Everything you wanted to know about the Irish backstop.
If you read any coverage of UK Prime Minister Theresa May’s decision to delay Parliament’s vote on her Brexit deal yesterday, you likely saw that the root of MPs’ discontent was the so-called Irish backstop. That phrase was everywhere, without much explanation, and we live to explain jargon to normal people (and crazy-in-a-good-way folks who don’t speak Jargonese). So here is our attempt to demystify the topic.
What is a backstop?
It is that fence in baseball that goes behind home plate to stop foul balls from hitting spectators.
What does this have to do with Ireland?
In the policy world, “backstop” usually refers to a Plan B, a failsafe mechanism you can default to if things don’t go as planned. During the eurozone debt crisis, the bailout funds were backstops for the financial system. So in Brexit, the Irish backstop is basically Plan B for the Irish border. It is the system that would theoretically take over at the end of 2020 if the UK and EU don’t agree on a permanent solution between now and then.
Solution to what?
The border between the UK and Ireland. The Good Friday Accords, which cement the peace agreement between Ireland and Northern Ireland, mandate an invisible border between the two. No passport checks or vehicle inspections—basically nothing that would conjure memories of razor wire and conflict zones. This is easy to accomplish while the UK is in the EU and part of the single market, as there is no need for custom checks at borders between EU nations. But if the UK isn’t in the customs union or single market, and it has its own tariffs, customs practices and regulatory codes, that sort of mandates border inspections for trucks carrying goods.
What does the backstop entail?
It would keep the entire UK in the EU’s customs union indefinitely. Additionally, Northern Ireland would be in the single market for goods, preserving commerce on the island of Ireland. If that happened, it would likely require the UK to perform a customs check on goods entering the island of Great Britain from Northern Ireland, despite the fact the two are in the UK. Again, this is all presuming they don’t figure something else out over the next two years.
Why don’t people like this?
If you will pardon us painting with broad brushstrokes, you can basically separate the UK’s political class into three camps right now: Remainers, Leavers and Unionists. There is some overlap among the three, but those nuances aren’t necessary to go into for our purposes. Remainers, which never wanted Brexit, appreciate the customs union but don’t think it is a close enough relationship with the EU. Leavers, which backed Brexit, despise customs union membership because it means the UK can’t sign free-trade deals on its own. Unionists, which want to preserve the United Kingdom of Great Britain and Northern Ireland, don’t want any semblance of a border in the Irish sea.
But this is just a backstop, right?
Correct. No one intends for it to take effect. It is a failsafe and, we suspect, intended to motivate negotiators on both sides to keep at it and find something better.
So why is it a dealbreaker?
Some people don’t understand that it is a last-ditch safety net that isn’t supposed to take effect. Others don’t trust politicians to arrive at a solution within the next two years. Plus, the fine print says the UK can’t exit the backstop unilaterally if it takes effect. EU politicians would have to be willing to re-open talks. So people fear that could leave the UK as a vassal state in perpetuity, paying membership dues to the customs union while having no say on rulemaking.
What does this mean for Theresa May?
Unknown. She is in Europe trying to cajole EU leaders into promising the backstop will never take effect, hoping this will win over MPs.[i] Meanwhile, her political opponents are swarming. Hollywood-legend-turned-international-political-thinker Pamela Anderson is trash-talking her. UK newspapers are handicapping her potential replacements. Labour leader Jeremy Corbyn is jockeying for power. But May seems to be a cat with nine lives, and the role of UK prime minister is a thankless one right now, with little chance of success or re-election. We would be surprised if anyone really wanted to take it until after a deal is sealed. But, you know, stranger things.
Good grief. So what happens if there is a no-deal Brexit?
The million-pound question. The backstop was part of the withdrawal deal. Presumably, it wouldn’t take effect in a no-deal scenario. That said, we think it is highly unlikely that in the event of a no-deal Brexit, the Irish border would become a hard border overnight. For one, they don’t have the infrastructure to begin checking goods immediately. It takes time to build inspection facilities and checkpoints. Two, no one on either side wants that. In the end, this is a political situation, and we suspect it would be fairly simple for politicians on both sides to pass emergency legislation ensuring goods, services and people can flow across the border uninterrupted pending a more permanent arrangement. Politicians have a way of doing what they need to do in order to preserve their chances of re-election. We won’t hazard a guess on exactly how it will work, but in our experience, where there is a will, there is a way.
So I don’t need to worry?
Look, we aren’t Pollyanna. This could all get a bit messy. We just happen to think all those worst-case scenarios hyped in the press, which involve food shortages and borders that are all but patrolled by armed guards, are likely quite wide of the mark. Stocks move most on the gap between reality and expectations. If a no-deal Brexit happens and brings even just an ounce or two of chaos, that will be much smoother than what most envision. When expectations are for disaster, and not-disaster happens, it tends to be bullish for stocks. Relief can be a powerful positive driver.
What do you think is the worst that could happen from here?You mean in the realm of all things Brexit? A second referendum. While it might placate the Remain crowd and raise enthusiasm about the prospect of the UK retaining all its economic links with Europe, it would also raise and prolong uncertainty. If the results contradicted the first vote, we doubt it would settle the issue—instead you’d get a protracted “which referendum best reflects the people’s will?” debate. Constitutional crisis is a term that gets bandied about a lot in the UK, but in this case, we think it would be apt.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.