I'm optimistic about a Brexit deal – despite the gloomy outlook

Both Brussels and London have moved in talks, and both grasp the political advantages of even a minimal free trade agreement.

After six rounds of talks, the UK and the EU are far from reaching an accord on their future relationship. Both sides are warning that failure – meaning that Britain would leave after the transition period on 31 December without a deal – is a real prospect. Those working for Michel Barnier, the EU negotiator, complain that the British have wasted July by refusing to offer meaningful compromises.

Failure is certainly possible. But a deal this year is more likely, for several reasons. First, there has been more progress than one might suppose from the public comments of Barnier and David Frost, the UK negotiator. The EU has hinted at a softer line on fisheries and state aid, and agreed that an arbitration mechanism rather than the European court of justice should adjudicate on disputes.

The UK has moved a little, too. By making clear that it will stay in the European convention of human rights it has facilitated future cooperation on justice and home affairs. And it has agreed to the EU’s demand for an overarching structure encompassing various EU-UK deals, as opposed to a series of disconnected agreements (which the EU has with Switzerland and strongly dislikes).

Another encouraging sign is that Northern Ireland has become less neuralgic. The withdrawal agreement requires checks on goods crossing the Irish Sea, so when Boris Johnson several times denied the need for such controls, the EU became frantic. But Michael Gove – the British co-chair of the joint committee for implementing the withdrawal agreement – has clarified that goods travelling from Great Britain to Northern Ireland will be controlled.

The two sides remain far apart on the “level playing field”. The EU is worried that the British will gain an unfair advantage by undercutting its standards, for example on social and environmental protection. The most sensitive part of the playing field is limits on state aid for industry, with the UK refusing to say what kind of regime it wants. The other thorny issue is fish, with the two sides arguing over how many fish the EU should be able to catch in British waters and how often quotas should be reviewed.

But the second reason for optimism is that there is still time for both sides to resolve these differences. The real deadline for a deal, so that MEPs have time to ratify it by year-end, is mid-October.

Third, Covid-19 has increased the chances of a deal. The British government’s handling of the pandemic has led to questions about its competence. If the year ended with no deal, chaos at borders, disrupted supply chains and food shortages, there would be still more questions. That is why Boris Johnson may at the last minute prove as flexible as he did last October, when he accepted a border down the Irish Sea in the withdrawal agreement, having promised that he never would.

A fourth reason is that no deal and its consequences would boost support for the SNP in next May’s Scottish elections. The SNP is already on course for a majority, but the bigger its vote, the harder it will be for Johnson to block another referendum on independence. Rather late in the day, No 10 has woken up to the risk of the UK breaking up.

Similarly, no deal would also impact Northern Ireland. Goods travelling from Great Britain to the region would have to pay tariffs, making the new border regime more complicated and uncomfortable for Northern Ireland.

A fifth reason is that if no deal looms business leaders will squeal. They have said very little about Brexit in recent months, fearing that it would be counter-productive and incur the wrath of No 10. But they are counting on the government doing what it takes to secure a deal, and if by October it appears unwilling to do so, they will speak out. Public opinion may then start to worry about jobs.

The Conservative party was close to big business from the time of Robert Peel’s leadership in the 1840s right up to Johnson becoming prime minister. The current distance is not sustainable for long, especially now that Labour has, in Keir Starmer, a leader who is sympathetic to business.

Johnson’s government is much more united on Brexit than that of Theresa May. No cabinet minister questions the pursuit of a hard Brexit (even if some backbenchers do, in private). But there are nuances among the people who count. In No 10, Dominic Cummings is apparently indifferent to whether there is a deal. Frost, who is an influential as anyone on Brexit, wants a deal, but only on his terms; he expects the EU to make concessions. Like Frost, Johnson wants a deal and says he can live without one – but the prime minister gives the impression of being more willing to show flexibility. Gove is the keenest of the four to get an agreement – perhaps because, being responsible for no-deal preparations, he has thought through the implications.

If Frost and Barnier can strike a bargain, it will lead to a much harder and more disruptive Brexit than most Britons imagine. Manufacturers will suffer friction at the border, service firms will be barred from the single market and employers will find it harder to hire workers.

The macro-economic difference between the Canada-style free trade agreement (FTA) that Johnson envisages and no deal is not immense. Some leavers therefore argue that the UK might as well go for the full-blown sovereignty and simplicity of no deal.

That would be a mistake. The tariffs that a “WTO terms” Brexit would entail would cripple sectors such car-making and livestock farming. And the EU might not recognise British financial regulations as “equivalent” or data privacy rules as “adequate” – thus hitting financial services, police cooperation and tech firms.

But the biggest impact of no deal would be political. An acrimonious end to the transition would hit economic confidence and make it very hard for the UK and the EU to build close cooperation on trade or security for years to come. Although a thin FTA would harm the UK economically, it could be an interim measure. In the long run, when emotions over Brexit have subsided – when leavers no longer suspect remainers of trying to block it, and EU governments have stopped fearing that a slash-and-burn UK economy will outperform them – rational actors on both sides may see the benefit of closer economic, political and security cooperation.

Britain will not rejoin the EU any time soon but it could move away from “Canada” towards something more like “Norway” or “Switzerland”. The advent of a Labour government would hasten that process.