Brexit: We Are No Nearer to Knowing the Future

7/27/17

Another week and we are no clearer as to what is going to happen.  Last weekend the UK newspapers were filled with stories that the government had come to a consensus that a "transition" or "implementation" phase would be needed after March 2019, when the UK is scheduled to leave the European Union.  The only disagreement between government ministers appears to be over the length of such a transition.  Should it be two, three or four years?

But agreeing to a "transition" is a bit like agreeing to go on a "journey."  It says nothing about where you are starting from or where you are going to end up.  After two rounds of negotiations between the EU and the UK we are no wiser as to how matters may unfold.

There has been little or no progress on the three main Article 50 issues.  In particular, the UK is refusing to put a number of what it considers to be its financial obligations, or even to discuss a method to calculate those obligations.  Given where we are today, it seems to be highly unlikely that there will be a deal on the Article 50 issues by October, when the EU's chief negotiator, Michael Barnier, is due to report to the leaders of the other 27 member states if sufficient progress has been made to allow the opening of the second phase of negotiations with the UK on "the framework for its future relationship with the Union."

So, there is every possibility that the exit talks could come to a grinding halt in September.  Barnier will give the UK until then to realistically deal with the financial issue.  If they do grind to a halt do not underestimate how ugly matters could get.

Even if the Article 50 exit talks make progress, what does the UK want?  As of today, all the UK prime minister, Theresa May has said, it that wants a "deep and special relationship" with the EU after it leaves, without spelling out in detail what that means.  However, as Brendan Donnelly of the Federal Trust has pointed out (here) the UK government knows exactly what it wants:

…which is systematic "cherry-picking" of the perceived advantages of membership of the European Union combined with the systematic unpicking of the obligations of such membership.

That will never be on offer from the EU.  As Fabian Zuleeg of the European Policy Centre has noted:

The assumption that the EU27 are willing to accept any deal to avoid Brexit is misguided.  Not only are there red lines that they will not cross, but the clock is ticking as well.  The time left to strike a deal is limited.  It is for the UK to come up with workable solutions as otherwise the UK will end up with no deal at all.  While this is also negative for the EU27, it is seen as the UK's choice and not something that needs to be avoided at all costs.

Zuleeg adds that the reason that the EU27 are willing to accept this negative outcome is that "greater goods are at stake:"

…..the unity of the EU27, the integrity of the Single Market and the future of European integration.  While there is willingness to find a compromise with the UK, a country leaving the EU cannot be better off than a remaining member.  Allowing cherry picking of benefits would act as a signal to others inside the EU that a Europe à la carte is obtainable, opening the Pandora's box of disintegration.

But let us assume that the UK makes it clear to the EU that what it means by a "deep and special relationship" is a comprehensive trade agreement covering goods and services.  There is no reason why the EU would not be willing to negotiate such an agreement, while making it clear from the outset that such an agreement can never replicate the benefits of membership.

There are no circumstances in which such a deal will be negotiated between now and September/October of next year when Barnier has said that the exit discussions must be wrapped up to allow time for ratification by EU member states and the European Parliament.  Even the arch-Brexiter, UK cabinet member Liam Fox, admitted in Washington DC this week that while "it would be nice to think we could get a full trade agreement by the time we get to March 2019," that would be "an optimistic view of recent free-trade agreements."  The best that can be hoped for is an agreement to open negotiations on the terms of such a deal when the UK has left the EU.  In any event, the EU is a rules-based institution and one of those rules is that it cannot negotiate a trade agreement with one of its own members.  It can only negotiate such a deal with the UK after it has left.

Which brings us to the critical question: what happens between March 29, 2019, when the two year Article 50 notice period comes to an end, and the conclusion of a comprehensive agreement between the EU and the UK, which will take another several years at the very least?  On what legal basis will trade in goods and services between the UK and the EU to continue after March 2019?  As of today, no one can say.  Such uncertainty will push businesses to vote with their feet and move operations to EU countries.  It is already happening.

There have been suggestions that the UK could temporarily join the European Economic Area (EEA) or the European Free Trade Association (EFTA).  But neither the EEA or EFTA were designed as a place to "park" a departing EU member while future trade arrangements were negotiated.  As there has never been a Brexit before, new arrangements need to be devised.  A formula will have to be found to provide legal certainty post-March 2019.

A "bridging period" between full EU membership and non-membership over a three to five year period could be agreed.  During this bridging period the UK would act, and be treated by the EU, as if it were a member of the EU, accepting the jurisdiction of the Court of Justice of the European Union and making appropriate continuing financial contributions, which could take into account the figure agreed in the Article 50 negotiations.  All EU rules and laws would have to apply during the bridging period.  There could be no cherry picking, no transition à la carte.  But, the UK would be officially outside the EU and would no longer have any involvement in EU governance, no seat in the Council of Ministers and no MEPs in the European Parliament.  Leaving the EU will never be cost free, politically or economically.  We could describe the status of the UK during this bridging period as a "member state en partant."

An approach along these lines would provide breathing space for all parties.  While it has always seemed to us that Brexit is not in the best long term economic interests of the UK, given the political dynamics in the House of Commons, with the Labour leadership essentially backing the government's approach, as things stand today Brexit is likely to go ahead.  The Conservatives want Brexit in a blue bottle pouring right, Labour in a red bottle pouring left.  That's the only difference at the moment.  But, if the economy turns sour, things could change.

Given this, it is in the UK's and the EU's mutual interest to minimise the disruption Brexit will cause.  But, as the UK is the country which triggered the process it must live with the existential consequences of its choice.  The burden of finding a way forward falls on the UK, not the EU.

And in the words of that great group, Brooker T and the MGs "Time is Tight" (here).  A theme song for Brexit perhaps?