Boris Johnson’s government is seeking new legislation to renege on aspects of its Withdrawal Agreement, signed nine months ago, renewing political tensions and muddying economic expectations for the UK and the EU.
The prospect that the government could secure legislation in the House of Commons to renege on its withdrawal treaty – and effectively break international law – has increased the probability of a no-deal Brexit by year-end, further destabilising the UK’s recovery from the coronavirus-induced recession.
The UK government’s provocation relates to curbing the EU’s legal powers over the application of state aid rules and the movement of goods between Northern Ireland and the UK, once the transition period expires.
Prime minister Boris Johnson accused the EU of making “absurd” threats to stop food moving from mainland Great Britain to Northern Ireland.
The government fears the Withdrawal Agreement – designed prevent a hard border between the Republic and Northern Ireland and support unfettered economic activity – has created a backdoor through which the EU can enforce state aid rules to the UK in perpetuity.
Johnson is seeking to plug that loophole with the internal market bill, which he calls “an insurance policy”. The bill would enable the government to interpret various contentious elements of the treaty unilaterally.
Cabinet minister Brandon Lewis has admitted that the bill would break international Brexit treaty but in a limited scope. Critics suggest the size of the bill’s powers would be broad, creating a constitutional crisis which undermines the integrity of the single market within Ireland.
It also further erodes trust between the EU and the UK and weakens the government’s integrity for straight-dealing, before embarking an ambitious set of bilateral trade deals around the world.
However, this stance may be hard-nosed brinkmanship ahead of a last-minute return to political consensus. The EU has threatened legal action and called on Johnson to withdraw the bill by the end of September.
On Monday, the bill secured passage for a second reading in the House of Commons, but not without contention. Former chancellor Sajid Javid and former attorney-general Geoffrey Cox abstained, while Jonathan Jones, the head of the government’s legal department, quit over the proposed legislation last week.
The bill will need to pass both the Commons and the Lords before it can become law. But the government plans to pass the bill before the transition period expires on 31 December, which provides limited time for parliamentary scrutiny.
The renewed Brexit turmoil is consequential for the UK’s economic revival. A hard Brexit outcome will in the near-term weaken sterling – which has already reversed gains accrued over the summer months against the dollar and the euro – and could drive a long term devaluation of the pound which in turn could increase the pace of inflation.
Markets had seemingly expected a late-stage deal between the EU and the UK are now less convinced.
The outlook for the UK economy over the remainder of the year is darkening. The UK labour market has lost 695,000 since March, according to preliminary figures on Tuesday from the Office for National Statistics (ONS), including an estimated 434,000 job losses between June to August.
The grim numbers reveal the extent to which the UK’s labour market has suffered, despite the Treasury’s ambitious furlough scheme which at peak paid the salaries of almost 10 million workers.
The Coronavirus Job Retention Scheme is due to expire at the end of October, which economists have warned will prompt a spike in further redundancies and insolvencies.
Redundancy notifications by employers are running at more than double the levels seen in the 2008-2009 global financial crisis, the Institute for Employment said on Monday, which forecasts 450,000 redundancies in the third quarter, and a further 200,000 redundancies in the final quarter. Also, the possibility of a second pandemic spike in the winter – and a hard Brexit – represent ominous headwinds for the economy and the SME market.
The coming weeks and months are, therefore, critical on all fronts:
These are acutely challenging times for SMEs. If you would like to discuss your business, or portfolio companies, corporate and financial options, please to get in touch with one of our team today and let us lighten the load.
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