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Brexit Fever is Breaking

A no-deal disaster is still theoretically possible when the next Brexit deadline arrives on April 12. But a much longer extension is almost certain, now that the principle of a potentially endless negotiation has prevailed.

LONDON – By removing the hard deadline for completing negotiations on the United Kingdom’s withdrawal from the European Union, the EU has avoided the disaster of a 2008-style sudden stop in business with its second-largest trading partner. This decision dramatically improves the economic and political outlook for the UK and all of Europe.

For Britain, the prospects are suddenly much clearer and better than at any time since June 2016. While the likelihood that Prime Minister Theresa May will soon be ousted could create the impression of a constitutional crisis, the reality is that political conditions are sure to stabilize once the period for renegotiating the UK-EU relationship is extended again from the new, very soft, April 12 deadline until the end of the year or beyond. How this extension comes about – whether because of a new prime minister or a general election or a second referendum or a vote in Parliament to erase all of May’s “red lines” which prevented her negotiating a Norwegian-style associate membership of the EU – is impossible to predict. It is also not very important.

All that really matters is that eliminating the hard deadline for Brexit removes the threat of a “no deal” rupture with Europe. And once the promise of unfettered national sovereignty combined with integration in the global economy is revealed as a delusion, the most likely scenario will become an endless sequence of “temporary” transition arrangements. The EU’s arrangements with Norway and Switzerland, originally designed to last just one or two years when the EU single market was created in the early 1990s, are now approaching their fourth decade.

British voters probably will realize that any such semi-detached arrangement, far from enabling the UK painlessly to “take back control,” would involve high economic costs and a reduction in national sovereignty. As this understanding sinks in, the Brexiteer ardor will dissipate, politicians seeking re-election will be forced to focus again on the domestic issues of economic, social, and regional policy that largely motivated the 2016 referendum protest – and one way or another Britain will decide to remain in the EU. It would then become an important but subsidiary issue for the country to agree on a credible mechanism for setting aside a referendum that decided to make two plus two equal five.

More important for the world than what happens in the UK is how the postponement or cancellation of Brexit will affect political and economic conditions in the rest of the EU.

Starting with economics, eliminating the risk of a collapse in trade with Europe’s second-largest economy should significantly boost business confidence in every EU country.

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But the benefits are unlikely to be immediate, because, in theory, the EU has created a new cliff-edge risk with the April 12 deadline, by which point the UK must decide on a new negotiating strategy, apply for a further extension, and agree to participate in the European elections if it is to avoid crashing out. I attach a low probability to a repeat of last week’s no-deal brinkmanship (as do financial markets). But businesses that operate on longer timescales will naturally prefer to avoid making decisions until they can see how this next diplomatic hurdle can be overcome – and whether or not major changes in trade arrangements are likely to result from the new negotiations that follow a long Brexit extension.

The continuing uncertainty about Brexit will be particularly damaging to Germany, France, and Italy, because, for different reasons, domestic conditions in each of these economies are dire. Germany is suffering from falling demand for cars not just in Europe and Britain, but also in China and America. No one can say for sure whether if this is just a temporary blip, owing to new emissions regulations, or a permanent structural change caused by changing attitudes to fossil fuels and car ownership. What is certain is that Germany’s most important industry will be blighted by uncertainty for another year or two – and possibly much longer. Meanwhile, business and consumer confidence in France has been hit by a political crisis arguably worse than Britain’s, while Italy is already in a recession caused by a credit crunch and government austerity required by eurozone fiscal rules.

The right response to these pressures would be a large-scale fiscal stimulus, with big tax cuts and public investment programs both at the EU level and by national governments. The case for large tax cuts and more public spending is most obvious in Germany, where huge budget and trade surpluses are the biggest impediment to healthy demand growth in Europe and, indeed, in the global economy.

But what has this to do with Brexit? A lot. May’s humiliating retreat from Brexit will send a troubling message to populist parties across Europe. Just as the Brexit referendum initially fueled populist rhetoric in France, Italy, and Germany about breaking up the euro or weakening EU institutions, Brexit’s embarrassing setbacks are likely to have the opposite effect. After all, if Europe’s best-performing economy, most stable democracy, and strongest military power cannot cope with leaving the EU, what hope can there be for similar initiatives in France or Italy?

This means that the European Parliament elections in May could produce smaller swings than expected toward anti-EU parties. A less obvious implication, already comprehended by successful populist leaders like Italy’s Matteo Salvini, is that savvy national leaders should stop attacking EU institutions and instead attack the specific policies that those institutions impose. By defying EU fiscal and immigration rules while demanding that EU institutions be reformed, not abolished, Salvini has made himself the dominant figure in Italian politics.

The last phase of the Brexit negotiations offers new reasons for national governments to resist the European Commission’s interpretations of EU rules. The Commission’s initial advice on extending the Brexit deadline was to permit it only under political conditions that the UK could not possibly accept or fulfill. Had EU leaders followed the Commission’s inflexible and unrealistic advice at the March 21 summit, they would have forced Britain into a no-deal Brexit and might now be facing an economic disaster of 2008 proportions.

Such a disaster is still theoretically possible when the next Brexit deadline arrives on April 12. But a much longer extension is almost certain, now that the principle of a potentially endless negotiation has prevailed.

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