The New Government And Brexit: An Edelman Briefing by Edelman

GENERAL ELECTION EDELMAN 12 June 2017

NEW GOVERNMENT OVERVIEW WILL WALDEN Managing Director, Public Affairs Former Director of Communications to Foreign Secretary Boris Johnson It’s Monday morning and Mrs May is still the occupant of No 10, which in the circumstances is something of an achievement. Since Friday all her best-laid plans have been junked – out goes ‘strong and stable’; in comes a new May mantra: “Man the lifeboats, paddle like mad.” The re-appointment of all her top-tier ministers – Johnson, Rudd, Fallon, Davis and in particular Philip Hammond at No 11 (he’d been destined for the chop) was no surprise given her limited room for manoeuvre. Hammond cemented his newfound seniority by promptly demanding prioritisation of jobs and the economy in any future Brexit deal – and then tweeting about it. Senior Tories moved quickly to effectively chop the legs away from May’s table. She’s now wounded, bruised and pretty much powerless. Cabinet Ministers and key MPs like Graham Brady, the Chairman of the massively influential 1922 Committee of backbench Tory MPs, told her ‘govern as and with a team or you are history’. May faces a grilling in front of the ’22 this evening after Political Cabinet. By Saturday her two chiefs of staff – Nick Timothy and Fiona Hill – had been jettisoned from the plane at 20,000 feet, but not before a story had leaked about how the weakened PM was so weak she was now being told by senior Tory figures ‘sack them or face a leadership challenge.’ Three hours later they were gone – Timothy with a parting shot in an article for Conservative Home that accepted some responsibility for the election catastrophe (without actually saying what) before blaming Lynton Crosby, Mark Textor and Jim Messina, the campaign pollsters and strategists, for not selling Mrs May, the manifesto, or the message properly. So out went Timothy – the author of Red Toryism, the interventionist redistributive Mayite vision of Britain – and with him his soul sister Hill, famed for her bark, bite and “batshit crazy” ideas (according to Katie Perrior, the PM’s knifewielding former Director of Communications). Little loved and widely blamed, Nick and Fi, the two most powerful Chiefs of

Staff to serve any PM, had lasted just 11 months; and Mrs May’s vision for Britain has probably gone with them. Her approach of hostility to big business will almost certainly be a casualty. Expect demands for No 10 to re-engage with business … and expect changes if we get a new Tory PM. In came Gavin Barwell as her Chief of Staff. Barwell (previously the Minister for London and for housing) had lost his already marginal seat of Croydon Central on Thursday night, but his appointment was hailed by many centrist Tories as a sensible move. Nigel Farage and the Right didn’t like it. Barwell is a street-fighter having written the book (literally) on winning marginal seats, and is highly regarded as a principled, pragmatic and no-nonsense Tory. This author knows him and has campaigned with him. He will bring rigour, experience and a grown-up approach to Government; but in truth, he and his boss may not be around long enough for any of this to matter. That’s because very few commentators believe she will lead the party into the next general election. George Osborne put it bluntly when he said “She’s a dead woman walking”; but just because Osborne has form with her doesn’t mean he’s wrong. The Sunday papers were disappointed to find that, although the febrile atmosphere had set off a chain of WhatsApp messaging demanding she goes, no-one had actually raised a head above the leadership parapet, so they went and wildly exaggerated for effect anyway. The names in the frame include Amber Rudd, David Davis and Boris Johnson. There might be a surprise candidate lurking too. We are some way from all that, I suspect. The papers targeted the Foreign Secretary, suggesting allies were taking soundings and that, although he was urging everyone to shut up, he really wanted to be PM. In truth, what Johnson, Davis and other senior Tories want is a period of calm, no challenge to May (yet – they’d rather see her gracefully depart when the time is right and at their choosing), no new election (which could see Corbyn elected as PM), and probably an unopposed new leader and PM (although the Tory members will, I think, get their way and there will be a leadership contest). Johnson was quickly installed as the bookies’ favourite, but dampened political journalists’ enthusiasm when he 1) tweeted late on Saturday that he was 100 per cent behind May, before 2) an 8-point WhatsApp message to colleagues

NEW GOVERNMENT OVERVIEW (cont.) telling them to calm down emerged and 3) on Sunday evening appeared in front of the cameras at his official London residence to repeat the message that May was the best option.

MOVERS & SHAKERS

May completed a limited reshuffle earlier in the afternoon. In what some critics see as an attempt to cement softer Brexit credentials she promoted her long-time friend, Remainer and ally Damian Green from Work and Pensions to First Secretary of State and Cabinet Office Minister. Michael Gove’s subsequent appointment would signal otherwise on Brexit. Effectively, Green is Deputy PM and her softer, cuddlier link to the rest of her team. He’s also no threat to those likely to be the next PM. He will be responsible for making sure her Government can at least function day-to-day. This is pure survival mechanism on her part. So what now? The DUP deal is proving very unpopular with many, including her own MPs who oppose the DUP’s stance on gay rights and abortion and, more particularly, those who feel that the UK Government’s independent arbiter status between Unionist and Nationalist in Northern Ireland is no longer tenable.

DAVID GAUKE

LIZ TRUSS

May owes her precarious position of power to Ruth Davidson’s 13 Scottish Tory MPs. Davidson agrees with the DUP on one thing - that a softer Brexit is best - and so do emboldened Tory Remainers. What will the 52%, the Brexiteers and UKIP make of that?! Given Labour still say they too believe we will leave the Single Market, we are probably headed for a Brexit bust-up. What next for Mrs May? We simply don’t know. Uncertainty reigns. She could in all likelihood go, but then in all likelihood she was destined for a whopping majority only four days ago! So who knows?

DAVID LIDINGTON

Will she lead the EU negotiations? Yes. Whether by the time of the German elections in September and the likely re-election of Angela Merkel, we are on the way to a new PM may depend on how May governs, and how she’s seen by Europe. The technical stuff starts now, the political only really once Merkel is back in power. The PM may be damaged goods in the country, with the party and in Europe, but it’s by no means certain she could be made to stand aside this Autumn. If that did happen, a leadership contest over August and September is likely, followed presumably by a transition of power at Tory Conference in early October. In that instance that could mean the EU will be negotiating with a new PM – a PM with their own vision for Brexit Britain, but one who will be very unlikely to want to put that vision to the people anytime soon. One thought that may yet disprove the notion she might go: May was better at being PM than being a campaigner. Jeremy Corbyn was a much better campaigner than Labour leader. Now they are back in those roles May could yet rediscover some of her mojo – enough at least to carry on, even if she goes before the next election. It’s a long shot, but then so was all this!

12 June 2017

ANDREA LEADSOM

MICHAEL GOVE

When this Conservative Government is in trouble, it ‘uncorks the Gauke’. The robust, good-with-numbers Chief Secretary to the Treasury and Philip Hammond’s number two gets a promotion as he moves to Work and Pensions. After a woeful performance in the last year in which the judiciary essentially declared all-out war on her Department Liz Truss is shunted out of Justice to Chief Secretary to the Treasury – a demotion. Nevertheless, she is a survivor thanks to the PM’s weakness – she had been expected to be dismissed entirely. Truss is replaced by David Lidington, the capable and clever former Europe Minister and Leader of the Commons until this reshuffle. He becomes Justice Secretary, although he’s not a lawyer. Also demoted is Andrea Leadsom, from DEFRA to Leader of the House of Commons. As a Brexiteer and former leadership contender she couldn’t be fired completely. According to most accounts she’s been found wanting in the DEFRA brief – a key one for Brexit given fishing, food and agriculture subsidies. And here is the ill-disguised surprise – May swallows buckets of pride and moves the man she fired for disloyalty – Michael Gove – back into Government. He gets the DEFRA brief and she has an arch-kingmaker back in her team. In all probability this had to have been a move approved by Johnson and Davis.

BREXIT: A CHANGED TEAM, A CHANGING POSITION? Lucy Thomas, Head of Brexit Advice lucy.thomas@edelman.com

Whatever happens, the EU negotiations are set to begin in earnest a week today. As Brexit Secretary David Davis made clear this morning, the first priorities of the talks are the immediate divorce arrangements: guaranteeing rights of EU and UK citizens; the divorce bill; and the border between Northern Ireland and the Republic of Ireland. That leaves time for reflection on the major trade principles while the initial divorce priorities are worked through. It’s possible that the summer is spent by Theresa May and David Davis agreeing the initial priorities, with any new leader coming in time for Tory Conference to take charge of other long-term issues concerning future trade. How might the UK’s Brexit position change? Were there to be any change to Britain’s Brexit approach, the questions remain: what could that look like given so many different views within the Conservative Party, let alone other parties; and, perhaps more pressingly, would they try to find this before official talks start next Monday? Ending free movement The Brexit White Paper called for an ‘end to free movement as it currently operates.’ The last part is often overlooked, but leaves open many possibilities for what kind of agreement is reached – even without any watering down. In its manifesto, the Conservative commitment was less clear: to reduce and control the number of people coming to the UK from the EU, while still allowing us to attract the skilled workers our economy needs.

Labour’s manifesto was also clear on this issue, saying: “freedom of movement will end when we leave the European Union.” Single Market – membership or access? The Conservative manifesto spelt out that the UK would “no longer be a member of the single market or customs union; but we would seek a deep and special partnership including a comprehensive free trade and customs partnership.” On election night, Brexit Secretary David Davis said that it was the people’s decision as to whether they backed these plans – implying that the lack of a majority meant questions over the mandate for all this. Labour’s position depends largely on who you ask in the party. Its manifesto promise was to scrap the Brexit White Paper and “replace it with fresh negotiating priorities that have a strong emphasis on retaining the benefits of the Single Market and the Customs Union”; but did not clarify whether that means leaving or remaining inside them. This bridges the major divisions within the party. Both Jeremy Corbyn and John McDonnell said over the weekend that leaving the EU and Single Market amount to the same thing and not leaving would ignore the referendum outcome. However, Labour’s Shadow International Trade Secretary, Barry Gardiner, this morning refused to rule out Single Market membership. Others such as Chuka Umunna said Labour’s promise to retain Single Market benefits were hard to achieve without staying in. He also called for ‘fair movement’ to replace ‘free movement’ as a more controlled alternative.

POSSIBLE ALTERNATIVE OPTIONS EFTA: After the referendum, a number of senior EU figures were exploring this trade-off, which would keep Britain in the single market and customs union in return for reform of freedom of movement, including an “emergency brake” on unusually high levels of intra-EU immigration. Nick Clegg set this out as the least economically disruptive option. It could be seen as something to work towards for a transition period, if not for the longer term. EEA: Retain membership of the European Economic Area – known as the Norway model – which would also minimise economic disruption and uncertainty with more frictionless trade. EEA membership also means exiting some EU policies – such as agriculture and fisheries – and regaining the ability to negotiate stand-alone trade agreements with non-EU countries. Although Brexiteers would have to accept some compromises as it would not restore full control over UK immigration policy, UK sovereignty over lawmaking, or cutting all UK budget payments.

12 June 2017

WTO crash land: Were the no deal scenario to result or talks break down, the UK would crash out and be at the mercy of WTO rules. The Conservative manifesto committed to lodging UK schedules at the WTO, so were we to crash out, the WTO tariffs would hopefully have been agreed and the landing – while painful – would be less calamitous in terms of tariffs than it otherwise might have been. Even if a new position is agreed, though, there's no knowing how long the current personnel will be in place. We could see a new PM in weeks – and one who would move things in yet another direction. EU reaction? Not one EU official has said that they expect the 19th June talks to start on time (although Theresa May and David Davis have shown no sign that they intend to delay). The election was meant to lead to an emboldened UK with a majority to get any deal through Parliament. Over the weekend, EU leaders have said a weak and divided UK position on Brexit is bad for all sides and the chances of the talks ending in no deal increase significantly in such an atmosphere.

BREXIT SCENARIOS Softest Brexit

Soft-to-Medium Brexit

Medium Brexit

Medium to Hard Brexit

Hard Brexit

Hard and Messy Brexit

Broad description of scenario

UK remains within both the European Economic Area giving it full access to the single market in goods, services, capital and labour (ala Norway) and the Customs Union.

Ambitious FTA granting UK high level of access to single market including a bespoke financial services chapter and a comprehensive agreement on customs cooperation to ease flow of goods at UKEU ports and border.

A comprehensive FTA along the lines of the EU-Canada CETA deal – possibly with better access for services – though this would still fall notably short of the single market. Vaguer commitment to future regulatory cooperation.

A more limited FTA focused primarily on ensuring tariff-free trade in goods, with preferential services access sacrificed.

No FTA can be agreed meaning the UK has to fall back on WTO rules entailing tariffs, compliance with rules of origin, and no preferential access for services.

Transitional arrangements

None necessary.

Comprehensive transition agreement (EEA with some minor tweaks) giving UK close to full single market access.

Transition agreement beginning process of gently disentangling UK from single market giving companies time to adjust.

Transition agreement beginning process of disentangling UK from single market in a way giving companies time to adjust.

Phased introduction of WTO rules – zero tariffs could be maintained for several years.

The UK crashes out of the EU on 29th March 2019 straight onto WTO rules with businesses having virtually no time to adjust – the ‘cliff-edge’ Brexit businesses are most concerned by.

Macroeconomic impact

Minimal as most sectors would experience no change. (The main exception would be agriculture as the EEA is outside the scope of the EU’s Common Agricultural Policy).

Even such an ambitious FTA would see a reduction in growth compared to full single market access but in the short term this would be manageable in the longterm negligible.

A moderate reduction in economic growth in the short to medium term, long term prospects depend on extent to which UK able to expand trade with other parts of the world to compensate.

A dampener on future economic growth but maintaining tariff free trade on most goods would limit the worst of the damage to service based industries.

Orderly transition would contain immediate damage but there would be a long-lasting reduction in economic growth.

Very negative – significant downturn or even recession as EU facing businesses’ worst fears come to pass. Inflation would increase and Sterling would experience further devaluation. Leaked HMT report warns of “major economic shock”.

Free movement and immigration policy

Free movement in its current form is a prerequisite for EEA membership.

Some form of bespoke agreement giving the UK a degree of greater control while still keeping free movement in close to its current form.

Some form of preferential regime which could feature free movement for highly skilled professionals.

EU nationals would require visas to work or settle permanently in the UK though potentially they could still enjoy some degree of preferential access. Bureaucracy aside, high skilled migrants should not be significantly impacted.

EU nationals would require visas to work or settle permanently in the UK.

EU nationals would require visas to work or settle permanently in the UK. Given expected economic upheaval, fewer EU nationals across all skill/salary levels may want to come to the UK in first place.

Regulatory environment

Vast majority of EUderived legislation would stay in place as it is driven by single market membership.

UK would need to maintain vast majority of EU laws to retain such a high degree of market access albeit with some scope for tweaks. Under a ‘living agreement’ regulatory changes would be quickly transposed into UK legislation in order to prevent NTBs developing over time.

UK would be free to shape own regulations but would need to ensure they are remain broadly compatible with EU laws. EU may also seek guarantees UK would not pursue radically divergent social/tax policies, i.e. the oft-cited Singapore model.

UK would have to retain equivalence with EU laws in exporting sectors (e.g. product standards) but could pursue deregulation in other areas such as employment and environmental laws.

Maximum scope for deregulation including in all areas except those covered by broader international agreements.

12 June 2017