Thread by @SMerler

🔎As the 🇬🇧 government is set to introduce its widely debated Internal Market Bill, Britannia seems to have moved from 'ruling the waves' to 'waiving the rules'. Why and what lays ahead? (Alert: long thread)1/

As we wrote in this ⬇️piece last year, the NI Protocol negotiated by Johnson achieved the remarkable combination of leaving the Prime Minister in a better political position at home, while putting the country in a worse economic position vis-à-vis 🇪🇺2/ algebris.com/policy-researc…

The NI protocol negotiated by Theresa May foresaw a temporary arrangement (the backstop) where the need to avoid trade-related checks at the Irish border was met by setting up a single EU-UK custom territory. For this to be possible ... 3/

...🇬🇧 would have needed to commit to level playing field in areas including State aid, environmental regulation and labour regulation, as well as to harmonisation of its commercial policy with 🇪🇺. The deal never passed b/c opponents feared a permanent loss of sovereignty. 4/

New Protocol forsees a permanent set-up with NI part of UK custom territory. This is achieved through a dual tariff regime with customs checks between GB and NI ("in the Irish Sea"), which treats goods differently depending on whether they are intended to stop in NI or transit 5/

This new set-up always had 2 key implications. First, 🇬🇧 remains outside 🇪🇺 custom territory and NI would be taken into 🇬🇧 custom territory. So 🇬🇧 is immediately free to set its own external tariff, and the trade deals it will negotiate will immediately apply to NI. 6/

Second, while NI would still be subject to EU customs rules to ensure that no border is needed on the island, these requirements would not 'spill over' to Great Britain. Accordingly, the commitments to level playing field only remained in (non-binding) political declaration. 7/

All this set the stage for a more competitive 🇪🇺-🇬🇧 trade relationship. As 🇬🇧 clearly wanted to retain more flexibility, 🇪🇺 would be less willing to offer deep trade concessions. In particular, the services bits in CETA would hardly have been on offer⬇️ 8/ algebris.com/policy-researc…

All these tensions are now coming to a head: following months of inconclusiveness it is dawning on Downing Street that they won't be able to extract the deal they want from the EU, unless they give up on level playing field (which would be a political suicide for the PM). 9/

Moreover, even the best deal the UK could extract compatibly with all its red lines would not liberalise much in services (worth ~40% of UK global exports). Britain is not getting the best deal it could get, and even the best deal would not make #Brexit economically viable. 10/

As rightly pointed out by @EuroBriefing in ⬇️, once you factor all these elements into the equation, the attractiveness of pursuing the "Singapore on Thames" model of regulatory competition on the EU's doorstep increases significantly. 11/ ft.com/content/460870…

...except that model necessarily implies a border on the island of Ireland! Does the UK government not care about that? I think the short answer is 'no'. The long answer is: the Northern Ireland Act of 1998 allows for unification referendum (at simple majority)...12/

...which was fantasy for many years, but may be closer to reality today. NI voted remain (like Scotland), the demographic trend in Northern Ireland have been evolving in a way that would soon favour the Nationalists ⬇️ and #Brexit may accelerate it 13/ newslab.ie/nuigddj/?p=389

So NI may no longer be part of the UK in a few years' time. If you were a cornered UK PM would you put Global Britain's only chance of post-Brexit economic success at risk for the sake of NI? Probably not, except throwing the Irish under the bus wouldn't help your ratings. 14/

So you raise a major fuss on a fishing, stall negotiations for months, get ready to blame the EU's uncompromising stance for no deal. You also know the EU prides itself as a peace project, and cannot accept playing an active role in the resumption of violence in Ireland ... 15/

... so chances are the EU will have the Irish carry out the customs check that the UK committed to do in the Irish sea well into Irish (and the EU) territory instead, to avoid building a border. Who knows: you may end up getting Singapore on Thames + Smugglers' Heaven. 16/

So, I think the erratic behaviour of the UK government signals they are past wanting a deal because they realised they won't get the best deal they could get, and even that deal would not be a good one. What they are doing now is political ring-fencing for deliberate no deal. 17/

What could not have been factored in is the Hogan-gate, which resulted in 🇮🇪 getting the Financial Services Commissioner, who will oversee the discussion on whether 🇬🇧 should be granted equivalence (a file that will matter a lot to post-Brexit 🇬🇧). That'll be an interesting one!

*lies ahead (obv)