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European diplomacy, UK party politics and Britain’s short-term economic outlook point in the direction of a “hard Brexit” from the EU. As a result, Scotland’s place in the UK may be more in doubt than first thought after the June 23 referendum on EU membership.

Consider a warning from Martin Schulz, the German socialist who is the European Parliament’s president. He is not a household name in the UK, but it would be unwise to discount his opinions in the Brexit debate. As he pointed out in a lecture last Friday at the London School of Economics, no treaties governing Britain’s withdrawal, or its subsequent relationship with the EU, can take effect without the European Parliament’s approval.

He demolished the idea, aired by Boris Johnson, the UK foreign secretary, that Britain could enjoy extensive access to the EU’s single market while imposing restrictions on free movement of people. “I see a clear majority in the European Parliament for insisting that the four freedoms are inseparable, ie no freedom of movement for goods, capital and services, without free movement of persons,” Mr Schulz said.

In case no one in the UK was listening, Mario Draghi, the European Central Bank president, made exactly the same point in a speech on Monday to the EU legislature. So did Wolfgang Schäuble and Michel Sapin, the German and French finance ministers, at the end of last week.

This rock-solid European stance is incompatible with the desire of the UK government, backed by a majority of voters, for some controls over EU immigration into Britain. There is little reason to expect the Europeans to relax their stance.

Political pressures in France, Germany and the Netherlands, where national elections are imminent, and in Italy, where a constitutional referendum will be held in December, will dictate no softening of the common line. Moreover, it is imperative for the EU, in its own self-interest, to stamp out potential contagion from Brexit — and any deal diluting the four EU freedoms would spell Contagion with a capital C. 

London’s financial services industry, and British business in general, are aware of the risks of a hard Brexit, or exclusion from the EU single market and customs union. Yet the UK government’s Brexiters brush aside these risks, partly because there has been no economic meltdown since the June referendum.

For sure, not everything is rosy. Optimism in the financial services sector dropped in the three months to September for the third consecutive quarter, marking the longest decline since 2009. UK mortgage approvals hit a 19-month low in August. But there is no sense of immediate emergency, and this favours the hard Brexiters. So, too, does the lack of concerted opposition to hard Brexit in the ruling Conservative party, not to mention the disarray of the Labour opposition. Labour is distracted by its leftwing leadership’s embrace of what business critics on Monday called “the epitome of fantasy economics”.

But resistance to a hard Brexit is coming from Scotland’s ruling Scottish National party. Such a far-reaching change to Scotland’s economic circumstances would justify a second referendum on independence, SNP strategists say.

Back at the European Parliament, chief Brexit negotiator Guy Verhofstadt, a former Belgian premier, strongly sympathises with the view that, because Scotland voted in June to stay in the EU, the EU should help Scotland avoid an English Conservative-led hard Brexit.

What might that mean in practice? A road to Scottish independence? Who can say. But one thing looks certain: Britain’s exit from the EU promises to be anything but plain sailing.

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Background reading

Roderick Abbott, a former deputy director-general of the World Trade Organisation, warns that taking the UK’s WTO seat back will not be simple. 

André Sapir and Guntram Wolff argue that a Continental Partnership arrangement could be the best route for the remaining EU members to maintain strong economic and security co-operation with the UK. 

Peter Mandelson argues that the EU and the UK need to compromise to prevent a hard Brexit.

Hard numbers

From Fast FT:

Germany’s growth-driving consumers could be set for a subdued October after a measure of household confidence indicated a cutback in spending as the UK’s Brexit vote is starting to have an impact. GfK’s consumer confidence survey for Germany fell to a reading of 10 from 10.2 last month as spenders in Europe’s largest economy expected growth to “develop more weakly over the next few months”.

GfK said: “It looks as if the Brexit decision from June has now started to have an impact. In the three months since the referendum, economic expectations have continuously fallen.”

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