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The Brexit Trilemma

If you spend enough time in policy circles, you will eventually run into the concept of the impossible trinity. A country can have full control of its interest and exchange rates, at the cost of imposing controls on the movement of capital. If it decides it would like to remove these controls, then it must either use its interest rate to hold up the currency (giving up its independent monetary policy), or allow the currency to float (giving up control of exchange rates). Of the trinity of desirable outcomes – fixed exchange rates, freedom to set interest rates, free flows of capital – a country can enjoy at most two. No matter what it does, no matter how ingenious the political fixes suggested, attaining all three is impossible.

An equivalent constellation of problems neatly explains why Brexit has become so intractable. While there are any number of conditions, subsidiary clauses, and lesser wants attached to the list, the major British, Irish, and European desires can (with a little flexibility) be boiled down to finding a deal that achieves some subset of an independent legal regime, preventing the creation of internal borders in their respective internal markets, and avoiding friction on the Irish border.

To see this, start with the negotiating mandate given to the Commission. The EU, as a bloc, has no desire to give the UK the right to meddle in its affairs as a non-member, and certainly has no interest in creating internal borders for its convenience. The UK’s position mirrors this; it has no interest in allowing the EU to meddle in its affairs as a non-member, or in installing a border between Great Britain and Northern Ireland. And while Dublin’s Brexit wishlist might be quite long when it comes to relocating EU institutions, the top-line is very simple: Ireland doesn’t want any border frictions with Northern Ireland, and doesn’t want to loosen its place in the single market. It doesn’t really care what the UK does so long as these conditions are met, and it isn’t interested in leaving the EU.

These positions are clearly incompatible. Given that the UK wants to leave the EU’s legal sphere, you can have at most two of a frictionless border between between the UK and the EU, between Great Britain and Northern Ireland, and between the Republic of Ireland and the EU. Each party is insisting that the border goes somewhere else; Ireland wants it between Great Britain and Northern Ireland. The EU-27 share that goal, but in the absence of a deal think it should go on the Irish border. The UK is (implicitly) stating that it should go on the Irish border, or at Irish ports.

Where Brexit builds upon the classic trilemma is imposing a condition of unanimity; unless all three parties involved make the same choice about the location of the border, no-one gets what they want: the UK leaves without a deal, and everyone spends an extended period of time pointing fingers and shouting while the Irish border hardens and businesses shed jobs.

The only way I can see through the trilemma is to try and soften the trade-offs. Just as a country can choose something between a totally free-floating currency and a fixed exchange rate, it’s possible for the UK, Ireland, and the EU to partially achieve their goals if they are willing to compromise. The caveat to this is that it would mean genuinely compromising; up until now, the EU’s version of the same has effectively meant ‘the UK accepts the backstop or just stays in our legal system’, while Britain’s version has largely meant the EU allowing a lacuna in its internal market.

One way out of the impasse – initially proposed by Jonathan Faull – was to play with the definition of what a ‘hard’ border actually means. What if – the thinking went – the UK and Ireland agreed to process goods for trade a long way back from the actual boundary between the two countries? That way, the border itself could be kept open, without any visible interference or physical markers to stir up republican identities. The compromise would be the UK and EU implicitly accepting a degree of smuggling, with an associated hole in their internal markets, and Ireland accepting that ‘no hard border’ does not mean ‘no frictions whatsoever anywhere in the process of trading with Northern Ireland’.

Predictably, this plan was shot down, but Boris Johnson’s new plan appears to be built from its constituent parts. Northern Ireland stays within the EU’s regulatory sphere – a significant concession of sovereignty – and customs are dealt with at trading sites behind the border. The hole in the EU’s regulatory boundary is far smaller, and a border appears between the UK and Northern Ireland. As this border is likely to be largely one way, the UK is likely to experience some illegitimate importing of EU goods but has decided that that risk is worth taking, given that it keeps the UK out of the customs union and prevents the imposition of a customs border within the country.

But this, also, has proved unacceptable to the EU. If we had but world enough and time we could spend the next big-bang to heat-death cycle of the universe thrashing out a perfect deal that achieves every goal, and we might even succeed. But here and now we have to construct a deal with the limitations in front of us, and that means finding a way out of the trilemma.

The EU, at present, seems to think that the way out is to wait for the British government to be replaced. The gamble is that the Benn act will prevent the UK leaving without a deal, and an eventual election will result in the installation of a government more amenable to its demands. If this doesn’t happen, then it can just go back to insisting on the backstop as it’s starting point. After all, as things stand the backstop – is perfect; there’s no border with Northern Ireland, there’s no threat to its internal market, it gets to govern part of the UK, and as an added bonus the level playing field commitments and unionist fear of division will give it a powerful grasp on the regulation of what might have been a large and competitive neighbouring market. While the deal is still on the table and Parliament is still divided, there’s no good reason to offer anything else.

From the UK government’s point of view, the same backstop is a disaster that divides the union, pre-judges the future relationship, keeps the UK enmeshed in EU law, and – while in theory temporary – would in practice last forever as the EU is all but certain to reject any alternative arrangement as comparatively flawed. Boris Johnson’s government would probably prefer to leave without a deal rather than accept it.

The danger for both parties is that they might both, in the end, prefer to compromise rather than face a no deal scenario, but find themselves bound up in negotiating positions that prevent this. While Irish domestic politics in particular mitigate against accepting any sort of border friction, the default under a no-deal Brexit is that the border goes between Northern Ireland and the Republic, with Dublin, London, and Brussels trying to keep it as soft as possible. This, in itself, should be a call to compromise; it would be a tremendous shame to incur the high cost of a no-deal departure only to hit upon a workable solution afterwards.