There has been a great deal of confusion in the past few weeks over what type of “Brexit” deal the United Kingdom is ultimately seeking, and more specifically, what kind of relationship with the European Union the British government wants once the withdrawal is finalized.
It appears that the European commission is now convinced that it is paramount to begin negotiations on an interim agreement in parallel with negotiations over a final post-Brexit deal. The disentangling from the Single Market in and of itself is seen as the easy part, and negotiations should focus on future relationships instead.
With Prime Minister Theresa May’s speech on Brexit set for next Tuesday, here are a few clarifying points:
*** Prime Minister May has previously stated four key demands: refusing to pay into the EU budget; ending free movement of people, getting rid of European Law primacy, and ending judiciary control from the European Court of Justice, all of which are incompatible with membership in the Single Market (as per the Norway model). But that doesn’t mean the UK and the EU cannot successfully negotiate more limited (as German Chancellor Angela Merkel mentioned), specific arrangements – in other words, a “Free Trade Agreement.” ***
*** We understand the British government will aim for a Free Trade Agreement with the EU, from the “outside” – something unique, but that might look similar to the one recently negotiated by the EU and Canada, the Comprehensive Economic and Trade Agreement, or CETA – in order to maintain a level of access to (but not membership in) the single market for goods and service. That access is cherished by the Conservative government even more than the defense of the financial services “passport.” British strategists say that they will try to start discussing that FTA as quickly as possible, preferably while exit negotiations are still ongoing, and the European negotiators are already on the same page, but acknowledge that there might be the need to have an interim agreement in place in the event negotiations for an FTA drag longer. ***
*** Behind closed doors, negotiators in Brussels have signaled their openness to both an interim agreement, as a bridge to a pragmatic post-Brexit arrangement on free trade with the UK. Officials point out that the EU has negotiated free trade deals for forty years, and the UK has a long tradition of pragmatism; and while both Brussels and London acknowledge the difficulty of doing so in the context of such a longstanding close trade relationship (it’s always harder to “scale back”), there isn’t any disruptive political animosity on either side. ***
**** A possible stumbling block in finalizing an FTA could be that the deal will be a so-called “mixed agreement” under EU law, and therefore will require ratification from national parliaments. As CETA’s ratification process recently showed, strong national opposition to an EU trade deal can eventually be managed, but it could cause delays in the final approval of an EU-UK deal, therefore making an interim agreement all the more crucial. ***
A Timeline for Negotiations
As we have said before, the expectation is for a final deal between the UK and the EU to be sealed before the European elections take place in spring 2019. That date puts a lot of pressure on negotiators – the number of formalities to be discussed makes the timeline for substantial negotiations even shorter – but both EU and UK officials appear to be optimistic about wrapping up talks before the deadline.
The UK Supreme Court judgment which is due at the end of January over the obligation to have a Parliament vote on the triggering of article 50 will not change anything in the government’s plans. May has a majority in the House and the Labour Party, even though its MPs are split, has signaled already its willingness to look at post-Brexit policy priorities.
What is fairly new, and quite decent news for all the doom and gloom of “hard Brexit,” is the two-year span might be for the most part used to start talks on the future relationship between the UK and the EU.
The issue has been a contentious one – and it will continue to be as France, but also the European commission, insist on dealing with exit first. Technically speaking, the UK is not authorized to negotiate an FTA with Brussels under the current WTO rules, but it will clearly have to do so. That should not be an issue as such a violation would need to be reported by the EU Customs Union, which is unlikely to happen.
It is not a given, but if the process works as planned – and there is optimism – substantive progress could be made over the two years from early 2017 with a deal to be signed soon after the 2019 Brexit date.
As for the “Great Repeal Bill,” for all the noise it created, it is as a matter of fact a pretty smart move that delays any change in EU-generated legislation until after Brexit, at which point the UK will be able to choose which EU laws (by then transformed into national law) to keep, which to amend and which to repeal, without having to deal with it right now, in the heat of the negotiations.
The Main Risk-point for an EU-UK FTA
But there is one concrete risk going forward for a UK-EU FTA, one dependent upon how the political landscape in Europe looks in 2020, in terms of leadership and in policies.
Indeed, as recently was the case with CETA, an EU-UK FTA will almost surely be qualified as “mixed,” falling under the joint jurisdiction of the EU Commission, Council, and national governments, and therefore will require ratification by national parliaments. A recent ECJ judgment over another EU trade agreement with Singapore, qualifying it as “mixed,” further points in that direction.
And it is not inconceivable to expect that, as happened with CETA, a Brexit FTA could well be challenged by a given member state in that forum, or in the worst case scenario, be put in serious jeopardy, if the current anti-trade sentiment becomes mainstream in EU member states’ political discourse.
On the specific issue of financial services, we have been told – by EU officials no less – that the importance attached to the so-called “passport” in the negotiations is overestimated. They point out that even without single market access, hedge funds based in the UK would continue to be able to do private placements directly within the EU, and in any case would only need to “establish” themselves, as is currently the case with Swiss entities, with the authorities of an EU member state.
EU officials also pointed out that up to 80% of EU transactions happen in London, and therefore some very specific work has to be done in this area. Officials acknowledge they will be called to think outside of the box – e.g., on equivalences, financial markets etc. – in order to avoid financial instability.
But eventually, they are optimistic that a special relationship with London is likely to be carved up, one with a perhaps much less dramatic change to the status quo than currently expected.