly after becoming prime minister, Mrs May had taken an accommodating stance on Scotland, committing to a "UK-wide approach" to exit negotiations. She has since backtracked from that position, her confidence possibly boosted by recent polls indicating that the prospect of Brexit has had little material impact on support for Scottish independence.

Scottish First Minister Nicola Sturgeon responded at the Scottish National Party conference two weeks ago by promising a second referendum on Scottish independence in the event of a "hard" Brexit. She pledged to fight to keep Scotland in the European single market, even if the UK leaves - a practical nightmare with critical implications for the UK's own internal single market. Ireland too is becoming restive, with both the Republic of Ireland and Northern Ireland concerned about the prospect of a border for people and goods moving between the two sides, with consequences for not only UK-Irish trade but the Northern Irish peace process.

The integrity of the UK's own internal union is one of many British and European fundamentals set to come under immense strain as a "hard" Brexit begins to materialise.

The summer calm is over, and battle lines are being drawn. While it is easy to dismiss some of these recent statements as mere tough rhetoric, at some point rhetoric will be translated into substance, and that is where the stakes get high.

The outcome of Brexit need not be all-or-nothing. Beyond the single market, there remains a wide spectrum of possibilities for the future relationship between the EU and the UK. Softer variants of a "hard" Brexit exist, including via a bilateral trade deal and close cooperation that could preserve commercial ties while respecting red lines on both sides. However, these solutions require an element of goodwill and trust that is looking increasingly difficult to come by.

  • The writer is Asia director of Global Counsel, a consultancy that advises businesses on regulatory and political risk, with offices in London, Singapore and Brussels.
A version of this article appeared in the print edition of The Straits Times on October 27, 2016, with the headline 'Headwinds for a 'soft' Brexit'. Print Edition | Subscribe