And Now For Something Completely Different…

Early April 3 United Kingdom Prime Minister Theresa May met with the leader of the Labor opposition, Jeremy Corbyn, to discuss a common way forward on the UK’s impending divorce from the European Union.

Drama ensued. Markets and media immediately swooned that a softer Brexit, in which the UK retains significant links to the EU, was in the offing. One of May’s ministers quit her cabinet in fury over the very idea that the prime minister would speak to an elected representative from across the aisle. In recent days protestors in the hundreds of thousands have descended upon London to protest Brexit, while millions have signed a petition hoping to overturn, stop, or at least delay the process. A particularly fun resolution circulated in Parliament intending to dock May’s pay.

(Yes, I’m having an unabashedly good time here.)

The May-Corbyn is less “too little too late” and instead “not relevant at all”. It isn’t so much that a softer Brexit is no longer an option, but instead that it was never an option.

The first step of the Brexit process has always been not to determine what the British might be happy with, but what the remaining 27 members of the EU might tolerate. Under EU law each and every member state must sign off on the big issues — such as divorce agreements. It only takes one EU member to force the UK into a no-deal Brexit.

Any “soft” deal that grants the UK some of the EU’s benefits without all the EU’s costs and responsibilities is one the Union ruled out from the very beginning. Moreover, the UK’s firmest allies within the Union — most notably the Netherlands — have repeatedly and explicitly ruled such deals out for the simple reason that if the UK can get such a deal, so will everyone else, which would render the idea of the EU rather pointless. And since it only takes one country to veto any deal, the idea that the UK has any leverage in these talks is silly.

The result has been the “deal” Theresa May managed to negotiate. It obliges the UK to pay into the EU budget and abide by all EU regulations but forfeits any ability to influence what those regulations are. The Brexiteers have a point when they say the deal is worse than membership, but that deal is the only way the UK retains trade access at all. Unsurprisingly, Parliament has voted it down three times.

Anything shy of a no-deal/hard Brexit requires EU unanimity, UK government approval and Parliamentary ratification. A no-deal Brexit requires none of that. A no-deal Brexit is the default. So, a no-deal Brexit is where this ends. In nine days.

Everything else isn’t simply beside the point, it has always been beside the point.

Still, the Brits have obsessed over setting up a bunch of political dominos. It’d be rude to not knock them down.

  • May isn’t going anywhere. Normally when a British political leader proves unpopular within her caucus, a vote of no confidence is held within the party to eject him or her. May was subjected to just such a vote back in December. She survived it. According to the Conservative Party’s rules, she need not fear another vote until December 2019.
  • Nor is May’s government going anywhere. Normally when a government proves unpopular a vote of no confidence is held within the Parliament to eject it. May’s government was subjected to just such a vote back in January. She survived it. While another no-confidence vote is always a risk, its passage would trigger general elections. Not only is this something the Tories want to avoid desperately but resolving elections would take (a lot) more than the nine days remaining before the Brexit crash-out.
  • Nor can May negotiate a new deal. Parliament reclaimed her power to do that back in March. May is still prime minister, but she no longer has any legal or political influence over the issue of the day.
  • Nor can Parliament negotiate a new deal, or at least not competently. No party has a majority in Parliament, and that was before the parties started fracturing. Because the government has been stripped of negotiating power, any new negotiating team would have to come from Parliament, but not from the factions of the Conservative party that supports the government. Instead the negotiators would need to come from the anti-government Tory faction as well as the opposition. The leaders of these two groups are Boris Johnson — the leader of the Brexiteers — and Jeremy Corbyn, who also supports exit from the EU despite much hemming and hawing. So that option has a bullet in its head right from the get-go.
  • Nor will the EU shift its position. The April 12 date is already the EU’s second delay, this most recent delay was only of two weeks, and there is no longer anyone in London for the EU to negotiate with. May doesn’t even retain the legal standing to request an additional delay.

Nor will there be a new referendum. May is opposed to asking the population the same question twice (and she has a point), while Parliament is split on the topic. The Tories are majority against a new referendum, while Labor favors a new election instead of a consultation on the narrow topic of Brexit. And again, a referendum couldn’t be held within nine days anyway.

Which means those hoping for an outcome that is anything other than a hard Brexit must pray for one of two exceedingly unlikely outcomes:

Option A: May herself decides to go back on everything she has felt she had no choice but to try to achieve and unilaterally roll back the Article 50 process. Considering that Parliament initiated the Article 50 process it is unclear if May has such authority; she would immediately find her decision in court. Lawsuits move faster in the United Kingdom than they do in the United States, but getting constitutional law sorted out in less than two weeks is not in the cards. Chance of this both happening and ending in Brexit delay, stall or revocation? Less than 1%.

Option B: Queen Elizabeth II skips tea, sashays out of Buckingham, mounts a fabulously over-decorated horse, trots to Parliament, declares her royal non-confidence in the government, flourishes a gleaming sword in an attempt to rally the crowds to dismiss the government. (Ironically — hilariously — until recently the Queen had the power to dismiss the government without first summoning the people, but in 2011 the Brits updated some of their laws for the 19th-century and revoked that specific power.) Chance of this both happening and ending in Brexit delay, stall or revocation? Slightly more than Option A.

(Of course, this is the United Kingdom. Unlike every other country in the world, the British couldn’t be bothered to write their constitution down. So much in this newsletter as well as much of everything you have ever read anywhere else about the British constitutional system of government is based on interpretation of tradition.)

It is time to start thinking about something completely different, about life beyond a (hard) Brexit. To be blunt, the British government has a lot of other things they need to get cracking on.

First, they need to overhaul forty years of regulation and legal structures to function in a world beyond the European Union. Once a country joins the EU nearly every aspect of their domestic economies along with every aspect of their import and export systems becomes integrated into EU law. That now all needs unwound and reset to the new reality. Under normal circumstances I’d estimate that’s a half-decade process.
Second, the UK needs to negotiate replacement trade deals. One should probably be pursued with the EU itself, but that is — minimum — a decade process. In my estimation the EU doesn’t have that much road left so probably best to go just through the motions. Far more important are deals to be made with every member of the Commonwealth — where London still holds considerable strategic and political sway. Bilateral agreements with Turkey, Japan, Korea, Taiwan, and Brazil would probably be a good idea as well.

Third, NAFTA looms large, and is more important than all other potential deals combined. The Brits were already eyeing bilateral agreements with the United States and Canada, but since the new NAFTA has not yet been ratified, now would be an ideal time to shoehorn the UK in.

Fourth, time to figure out how to work without global capital. London serves as the financial bridge between the United States and the European Union. Or at least it did. With the UK out of the EU, that role has ended. Add in the general chaos and pretty much the entire financial district of London will liquidate or decamp. Some will go to the EU, while most will go to the United States. (The terms of any UK-US trade negotiations will force that issue). Expect four-fifths of the City’s financial business to relocate. The Brits need a fundamental economic overhaul.

Fifth, as the Americans back away from providing global maritime security, countries are going to discover that guns are at least as important as butter. The Brits have a fairly respectable gun collection, and a fairly robust reputation for using gun policy to complement butter policy. Call it gunboat diplomacy. Call it neo-imperialism. Call it a creative use of special forces. I call it a historical propensity to be a trendsetter in the application of security policy to diplomatic and trade affairs. Very few other countries will think that’s a good idea, but very few other countries liked dealing with the British Empire back in the day either. Just because it isn’t popular doesn’t mean it can’t work. (How the world’s former naval superpower interfaces with the world’s current naval superpower on issues like this will be particularly interesting.)

Which brings us to one final issue: the Brits need to move on.

All the above requires leadership, and while I may personally have great respect for May’s tenacity and endurance, I am not the person whose respect she needs to earn. Whoever was responsible for negotiating Britain through the thankless Brexit process knew from the beginning it would consume them. May was always going to be a transitional leader, and today she is a spent force. It is time for someone else, and that requires an election.

It is a heady time. The global Order is collapsing as the Americans back away. The EU now must confront all the issues that they faced back before the Brits started the Brexit process. Whether the issue is debt or banks or refugees or demographics or trade each and every one of them has the capacity to utterly wreck the Union. Turkey is on the rise. China is wobbling like a spinning plate. Russia is on the warpath. Everything is in motion and the United Kingdom, despite its hang-ups and challenges, is one of the few countries with a capacity for independent action.

Whoever rules the United Kingdom next will make the decisions that will shape its role in the world for at least the next half century. Based on your read of the British political environment that is either the most encouraging or most terrifying thing you’ve ever heard.

Brexit Blunder?

It looks like the Brits are in trouble. In the past 48 hours two major UK government ministers resigned: Brexit Secretary David Davis, and Foreign Minister Boris Johnson. It’s not hard to see why they’re gone. Brexit is really the only foreign policy issue that matters to most Brits, and the Davis-Johnson duo have been at it for nearly two years with zero results.

First, the least important outcome. The government of Prime Minister Theresa May is probably fine. It is no secret that May brought major Brexit supporters such as Davis and Johnson into the government to deal with the Brexit issue in part to discredit them. That has now – thoroughly – been done. While May still may face a backbencher rebellion (she leads a minority government so that’s always a concern), breaking the Brexit leadership’s back should give her more room to maneuver (domestically at least).

Second, this does not mean that the Brits are going back on Brexit. General sentiment among the sort of people who supported Brexit during the referendum two years ago has, if anything, hardened. Moreover, Labor leader Jeremy Corbyn is a semi-stealth Brexit supporter, so even if there were new elections and even if Corbyn became prime minister, Brexit would still be on the menu… albeit likely with a less impressive negotiating team.

Third, with the Brexiteers on the outside of London’s negotiating team, they are guaranteed to vote against any version of Brexit that they don’t care for. A hard Brexit is now the only reality.

A “hard” Brexit is one where the UK crashes out of the EU with no deal whatsoever. Any deal the UK has struck with the EU – for health and sanitation, tariff reduction, capital repatriation, or any of a thousand other topics – will be affected or restricted. Any UK supply chain that begins, ends or passes through any other country will become sticky, with many of them simply breaking. That impacts – conservatively – two-thirds of the UK’s external trade which itself accounts for roughly one-sixth of the UK’s GDP.

In every instance for every good and every transaction, the UK will need to decide whether to unilaterally retain EU rules or unilaterally adopt the rules of the target market in the hopes that the other side – also on a case-by-case basis – decides to allow the trade to flow without a legal understanding in place. The bureaucratic drag alone may well double the cost of doing business in the Kingdom before the political issues are even considered. London will try to establish trade deals with other players to make up for lost EU trade, but the EU is close and big and trade deals take months to years to negotiate.

Financial flows will be hit most of all. The Brit’s proclivity to let capital ebb and flow to wherever it wants to go have made London one of the world’s three largest financial centers. That is now over. Financial centers need a low-regulatory environment and access to a large market and political and market certainty. There will be no deal with the EU on finance, meaning there will be no unrestricted access to the EU, and with the uncertainty of a no-deal scenario, London’s financial industry will now decamp en masse.

Maybe one-quarter to one-third will relocate across the EU with Frankfurt and Paris doing fairly well. After all, at least some of the relocating bankers and financiers will need access to the EU from within. But most will go to New York which has a larger labor pool, similar regulatory format and global reach.

The EU will attempt to claim that financial clearing for euro-denominated transactions must be done from within the eurozone to prevent the Americans from gobbling up the lion’s share of the business. The Americans will disabuse the Europeans of that notion by threatening to force all dollar clearing to occur within the United States’ borders. Since Europe’s external trade is dollar-driven and not euro-driven it will be a fun conversation to watch but it’ll be pretty short. Regardless, London will not be a participant in the discussions. Regardless, London will hollow out.

All in all, the UK faces the greatest economic disruption since World War II. The Brits are looking down the maw of a minimum of a three-year depression where GDP falls by at least a fifth.

But all that was baked in before Davis and Johnson left. All that has been baked in since the Brexit vote. As the Greeks discovered at the beginning of their crisis, you cannot vote yourself rich… but you can totally vote yourself poor. There was zero chance the EU was ever going to grant the Brits the benefits of membership without the costs. Brexiteers like Davis and Johnson who claimed otherwise were either lying, stupid, or suffering from head injuries. The only options before the Brits now are reneging on Brexit (not politically possible), and a hard Brexit. And so a hard Brexit is the only road forward.

This is not a condemnation of the Brexit vote. I see the entire global system crashing down in the next one to four years. The Bretton Woods Order – the basis for that system – is an artificial construct the Americans designed, created, maintained and subsidized to fight the Cold War. They’ve been backing away from the Order for three decades, and they are now abandoning it wholesale. It would have happened without Trump, although probably a bit more slowly and without the…flair.

That means that everything in the global system that was predicated upon the Order will need to find a new basis for existence. Europe has two big Order-dependent things. NATO – which may well formally collapse at this week’s summit – and the European Union. There is no way that an export-based union of mutually antagonistic countries whose security is guaranteed by an outside power can survive in an environment in which those exports are impossible and the security guarantor leaves. The EU was going down anyway which means the Brits had to figure out their way in the world anyway. Brexit means they get a head start on the rest of Europe. Recent developments haven’t brought disaster, they’ve brought clarity.

Yes folks, a hard Brexit is the best-case scenario for the United Kingdom because it forces the Brits to move on now. So yes folks, a three-year depression that knocks a country’s GDP down by one-fifth is probably the best-case scenario for anyone dependent upon the Order as the world slides into Disorder.

I expect the Brits to come out of this better than nearly everyone. For two centuries they ran a globe-spanning empire that was the largest economic entity ever (at least until the Americans came of age). If there is one country that knows how to operate in a disorderly world, without continent-spanning trade pacts, where military and economic power are often fused, that has already stitched together a strategic security plan, it is the United Kingdom.

But that doesn’t mean the road from here to there won’t royally suck.

I Think They Get It Now, Part Four: The UK

Jump to other parts of this series: Intro, France, Germany, Italy, Japan, and Canada.

The United Kingdom has been the United States’ firmest and most capable ally for over a half century. As such many often think of the British Prime Minster as a sort of Washington Whisperer. The Brits, so the thinking goes, are a civilized people who can bring the oftentimes erratic Americans around to a saner course of action.

As one of the United Kingdom’s great statesmen, Winston Churchill, famously put it: “You can always count upon the Americans to do the right thing… after trying everything else.” The quote is as much an homage to the immense power of the United States, as it is to the trademark patience, dry humor and stiff upper lip of the English.

And so it is with no surprise that many world leaders have called upon British Prime Minister Theresa May to intervene on humanity’s account with U.S. President Donald Trump. But it is no surprise to me that she has done nothing of the sort. Nor will she. It is all wrapped up in why the United Kingdom is a major power in the first place.

The United Kingdom matters not simply because Great Britain is an island, or because the Kingdom has the naval power to defend its island, but because the Kingdom has sufficient naval strength to project power well beyond its island. That enables the Brits to pick the time and place of the conflicts they choose to engage in. Even if they choose poorly, they can always pack up, sail away and try again later. Clashes that leave most in ruin at most force an early election in the Kingdom.

There are only two things that could undo this strength. First, the United Kingdom’s flexible strength could be overwhelmed by a more powerful navy. Since the only Atlantic Ocean navy that is more powerful is the American Navy, this is a low risk. Second, the United Kingdom could for whatever reason find its navy degraded to the point that it can no longer project power. And that is precisely the challenge facing the United Kingdom today.

Ironically, painfully, the UK’s current naval weakness comes directly from an attempt to generate strength.

It is difficult for any student of global strategy who is not willingly blind to ignore the role played by the American supercarriers. The Nimitz class carriers are not simply the largest combatants ever floated, as a rule they pack at least seven times the combat capabilities of any rival naval vessel – including the largest carriers floated by other countries. The Nimitz ships have enabled the Americans to project power not just anywhere on any ocean or coast, but in most cases several hundred miles inland as well. Without nuclear weapons they are the most powerful conventional weapons systems any country has ever fielded, and just one of them if nuclear-armed has more firepower than the entire military of France. (No, that is not a France slam. The supers are simply that cool.) The Americans have ten of them. The combined rest of the world? Zero.

So long as the Nimitz carriers (or their soon-to-be successors in the Ford class) are the top shelf of military capacity, anyone seeking to oppose the Americans has to find a way to push the Americans at least a thousand miles away from shore (ergo why the Chinese are so heavily invested into long range anti-ship missiles). And should any naval power seek to ally with the Americans, they will always be entirely in the shadow of the massive, raw American power that the Nimitz ships provide. So long as the Americans are the only people with fully-operational supercarriers, no one but the Americans gets a vote as to how the Americans and their allies perform global strategic policy – even if you are one of the allies.

There are a lot of non-blind students of global strategy in the United Kingdom, and about two decades ago they all came to the same conclusion: if the UK is to matter at all, we must have our own supercarrier. And since, like any other vessel, ongoing refits are part of the process, we must have at least two. The end result was the launching of the Queen Elizabeth carrier program. Weighing in at 65,000 tons displacement they will be the largest combat ships ever floated with the notable exceptions of their inspirations: America’s Nimitz and Ford classes. Fully operational, they will give the Brits exactly what they are after: a seat at a table for two, the only table that matters. When the first ship of the new class started sea trials in December 2017, a veritable army of bubbly erupted at Whitehall.

Just one problem. The Brits screwed it up a little bit.

Maintaining weapons development systems over multiple decades and multiple administrations is difficult. In the time since the plans for the Queen Elizabeth class were first floated, the Brits have had a dozen elections and five prime ministers (and unless my political tea-leaf reading has gone completely off the rails, they’ll have a sixth before long). With each change of leadership there is a change in priorities, and oftentimes life rudely intervenes. Financial crises of the Asian, European and global kind have competed with the British Navy for resources. The Iraq War, the Afghan War and the Libyan intervention ruthlessly pulled British defense prerogatives away from the sea and towards land. The Joint Strike Fighter development program has gone egregiously, criminally, hilariously over budget.

At each step the Queen Elizabeth carrier program had to re-justify itself and fight for funding anew. In the process the Brits found themselves forced to mothball their existing jump carrier fleet in total in order to funnel resources to the new supercarriers’ construction effort. The Brits had to transfer their navy aircraft, pilots and flight crews to the U.S. Navy in order to maintain any hint of naval aviation capacity. And now, with Brexit looming, they’re having to slim the rest of the naval force to keep their supercarrier program on track.

Which means the Brits no longer have sufficient ships to protect their new supers once they are fully operational.

Carriers are not just massive and massively capable combatants, they also represent years if not decades of investment into equipment and personnel, and while they cannot be sunk easily, sunk they most certainly can be. As such every carrier is but the nucleus of a battle group, with all the other vessels’ primary purpose to ensure the carrier does not sink. The British Navy has atrophied so much for so long that it can no longer assemble two credible battlegroups and still defend Great Britain itself.

For the Queen Elizabeths’ deployments, this is nothing short of a Charlie Foxtrot. The new British supercarriers dare not venture further away from shore than the reach of British air power, whether that air power be launched from the United Kingdom itself or from the territory of a trusted ally. Support ships can certainly be built up more quickly (and cheaply) than the supercarriers themselves, but ships don’t grow on trees. This will be the state of the British Navy for at least a decade. Probably two.

This presents London – the naval power par excellence of earlier eras – with a galling choice:

  1. Abandon all hope of ever projecting power, and treat its shiny new supercarriers as the same sort of idiotic chest-beating paperweights the old Soviet “carrier” was,
  2. Fold its supercarriers into the Americans’ battle groups and de facto merge with the United States on all strategic policy… and hope against experience, culture and hope itself that the Americans will listen to your strategic opinions because you contributed a couple big boats.

The decision has already been made. The Brits know better than to fly solo, and they certainly know better than to fly solo against the Americans. The key memory is the 1956 Suez Crisis.

At that time the Brits were certain when the Americans said under the Bretton Woods system all the empires would be disbanded, that it didn’t apply to the British Empire. The British assault on Egypt inadvertently forced the Americans to choose between maintaining the British Empire and their own new global order. It wasn’t a hard choice. The result was strategic castration – with the Americans using all their ample political, financial and military strength to force the United Kingdom into a permanent, subservient position within the alliance that has lasted ever since.

To underline how annoyed the Americans were, they also forced the Brits to stick to the letter of the deals signed to support the United Kingdom against Nazi Germany in the early days of World War II before the Americans themselves were involved. The terms of such loans were so onerous that the Brits didn’t finish paying them off until the 2000s.

And so the Brits have no choice but to stiffen that lip and march forward into the very much known.

  • They will seek a direct bilateral trade deal with the Americans in order to replace the European Union at the core of their economic strategy. It may have fewer regulations, but it won’t enable the United Kingdom to be as wealthy as they have been, and the Americans will offer few concessions because the Brits are economically and strategically without options.
  • They will surrender the financial centrality of London to New York City either as part of the trade negotiations in the hopes they can glean a few concessions on other topics, or because without a firm Brexit deal the financial sector will up and leave London anyway.
  • Should the Trump administration manage to extract a final NAFTA deal from the chaos of the current negotiations, the Brits will grudgingly sign on knowing full well that direct competition from Mexico will do to the United Kingdom what Team Trump says Mexico has done to the United States. The alternative is to be a forgotten side deal only tenuously linked to the American market.
  • And no matter what military adventure the Americans go on, the Brits will be there. They know better than anyone it is far better to be in the Americans’ shadow than in the Americans’ way.

Put simply: what Trump wants, Trump gets. It’s that simple, because if the goal is security and stability for the British people, there is no other option.

This might sound humbling, horrible even. But it really is not. So the Brits don’t matter strategically on their own. They are still safe. They are still wealthy. With the world crumbling down there are worse sides of history to be on than being an adjunct to the Americans. And isn’t it the fate – if perhaps not the goal – of most parents to eventually move in with the kids?