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• As Michel Barnier and David Davis meet for the third round of Brexit talks in Brussels, there is widespread speculation in the UK and across the EU that the UK’s decision to leave the EU could be reversed.
• This has been added to by Labour’s decision to formally support the UK remaining in the single market and the customs union for a lengthy transition period after 2019. There are rumours that Labour is testing the water ahead of supporting a second referendum.
• A second referendum is possible, but still looks quite unlikely, for a number of reasons. A deeper economic downturn in the UK, further signs of government incompetence, and an offer from the EU27 on amendments to free movement would make it more likely.
• Without a major political intervention, the UK is heading for a tough economic reckoning. The domestic political consequences could be nasty.
• The EU27 will not be as badly affected, and there are some opportunities for reform.
• However, beyond Brexit, the bloc faces some major challenges that will further test its unity in the coming years.

The third round of UK-EU27 talks kicked off in Brussels on August 28^th, with the two sides still far apart on key issues. Michel Barnier, the EU27’s chief negotiator, has continued to make it clear that sufficient progress must be made on UK payments into the EU budget after Brexit, the UK-Ireland border, and the post-Brexit status of EU27 nationals in the UK and UK nationals in the rest of the EU, before talks can start on a future bilateral trade arrangement. Meanwhile the UK government has been reluctant to accept this timetable, instead publishing position papers on post-Brexit trade. Irritation has become very clear on both sides.

Meanwhile evidence of a slowing UK economy and the spectacle of a British government not up to the task is leading to speculation that Brexit could be stopped. Many of those voicing such views are the usual suspects, although these sentiments have also been voiced by a surprising group of people. Indications of a stuttering economy, growing evidence of the overwhelming complexity of the Brexit process, signs that the vote to leave could have some unintended damaging consequences, and the appearance of a government that is not competent to deal with the scale of the challenge, appear to be forcing even some previously committed to leaving the EU to have doubts.

Labour’s decision to call for a long transition period with continued membership of the single market and customs union is a significant development. There will now be real opposition in parliament to the government’s stance. Added to opposition from smaller parties such as the Scottish National Party (SNP) and the Liberal Democrats, scrutiny by the House of Lords, and the anti-hard Brexit elements within the Conservative Party, this means that the passage of Brexit legislation in parliament is far from assured for the government on its chosen terms.

There have been rumours that Labour is testing the waters ahead of an outright push to overturn the referendum decision. It is feasible that the Labour Party could take a decisive stand against leaving the EU, and argue that a second vote is required now that the implications of leaving the bloc are clear. A strong pro-remain push by the Labour leadership, allied with smaller parties and some sections of the Conservative Party, could feasibly have a big impact on the Brexit process.

There is certainly not a majority for “hard” Brexit in parliament. However, although Prime Minister Theresa May’s “hard” Brexit stance appears to have been diluted somewhat following her chastening election setback, and many in the party (including some key figures) are pushing for a “softer” form of Brexit, there have been no serious moves from the government towards attempting to overturn it entirely, despite the fact that most Conservatives, including members of the current cabinet, campaigned for remain.

Still a long way to go until a second referendum

The idea that a second referendum is somehow undemocratic—a claim made repeatedly by the leave side—is plainly nonsense. It has become painfully clear in the past year that the simple in/out referendum of June 2016 is very far from providing clarity on what kind Brexit the country wants. Prime Minister Theresa May chose to interpret the result in a very particular way, but it could have been interpreted differently. There was nothing about the Brexit vote that forced politicians to pursue a so-called “hard” Brexit afterwards. During the referendum campaign, some prominent leavers had repeatedly insisted that even if there was a vote to leave, this would not mean leaving the single market.

However, the prospect of one or both main parties agreeing on the necessity of second referendum will probably require signs of a decisive change of heart from the public. This still looks some way off. It would require two things would to happen:

1. The economy would need to falter significantly, to the extent that it affected jobs and incomes in a very visible way. Real wages would need to fall consistently, and companies would need to start cutting investment, holding back on hiring in the UK, and moving larger numbers of workers abroad. It has long been clear that voters don’t want to pay the costs of Brexit, and therefore this scenario could see a growing number of them change their minds. It is now clear that many believed the “have your cake and eat it” approach so flagrantly bandied about by leavers, and the GBP350m per week for the National Health Service. These things are now evidently not true. Brexit will clearly involve some hard trade-offs. However, while there are signs of an economic slowdown, such a negative scenario is still some way off. The true cost of Brexit will not become apparent until after the UK actually leaves the EU, by which point it will be too late for it to change its mind
    
2. The painful reality of Brexit negotiations, and the shoddy nature of the UK government’s approach, would need to be clearer to the general public. At present, this is not being communicated via the majority of the media, and so many are unaware. Most of the Westminster press pack remains focused on the battle between those in favour of a “hard” and “soft” Brexit in the cabinet. Few are listening to what the EU side is saying, and even fewer realise the lack of room to dictate the terms of Brexit that the UK actually has.

As a result of the above factors, there does not seem to yet be a clear enough sign that the public has changed its mind for major frontline politicians to be brave enough to act (and take on the Eurosceptic tabloids) by arguing for a second referendum and an attempt to halt the Article 50 process.

An additional important factor, including for the Labour Party, is immigration. Labour’s announcement of its new position included a pledge to only remain in the single market in the long term if the UK receives concessions on immigration and current free movement of people legislation is amended. It is clear that the issue is an important source of division with the party, and something that the leadership cannot ignore. The fact that aspects of EU migration can be controlled within the single market has been strangely absent from public debate in the UK throughout the Brexit process.

It is quite likely that any U-turn on Brexit, either by the British government, the opposition, or the general public, would require some controls on immigration. This is not unthinkable from the EU side (am “emergency break” was apparently offered to the UK by Germany in the immediate aftermath of the Brexit vote), and there is a coalition of richer member states who could feasibly be in favour of changing the status quo. However, it would be politically challenging for the whole EU27 to agree on. Bureaucratically, the wheels are already in motion on the EU27 side, and it would require a big intervention from the Council and a lot of deft political footwork to push something like this through.

Clock is ticking, and chances of a “cliff edge” Brexit are non-negligible

There does appear to be a bit more realism in the UK government. If calms heads on both sides prevail, it should be possible to reach a deal on post-Brexit payments from the UK into the EU budget. Meanwhile those in the UK government arguing in favour of a post-Brexit transition deal appear to now have greater influence. This looks like the path of least resistance from the perspective of both sides, with a so-called “cliff edge” Brexit likely to be economically damaging for the whole continent. However, with the possible exception of Ireland, this risk highly asymmetric. The UK will lose much more from a “cliff edge” Brexit, and as such, the EU27 can push quite hard to extract the terms that it wants from the UK. There is still very little consideration on the UK side of what kind of transition the EU27 is likely to want and be willing to accept.

October is set to be a crucial month. The Conservative Party Conference will inevitably turn into a leadership contest, and Ms May could be forced to set out a timetable for stepping down. Bitter infighting between “hard” and “soft” Brexit camps for the party leadership could ensue. Brutal and damaging Conservative divisions on Europe are nothing new, and have caused the party serious damage in the past. Hard Brexiteers are terrified that the long dreamed of prospect of EU exit—now tantalisingly within reach—will slip away, and will fight hard to prevent any change in course. This will take place against the backdrop of the final set of first phase UK-EU27 Brexit negotiations, and the European Council summit, both of which will also take place in October.

Meanwhile, as time goes by, Brexit will be de-facto formalised, even before 2019. Although much of the EU is understandably focused on Brexit, the bloc is also moving on. Plans to reform the EU27 will gather pace after the German election in September. The UK will not be part of this, and as such divergence will already start to happen.

After March 2019, the chances of Brexit being stopped are gone, and only option is back in via Article 49. This would mean re-entering the EU on inferior terms, with almost certainly larger budget contributions than is currently the case (with the UK rebate gone). There would also be a formal requirement to join the euro at some point (although Sweden shows that this is effectively meaningless). The UK re-entering the EU on such terms remains very hard to imagine, at least in the next five years.

On the UK side, the political fallout is potentially toxic. If Brexit goes ahead there will be an economic reckoning, and many will be angry and looking for others to blame. Both major parties could be riven by infighting as a result. Fault lines that are already visible could become more problematic, with tensions between various groups increasing. The Scottish independence movement—which was dealt quite a hefty blow at the recent general election—could make a strong comeback (not to mention the chances of serious instability in Northern Ireland). The UK’s standing in the world has already suffered, and as the painful reality becomes apparent, national prestige will take a significant hit.

Brexit is a temporary plaster covering deep EU27 divisions

On the EU side, the damage from Brexit will not be as great (except maybe for Ireland) and there will be some opportunities. The idea that the UK has alone stood in the way of reform of the EU in recent decades is false; in many ways—such as the creation of the single market and the expansion eastwards—the UK had a decisive and positive role. However, as one of the most powerful member states and also one of the most difficult, the UK has been an awkward fit for the EU in many ways. Its departure does create the opportunity for further integration, at least in some areas. Most interesting will be Macron-Merkel plans for reform after the German election; ironically something that the UK could have significantly influenced to its own advantage had it not voted to leave.

Nevertheless, the EU has some serious issues to deal with. Brexit is acting as a powerful unifying force at present, but this will not last indefinitely. East-West splits on a host of issues are apparent, including on refugee sharing, posted workers, child benefit payments, and corruption in EU funds. Meanwhile, a lot of faith is being put in Emmanuel Macron, but he will probably need to make serious progress in France before receiving concessions on euro zone reform from Germany. Despite the closing of the Balkan route, the refugee/migration issue has clearly not gone away, as recent developments in Italy show. Finally, North-South tensions, particularly on fiscal matters and reform of the euro zone, continue to exist.