Brexit – the end of the beginning

Following the Brexit referendum, there was a clear consensus in the UK government that no progress would be made in the withdrawal negotiations until November or December 2017. On this they have proved to be correct but for entirely the wrong reasons. British ministers felt then that Germany would not be paying attention to the negotiations until the results of their September elections and subsequent coalition discussions were settled. At that point the UK would meet with Mrs Merkel, sort out the main outline of an agreed deal based upon the pressure from German industry not wishing to lose a major export market. Germany would then tell the rest of the EU how it was all going to work out, and Europe would fall into line.
Instead the EU27 have appointed a negotiating team and given them a clear mandate. They have made it clear that the national governments would not get involved in negotiating with the UK. The wishes of German business leaders have been prioritised below that of the interests of both Germany and the EU as a whole. Mrs Merkel has given no indication of wishing to get involved in the Brexit talks.
Thus, until now the UK has barely proposed anything about what they wish to see as the outcome of the talks and have been content to let the EU set out their proposals. This is because of the divisions within the Conservative Party, which means that any public position of what the UK wants will incur the wrath of one half of the Party. The UK Cabinet has not yet even discussed the outlines of a trade deal they would like to secure, such is the divisiveness that any declared position will cause.
However, a critical point in the talks has now been reached. If at their December meeting, the EU27 decide that insufficient progress has been made in the Phase 1 discussions on UK payments, the customs border in Northern Ireland and the future rights of EU Citizens currently living in the UK, then the earliest point at which talks could start to discuss a transition phase and any future trade deal in Phase 2 would be March. Given that both sides have indicated that talks will need to end by November 2018 in order to seek all the national approvals required, this does not leave enough time to agree a meaningful settlement. December is the critical point in the negotiations, but not because there should be a new German government in place.
It is however, possible to see what would make an acceptable deal for the EU27, and in truth, they may just present it to the UK on a take it or leave it basis. It consists of:
a) A transition period of about two years ending between December 31 2020, the current EU budget round, and June 30 2021, the end of the current term of the European Parliament. The UK would have left the EU in March 2019 and have no voting power but would remain in the Single Market and Customs Union and be subject to all EU regulation and the ECJ.
b) Payment by the UK of a sum larger than €40bn, and probably nearer to €50bn. The UK has offered €20bn which would cover the existing level of contributions for the two year transition period. The UK is likely to agree to a further €10bn as its share of the pension deficit of EU civil servants, but payments beyond that are difficult to justify domestically unless presented as the costs of getting a deal. The EU sees this as settling the accounts on departure, the UK sees this as the price of getting a trade deal.
c) No hard border on the island of Ireland (this is now officially a red line for each of the Irish Republic, Northern Ireland and the UK). However for the EU a hard border must exist somewhere between the island and the mainland. This is unacceptable to the DUP, on whom the Conservative Party depends for its majority in Parliament. It is currently difficult to see how this can be achieved absent a highly creative solution that has not yet been aired.
d) An agreement on the rights of EU citizens living in the UK. The UK offer is to treat them equivalently to UK citizens, however this in fact removes rights from them that they hold today that UK citizens do not. If the UK insists on not improving their offer on this, then the EU27 may well accept this reluctantly, but be less prepared to concede on other issues.
It should be noted that the value of a transition deal falls quickly if it is not agreed by early 2018 – this is because companies will be forced into taking measures to cope with a Brexit in 2019 with no transition deal.
Following an agreement along the lines set out, negotiations about the future trade deal would then begin. Again, the EU position on this can now be clearly discerned.
The EU would be happy to offer a Norway-style arrangement but this requires the UK to accept free movement of workers, continued payments to the EU and acceptance of the authority of the ECJ, all three are UK red lines and unacceptable to the government.
Alternatively, they would agree to a trade deal similar to the Free Trade Agreement just signed with Canada. A Canada-like deal would offer zero tariffs on goods trade but nothing at all on services, particularly financial services. This is very acceptable to the EU, and it meets the minimum UK target of both Conservative and Labour parties of “tariff-free access to the single market”. However, it brings no benefit to the UK services sector, the strongest part of the UK economy, and in truth paying €40bn to land such a deal would be hard for many in the UK to approve.
There is little desire, or need, for the EU to agree to anything else – in the end it is likely to be a “take it or leave it” offer to the UK. The UK is left to choose between a set of very unappealing economic options, as the price for its political desire to “take back control”.