British Prime Minister Theresa May is due to present her updated vision for Brexit at a conference in Florence this coming Friday. Before that, she will hold a crucial cabinet meeting on Thursday in which some of the major internal Brexit-related knots will come to the front.
*** In her Florence speech, May is likely to publicly acknowledge that the UK is seeking a transition period, in order to avoid a “cliff edge.” While the British government seemed to be aiming for a two-year transition, we have been told May prefers a longer hiatus of three years, which would give her enough time to prepare for elections, to be held on their scheduled date, in 2022. ***
*** Whilst May will probably omit to say it in her speech, we understand from UK sources that the UK is aiming for a final deal that will look like an Association Agreement (i.e. EU/Ukraine) but that will not be called so for obvious political reasons. The EU usually operates with “models” for international agreement, but the UK government is determined to have its own unique, sui generis relationship. ***
*** Meanwhile, in Brussels, limited progress has been made in the negotiations on the so-called “divorce.” While the two parties made substantial headway on citizenship rights, both the divorce bill and the Irish border remain harder to crack. Specifically on the divorce bill, we understand the UK, while amenable to paying all its dues until 2019, would like to tie further contributions (until 2021) to actual progress in the negotiations over the future trade relationship with the EU. ***
A “Membership Without a Vote”
A transitional deal will keep as much as possible of the status quo between the UK and the EU. As the EU sees it, it should be tantamount to a “membership without a vote,” but such a deal would be a hard sell in the British Parliament: it would pass, mainly thanks to Labour votes, but would most likely break apart the Conservative Party.
While May is determined to be the Conservative Party leader up to and perhaps beyond 2022, it is not a mystery that both Foreign Secretary Boris Johnson and Chancellor of the Exchequer Philip Hammond are looking for openings, which means that May needs to keep her party all that much more under tight control.
So the British government will require at least a few token, favorable concessions that would signal a “change” in the relationship (don’t forget, “Brexit means Brexit”). These, in turn, would help in selling the transition politically as a true step forward.
On the plus side, concerns about EU citizens’ net migration to the UK have vastly subsided with numbers falling dramatically from 327,000 to 246,000 a year, which has lifted some of the pressure on May to fully “close the borders.
We also understand that third countries, with which the EU has trade deals, are overwhelmingly in favor of keeping the status quo during a transition period, which the British government seems oriented now to request. That would also give the UK more time to negotiate FTAs with such third countries later on, a task that itself will not be easy. During May’s visit to India, for instance, President Narendra Modi made it clear the Indian government would request a further 40,000 immigration visas for Indian citizens to the UK as a price for a bilateral FTA.
All in all, however, the British government is quite relieved by the UK’s domestic growth numbers which, even if not great, are still holding up. Ultimately, they say, Britain is an open, dynamic economy and will be able to adjust.
A Sui Generis Deal
Both the EU and the UK are well aware that a simple Free Trade Agreement would not be broad enough to cover all the desired fields of future cooperation between the two parties. EU sources maintain that especially for security and defense cooperation, something far deeper than a simple FTA will have to be devised.
The new deal will need to be more similar to a standard EU Association Agreement (as in with Ukraine), even though for political reasons it will not bear that name. UK officials maintain that they want to carve their own special relationship, and a prominent member of the EU Parliament acknowledged as much, even in reference to the thorny financial services industry discussions.
And in a strong signal for this new stage of negotiations May has – while offering up an opening 20 billion Euro bid to the EU – given instructions to UK negotiators to stick to their guns in refusing concessions on at least part of the so-called “Brexit bill.” While, we understand, she is ready to pay UK’s EU contributions up until 2019, plus a hefty sum to take care of current UK-EU officials’ pensions, once the transition period is over, and until the end of the current EU Multiannual Financial Framework (which runs until 2012), the UK will only make further payments, in semi-annual installments, if London sees consistent progress in trade negotiations.
EU sources nevertheless confirm that there has not been much progress in settling the criteria for determining the UK’s dues, even though they seem to ignore, or perhaps avoid to publicly acknowledge, the UK strategy with regard to this chapter. EU sources claim that “UK negotiators have argued against the merits of the EU position in a 3-hour presentation, rejecting that the UK would have any financial obligations to the EU after withdrawal. The process of finding common ground has thus not really begun yet.”
Progress in the Divorce Talks
And despite the press focus on the perceived lack of any progress in negotiations, some progress has been achieved in the main chapters of the so-called “divorce talks,” the ones the EU sees as a conditio sine qua non for future trade negotiations.
For one, both sides are closer to settling the status of EU citizens in Britain, and UK citizens in the EU, with some progress made specifically on social security coordination and healthcare. One of the remaining sticking points is the UK demand that the approximately 3 million EU citizen living in the UK apply for residency on an individual basis (even when members of the same family), while the EU side advocates a collective approach whereby EU citizens with rights in the UK are identified and their rights are recognized.
The British government is also prepared to accept the validity of the European Court of Justice’s previous jurisprudence regarding citizenship rights, which will likely be incorporated into UK law, but does not want ECJ jurisdiction ad infinitum.
And a suggestion has finally been made by the EU for solving the Northern Ireland issue, namely the extension of a customs union and the single market to Northern Ireland in order to avoid a hard border on land. EU officials acknowledge this is politically unacceptable for the UK side, but at least it is a start.
All in all, while negotiations will be complex and exhausting, chances that any of the two parties will walk away are minimal, and we believe chances of a disruptive cliff edge – a gap between the end of the transition period and the entry into force of the FTA – are very slim.