Brexit update: another year of tough talks

Post with image

With both sides having agreed on the cost of Brexit, the UK and the EU can move on to talks about even thornier issues including the details of the transition and a trade deal. The UK’s “nothing is agreed until everything is agreed” stance might not sit easily with the EU’s wish to set transition terms and only then work on a trade pact as the 2019 Brexit date looms.

Sufficient progress made in the first phase of Brexit negotiations

The UK government managed to find a form of words on the terms of the divorce from the EU that all the relevant parties could sign off on in December 2017, securing confirmation from EU politicians that “sufficient progress” had been made in the first phase of the Brexit negotiations and clearing the way for phase two.

The EU more or less got what it wanted – on citizens’ rights, on the divorce bill and on the Irish border. Discussions now move to the post-Brexit steady state and the transition deal that will bridge the gap between here and there.

Joint report December 2017

The joint report detailed the agreement so far. It should, however, be read as a statement of intent rather than as a binding agreement.

As the UK Brexit minister David Davis emphasised, the negotiations are still operating on the principle of “nothing is agreed until everything is agreed”.  That said, the UK government has accepted in principle to pay a close to EUR 50 billion divorce bill. The settlement was perhaps the least difficult part of the negotiations as the UK would have had to pay this sum anyway as a member of the EU and it has no implications for the UK’s fiscal position.

Yet, the fact that it took a significant amount of time to agree on such a relatively straightforward issue might be a sign of concern and raise questions about how quickly agreements on more complicated matters can be reached within the little time that remains.

Resolving the Irish question

The most contentious and interesting part of the report relates to the Irish question. In the post-Brexit world, if the UK leaves the EU’s Single Market and Custom Union, a hard border will be required between EU member Ireland and Northern Ireland. This runs against Northern Ireland’s 1998 constitutional settlement. While the issue remains unresolved, the UK made a few promises and laid out a number of options in the joint report.

It remains committed to protecting North-South cooperation and to its guarantee of avoiding a hard border as part of the overall EU-UK relationship. In the absence of agreed solutions, the UK will maintain full alignment with those Internal Market and the Customs Union rules which, now or in the future, support North-South cooperation, the all-island economy and the 1998 agreement.

One may interpret this as the UK’s nod in the direction of a decidedly soft Brexit. But if the UK insists on leaving the Single Market and Custom Union, the Irish question will likely haunt the next phase of Brexit negotiations.

What happens next in the Brexit talks?

Work will now begin on translating the joint report into a binding agreement with less than a year to agree the terms of the transition period and future trade relationships. These will have to be sent to the European and UK parliaments as well as the European Council for final approval.

If 2017 seemed to be a tough year for the negotiations, 2018 will likely be as, if not more, difficult.  Some of the most contentious decisions lie ahead.

In terms of timeline, on 29/01/18 the EU adopted its negotiation guidelines for the transition period, proposing it run from March 2019 to December 2020, with formal talks to start in February. The EU is expected to produce its guidelines on the long-term EU/UK trade framework in March.

Transition deal: disagreements remain

The EU’s position is that the transition period should look more like two years of continued EU membership for the UK, where the UK has to accept all EU rules but loses its voting right on EU issues.

The UK, however, wants more bespoke transition terms. For example, it does not want to accept new EU rules and regulations during transition and it wants to leave the Common Fisheries Policy as soon as the transition starts.

It is unclear whether the UK will quickly accept the EU’s transition terms or stand firm on its demands. The sequencing of the talks, where guidelines on the future trade framework will be produced only after transition terms are agreed, will likely give the EU negotiating leverage, potentially forcing the UK to compromise and accept the EU’s terms to move forward to trade talks within the extremely compressed negotiation timetable.

Trade agreement: sooner for the UK, EU has more time

Regarding the trade deal, while minister Davis argued recently that a full trade deal can be achieved at around Brexit in March 2019, the EU is aiming at “identifying an overall understanding of the framework for the future relationship” by Brexit day.

Of course, it would be in the UK’s benefit to conclude the trade agreement sooner rather than later.  The UK has more negotiating leverage (in the form of money and avoidance of a “no deal” outcome) during the Article 50 process.  It is also necessary to gain as much visibility as possible on the future EU-UK trade relationship for the UK Parliament to vote to authorise the “withdrawal agreement” by the end of the Article 50 period.

However, given the complexity of trade deal negotiations, there is simply not enough time left in the Article 50 period.  The EU’s position of agreeing to a framework that sets the broad direction for future detailed trade deal negotiations seems more realistic.

 

For previous posts on Brexit, click here.

Jenny Yiu

Co-Head Inflation, CFA

Leave a reply

Your email adress will not be published. Required fields are marked*