Johnson's conservative friends are pushing him towards no-deal

The UK's internal market bill turned out to be a storm in a teacup. The storm subsided yesterday when Boris Johnson cut a deal with Tory rebels that will give the UK parliament the last word on any future breaches of the withdrawal agreement. For the EU and the EU/UK trade deal, this whole episode is completely irrelevant.

There is one political development, however, that could increase the probability of serious challenges. Conservative commentators, friends of Boris, are rounding on him. This morning we see the extraordinary spectacle of both the Spectator and the Daily Telegraph running stories about Johnson's failing premiership. Allister Heath writes in the Daily Telegraph that Johnson needs to do two things: fix the broken system of Covid-19 testing; and leave the transition period properly, by which we presume he means no deal. We certainly agree with Heath on the former issue. But we are not sure that the UK, or even Telegraph readers, are quite ready to draw the right conclusion from the testing debacle: an open acknowledgement that the UK's revered National Health Service is no longer fit for purpose.

Fraser Nelson's cover story in the Spectator this morning lists a large number of policy failures and U-turns, including the latest twists and turns on the internal market bill. The criticism is devastating, but the message is conditionally optimistic. Even now, Johnson is ahead in the polls. There is no alternative leader in his own party. But he needs to start to govern.

The reason we give these comments so much prominence is the implicit message they contain for the future relationship with the EU. They are both saying that Johnson cannot afford a deal with the EU that would be interpreted as a climb-down. If that happened, the sense of indecision might become irreversible. These are spine-stiffening rally calls by Johnson's most loyal supporters. We think he will heed what are still, in tone, friendly warnings.

The UK-Japan trade agreement tells us what a compromise can look like. We disagree with the interpretation of this deal in the FT, which argues that the UK had undermined its own negotiating position with the EU by agreeing to a state aid regime in its recently concluded deal with Japan. As the FT writes, the two governments agreed to prohibit indefinite government debt guarantees for struggling companies, or open-ended bailouts without restructuring plans. We cannot think of an existing or potential future state aid case in the UK that would fall under this category. We believe that the UK can happily live with this type of arrangement in a trade deal with the EU. We think the problem here is more likely to be the EU. Recall the proximity argument. The EU seeks harder guarantees from the UK than it did from Japan, on the grounds that the UK is geographically closer.

This is where the rallying calls of Johnson's supporters become relevant. Nobody would regard it as a defeat if Johnson were to agree to the standard terms on state aid in international trade agreements. The same goes for other level-playing-field issues, such as environmental and labour standards. But we think this is the marker of a broader line between perceived success and failure. A deal will happen if the EU agrees to treat the UK as a normal trading partner. But such a consensus has yet to emerge in Brussels. It won't happen until October. If it doesn't emerge, or only insufficiently, our expectation is that Johnson will walk.