New Prime Minister – New Brexit Deal? Not Likely.

What is a likely Brexit outcome? As Boris Johnson takes over negotiations for Brexit, new perspectives appear on the deadlocked process. His major promise is to get a deal with the EU for leaving before the current deadline of October 31st.

With the insights of bargaining theory, we show that this attempt is not only not promising, but that a hard Brexit is the most probable outcome. Newly elected prime minister Boris Johnson has demonstrated his determination to bring the Brexit process to an end.

Yet, he has not come up with concrete solutions on how he intends to reach an agreement that is acceptable for both the European Union (EU) and the United Kingdom (UK). Therefore, a lot of skepticism is justified. Some rather believe that the date of leaving the EU will be delayed again, as it has already been done twice due to the inability for the two sides to find a suitable compromise.

Since November 2018, when the EU and the UK, under the May administration, finished their negotiations on the Brexit withdrawal agreement, progress has been at a standstill for three major reasons:

1. There was no majority for this agreement in the British parliament, a situation that is no different under the new Prime Minister.
2. The EU is unwilling to substantially renegotiate yet again.
3. Neither party favours a hard Brexit, which would be a withdrawal without agreement.

The situation gets even more stuck, since for certain aspects on the content level, a compromise is simply not possible. Take the example of the border between Ireland and Northern Ireland – how do you keep an open border if you want to control trade?

Bargaining theory can be useful in this situation to estimate the chances of another postponement.

You may also be interested in our study: Does Brexit Spell the End of Comparative Advantage?


A basic model of bargaining

A classical model to depict a bargaining situation is the “divide-a-dollar” set-up. In this scenario, two parties must agree on how to split one dollar. Party one makes a suggestion, which party two can either accept or reject. If she accepts, there is an agreement. If she rejects, it is her turn to formulate another proposal, which gives party one the choice of acceptance or rejection. Should they fail to agree at some point, both receive nothing. Furthermore, there is a discount factor, so the value they can split decreases each round.

This basic model is applicable to our situation. Even though the negotiation does not take place in turns, both parties need to agree to realize an orderly Brexit.

A discount factor makes sense, because the longer the process takes, the longer the uncertainty prevails. This hampers businesses and entrepreneurs from making investments and hiring employees, causing a direct negative effect for the economy. Also, the point of no-agreement is obvious here – a hard Brexit.

The deadline matters

From a theoretic point of view, there is a difference, whether a deadline exists. If there is a deadline, a rational party will always accept the offer in the last round, because rejecting immediately causes a payoff of zero. The second party can incorporate this knowledge into their offer, and thus make an optimal suggestion for themselves. Alike, the first party can predict that action during their turn. Continuing this pattern enables both parties to optimally adjust up to the first decision node.

Yet, once there is no deadline, both parties face the threat of constantly losing value, in case they are unable to agree. In this scenario, a fully-informed, rational party would directly formulate an acceptable proposal, which includes the degree of the discount factor. Fully rational acting agents are a construction from theorists and hardly found in real-life. Therefore, we can assume that an agreement in an infinite bargaining situation is difficult to reach. Instead, it leads to a situation of no agreement with a constant small loss of value.

The British will ask for further postponements

From the British perspective, under this scenario. bargaining with a deadline will make the British accept the deal shortly before it is crossed, because it is the better alternative to a hard Brexit. Bargaining without a deadline, which is basically the same as regularly extending it, will lead to no agreement and a maintenance of the status quo. So far, the British parliament has only been able to agree on what they do not want.

Every time they voted on the Brexit deal, they rejected and chose the status quo. For this reason, we can conclude that the British side prefers  bargaining without deadline and will demand another delay of the Brexit. Even though Boris Johnson has stated that he would rather leave the EU without a deal, there is little evidence so far that he will get a majority for this in parliament.

Stronger position for the EU

One may object and point out that according to this theory, the EU could also be in the position of either accepting a deal right before the deadline or facing a harmful hard Brexit. And indeed, theory predicts that any (Johnson) deal will be accepted, if it is better than having no deal at all. However, for two reasons this scenario is quite unlikely. First, there remains very little time to reach a majority for such an agreement.

The EU does not bargain as a homogeneous party but consist of 27 heterogeneous agents. When these try to agree on a position themselves, patience is required. And second, the UK lacks the bargaining power to put pressure on the EU. Even if a hard Brexit will harm the EU, their losses are expected to be significantly lower that the British ones. Johnson’s attempt to get concessions via threatening a hard Brexit is simply not credible.

Macron’s approval marks the biggest challenge

Should the British ask for a postponement, there remains an obstacle, probably the biggest one. Article 24 of the Lisbon Treaty demands on the EU level, that the European Council needs to approve it unilaterally. This was already complicated for the previous two postponements. Now, there is one major opponent to granting a third one: the French president Macron, and his ambitious plan for the restructuring of the EU.

In his opinion, the entire Brexit process absorbs too many resources, which in his opinion should be dedicated to more pressing political issues at the European level. For this reason, he believes the European losses due to a hard Brexit are bearable. As long as he cannot be convinced, a further delay will be blocked.

What is a likely Brexit outcome?

Despite Boris Johnson’s ambition, the chances of an agreement within the deadline are very low. Bargaining theory predicts that the British are likely to ask for another postponement. Though, the biggest hurdle is the French unwillingness to grant a further extension. Consequently, a hard Brexit seems to be the most probable scenario and all relevant actors should prepare accordingly.

Literature

Rubinstein, Ariel. “Perfect equilibrium in a bargaining model.” Econometrica: Journal of the Econometric Society (1982): 97-109.