Thursday, June 07, 2018

A pragmatic plan for Brexit

Published on CapX 
There really only are two different ways of implementing Brexit. The first is for the UK to simply leave. No deal, no negotiations.
That this would be a costly option should be obvious. One estimate puts that  cost at half a million jobs in Britain and 1.2 million in mainland Europe. Brexiteers who claim this would be Britain’s best bet make their case by expressing hope that it may convince the EU to grant more favorable terms. That is, at best, a risky strategy. At worst it would be catastrophic.
The second option is to negotiate Brexit. On this approach there really aren’t as many workable options as the public debate would have you believe.
Staying in the single market is unrealistic as it would degrade Britain to a “vassal state”. Staying in a common customs union would deprive Britain of freedom to trade and wouldn’t avoid disruption at the border. The debate badly needs an injection of common sense.
That is where Open Europe’s new proposal for a negotiated, pragmatic Brexit comes in. As I’ll explain, it is an outcome which Remainers, Brexiteers and the EU27 should find to be an acceptable compromise.
In this proposition for the future EU-UK economic relationship, we look at the key challenge as to how secure market access for both British and European companies. Our proposal involves close alignment with the EU on goods but divergence on services.
Market access and regulation for goods
Many companies outside of the EU choose to adopt EU goods regulations. Therefore, it makes sense for Britain to remain close to the EU in terms of goods regulations. Under the Open Europe proposal, Britain would take over EU rules voluntarily, as Switzerland does, but not automatically, as Norway does.
When the EU came up with its costly REACH chemical regulation, they did not automatically apply to Switzerland. The Swiss have the right to say “no”, at the risk of losing a degree of market access, and we think this model would fit Britain well when it comes to goods trade.
Why would Brexiteers agree to this? Surely it entails a loss of sovereignty?
Hardline Brexiteers will be less than enthusiastic. They will surely claim that goods trade is extremely important for the UK economy, so to give up sovereignty here isn’t reasonable.
That’s not quite right. Goods only accounts for a small part of the British economy. Eighty per cent of economic activity in Britain is services.
These Brexiteers have remarked that smaller companies that don’t export surely shouldn’t be hit by heavy EU regulations and should instead be free to enjoy the benefits of light touch UK regulations.
To deal with this objection, we suggest that the UK only really follows EU goods regulations in highly-regulated sectors. In less-regulated sectors, we think an enhanced mutual recognition agreement could do the trick.
Sure, some sovereignty is traded, and we don’t enjoy the full force of regulatory competition. But that is a tradeoff for something that is very valuable indeed: access to the EU market. Given that half of UK goods exports are directed to the EU market, this makes sense.
Would the EU agree to this? Brussels would surely enjoy imposing rules on the UK. More seriously, many of the manufacturing companies that are based in the UK and that are vulnerable to disruption of their supply chains, are European companies.
Nevertheless, the EU isn’t biting yet. When Britain came up with a version of this – then dubbed “the three baskets approach” — the Commission dismissed it, warning that this is “not compatible with the principles in the [European Council] guidelines.” It really wants Britain to take over all of its regulations, also those on services, despite the fact that in the past it has compromised on this with Switzerland and that there is so much “pick and choose” in the whole operating system of the EU it is simply odd to hear EU officials proclaim that some flexibility would pose a “risk for integrity and distortions to proper functioning of [the] internal market”.
Has the German refusal to open up its services market somehow damaged goods trade between Italy and Spain? Hardly. Yet many pundits, often out of hostility to Brexit, swallow the Commission’s questionable logic without thinking it through.
Market access and regulation for services
When it comes to services, Open Europe’s proposal basically assumes it will be very hard for Britain to agree to the EU’s “market access in return for taking over all our rules”. Therefore, we think it makes more sense for the UK to accept reality and try to limit the disruption from losing a degree of services market access. The latter is possible by trying to conclude a deal that goes further than the existing equivalence regime for financial services.
Ideally, a wide-ranging mutual recognition agreement for financial services should be agreed, or failing that, an expanded equivalence. In everyday language: when a financial or non-financial product has been regulated or supervised by the UK, the EU should deem it trustworthy with as little hassle as possible, and vice versa.
Why would remainers agree with this? One thing prevails here: “opportunity cost”. Eighty per cent of the UK economy is composed of services and only about a third of Britain’s services exports go to the EU27. The global services market is expected to be growing a lot in the next few decades. However protectionist the EU may be, the EU market is very unlikely to be greater than the global opportunities offered by boosting UK services as a result of being able to set one’s own regulations.
In selected areas where losing access to the EU’s services market really is a very big deal, as for example when it comes to financial clearing, the EU, which at the moment permits US clearing activity, can be expected to be flexible.
Restricting UK clearing houses would fragment the clearing market and badly affect finance opportunities for companies in mainland Europe. More in general, if the EU were to cut off access to the world’s leading financial centre which happens to be at its own doorstep, this would hit EU consumers, but then it’s not certain of course how much the EU realises this.
What’s more: the EU’s services market hasn’t been opened up sufficiently and that is a bad thing. In a Brexit context, it is a good thing, as it means that the damage from losing the EU’s financial passport is smaller than assumed.
As we’ve made clear in an earlier research paper, the EU’s financial passport is mostly important for banks. It’s less vital for asset management and least of all for insurance firms.
Customs
You wouldn’t know it given the energy devoted to the customs union debate, but customs checks represent only a fraction of procedures that take place at a border. Most of these are regulatory controls on goods, or checks on agriculture and food. Our solution for goods would thereby also soften border crossings.
Unless one thinks it’s sustainable for Britain to let the EU negotiate market access to the UK market when discussing trade deals with China, India or one day even Russia, while Britain would then need to get permission from these countries to get the access the EU negotiated to their market, it is a no-brainer for Britain to leave the customs union.
That’s to say: at least at some point, given that the challenges of working out customs formalities may well justify that the UK remains somewhat longer under the EU’s external tariff regime. Britain can then leave the common customs arrangement with the EU on the day deals concluded with Australia, India and hopefully the US enter into force, when it will then also be able to scrap tariffs to benefit UK consumers.
Not even Norway, the non-EU country that is institutionally closest to it, has joined a common customs union with the EU. In order to deal with the Irish border and other challenges, we pointat the many precedents in the world that serve to minimise friction at the border – without denying that there is likely to be more friction than at the moment.
Surely, the EU may itself realise that it is better to conclude a sustainable arrangement with Britain rather than one which will come under fire. What we advocate with Open Europe is that the EU and Britain conclude an extensive Free Trade Agreement including zero-tariff and zero-quota trade.
EU regulations that have nothing to do with trade
It is important that Britain makes sure the EU doesn’t once again pull off its trick of selling its many regulations that sometimes have little do with trade as measures relating to open up trade. We think regulation covering employment, taxation and the environment should not be subject to intervention from the EU.
Brussels needn’t fear that Britain will suddenly engage in a regulatory “race to the bottom”. The strength of Jeremy Corbyn should be enough proof that Britain isn’t as “neoliberal” as sometimes claimed.
Surely the UK shouldn’t take over all kind of non-trade related EU rules and, who knows, that may lead to questioning how necessary those rules really are.
Obviously, the EU’s plans for “level playing field agreements” carry a risk in this regard, so here, Britain must issue a strong and firm message: thanks but no thanks.

Wednesday, May 23, 2018

Switzerland offers some valuable lessons for Brexit

Published on CapX
It’s hard to ignore Switzerland’s experience when looking at Brexit.
Here we have another country that isn’t a member of the European Union, the single market or a customs union. It’s also a country that trades heavily with the EU. And it has an arrangement that avoids passport checks at its border. Last but not least, its decision not to join the internal market was met with grave warnings from its business community that trade would be disrupted.
So where is Switzerland’s experience with the EU instructive for Brexit Britain and where does it diverge?
Similarities between Brexit Britain and Switzerland
1. Switzerland isn’t in the single market
In 1992, the Swiss voted against joining the European Economic Area or single market, which was then about to be founded. In return for full access to the single market, non-EU countries like Norway and Iceland agreed to accept all the rules of the bloc without being able to vote on them.
There have been some numbers put about on how much of a “rule-taker” these countries really are. The only figure based on official data has come from the Icelandic government, which recently declared that Iceland had only taken on 13 percent of the internal market’s regulations. That’s twice as high as the figure cited back in 2006, but may still sound surprisingly low.
The explanation is simple: Iceland and Norway don’t have to implement single market rules when they aren’t relevant to them. For instance, they both enjoy an exemption from EU rules on beehives. The EEA is really a constant negotiation between the EU and the non-EU members of the single market on whether EU rules are relevant.
At the same time, Norway has just given in and agreed to adopt the EU’s updated “Energy Package” regulations – an indication that the haggling can only go so far. The Swiss voted against joining the EEA out of concerns over national sovereignty, and not a lot of explanation should be needed that this isn’t a sustainable place for Brexit Britain, even if it has more or less accepted to be a “vassal state” during the transition period until the end of 2020.
For Switzerland, there is another, more specific reason that automatically adopting the EU’s rules wouldn’t be acceptable. As the Swiss Finance Minister, Ueli Maurer, noted earlier this year, “to completely accept EU law would damage [the Swiss] economy”, as it would threaten the existing regulatory divergence between the country’s 26 cantons.
2. Switzerland isn’t in a customs union with the EU
The Swiss have their own independent trade policy and can set higher or lower tariffs on imports. They have a trade deal with China, unlike the EU. This does mean when goods cross the border they have to be inspected, which means delays and bureaucracy, particularly for small companies.
Still, only about two per cent of road freight is physically inspected, which is about the same as the number of containers entering Europe’s second biggest port, Antwerp.
The Swiss controls are often carried out away from the border. Small traders are often not checked and technology is increasingly being used to reduce the administrative burden. Indeed, the head of Swiss customs, Christian Bock, has told MPs that he thinks a soft border on the island of Ireland could be “possible”.
To make this happen, he suggested “common patrols between the United Kingdom and Republic of Ireland”, an intelligence-led strategy to ensure safety of cross-border trade, controls away from the border, a pre-qualification system for trusted traders, and a streamlined system to manage “low-risk” or regular trade. However it still isn’t entirely clear how much “physical infrastructure” the British government, Ireland and the EU are willing to accept, and there are a host of political and cultural sensitivities to bear in mind.
3. Switzerland has a passport-free travel arrangement with the countries it shares a border with
The Swiss are a member of the Schengen Zone, which allows travel without passport checks as a general principle, although in recent years the European Commission had to allow a lot of flexibility in the implementation of this, due to the refugee crisis. The Swiss backed Schengen in a 2005 referendum with a solid majority of 54.6 %.
In Britain too there is firm support for the Common Travel Area with the Irish Republic, which was established in 1923, long before either country joined the EU. It’s important not to confuse the right to settle somewhere, called “freedom of movement” in EU lingo, with the right to cross a border without being checked. The former has been subject to heated political debates, both in Switzerland and the UK.
4. Cross-border traffic between Switzerland and the EU is much heavier than between Northern Ireland and the Republic
Roughly 30,000 people cross the U.K.-Irish border every day, while the number of people crossing the Swiss-EU border is more than 300.000.  There is also more than twenty times as much cross-border shopping in Switzerland compared to the EU’s future border in Ireland.
As for trade, one can safely say that EU-Swiss commerce is of a different scale and complexity to that between Northern Ireland the Republic.   The Irish border sees only about 5 billion euros worth of trade a  year, a figure dwarfed by the 184bn euros between Switzerland and its four EU neighbours.
Swiss authorities open more than 30.000 smuggling cases per year. In Northern Ireland this issue isn’t entirely absent either, especially when it comes to fuel laundering and tobacco smuggling. Of course, the key difference here is the history of the Troubles, but as much as one needs to keep this in mind, it is also worth looking at certain precedents that can be helpful to provide solutions.
5. Swiss-EU negotiations got off to a bad start
The EU leadership at the time wasn’t exactly delighted to see the Swiss reject their preferred model for involving non-EU member states economically, especially just after the Danes had just rejected the Maastricht Treaty and the French had come close to doing so.
It took the Swiss and the EU at least five years – from 1994 to 1999 – to work out a deal, whereby the Swiss basically agreed to voluntarily take over EU regulations in return for market access. For the Swiss, it was important this happened “voluntarily”, so as to respect the referendum result, while for the EU it was important to have some restrictions to avoid undermining countries like Norway which had agreed to automatically accept EU rules in return for full access.
6. The Swiss government was also split on ideological lines
Even after their deal with the EU was concluded, severe ideological differences persisted. These worsened after the Swiss narrowly voted against freedom of movement in 2014, a decision which was all but ignored. Regarding an updated relationship with the EU, the seven cabinet members from the four parties that compose the Swiss government only managed to agree in March 2018 on a unified platform for talks, “a major step forward after their squabbling hampered years of negotiations and frustrated the EU”, as Reuters put it.
In a nutshell: internal divisions and some healthy political discussions shouldn’t necessarily prevent a deal with the European Union.
Areas of difference
1. Switzerland accepts freedom of movement
The British government’s insistence that freedom of movement must end after Brexit will of course make it harder to obtain concessions in other areas. Given the importance of workers from Southern and Eastern Europe for the UK economy we might expect a degree of latitude here. Perhaps maximum quota per EU member state, or another arrangement that can reassure citizens there is sufficient control.
It’s likely the final deal will contain so-called “guillotine clauses” – explicit or implicit – meaning that blowing up one part of the deal scuppers the whole thing. This was the issue with the Swiss rejecting freedom of movement in 2014: the Swiss Parliament determined that this wasn’t worth sacrificing the whole arrangement with the EU, and it decided to ignore the referendum – apart from deciding some minor policy changes – and continue with business as usual.
2. Switzerland has a much smaller financial sector than the UK
If the Swiss experience is anything to go by, the UK will be involved in continuous negotiations and adaptation of any deal on financial services long after it has left the EU. Switzerland’s weak access to EU financial service markets would be a major issue if the Swiss deal were to be cut and pasted for Britain.
If it sticks to its so-called “three baskets approach”, the UK government is likely to suggest voluntarily shadowing EU regulations for goods, so as not to disrupt supply chains, while preferring regulatory divergence when it comes to services, which account for 80% of the British economy. The UK government would try to deal with that divergence by convincing the EU that its own regulations can be considered “equivalent” to theirs. Equivalence isn’t a perfect instrument to safeguard market access, as it’s shaky, dependent on the EU’s whims and not applicable to every kind of EU regulation – but it’s the best option out there. In its dealings with Switzerland, the EU has not shied away from aggressive negotiation tactics. For example, it decided to only grant Swiss stock exchanges access to EU markets for only one year, something which was protested by Germany, Austria the UK and 8 other member states.
The lesson here is that it will be a matter of trade-offs: is the EU’s market important enough to bend regulations? For the EU, the question will be if it will be wise enough to understand that cutting off UK financial services has the potential to damage both consumer choice and financial stability. there. In any case: continuous negotiations over market access and coordinating regulation can be expected.
3.The lingering hope of EU membership
Only six months before the Swiss held their referendum in 1992, the Swiss government had submitted an application to join the EU, which they only finally withdrew before the Brexit vote in 2016. While the Swiss public emphatically rejected EU membership in a referendum in 2000, during the trade negotiations in the 1990s there was still a lingering hope that the country would one day join. For all the wishful thinking of Remainers, that dimension isn’t really there in the Brexit negotiations. This may make the EU less flexible than it was with Switzerland.
Advantages for the UK
1.The UK has a much bigger economy
Switzerland is a very wealthy country, but it doesn’t have the kind of economic clout the UK enjoys. Britain’s economy is the same size as the 19 smallest EU member states put together, something many in the EU27 still do not fully appreciate.
2. The UK trades less with the EU than Switzerland does
Switzerland exports more than half of its goods to the EU – compared to only 43% for Britain, and almost three quarters of Swiss imports come from the EU, versus 54% for Britain. Switzerland, in turn, is an important trading partner of the EU, occupying fourth place after the United States, China and Russia. If you thought the British were desperate to keep good trading links with the EU, look at the Swiss.
3. The UK is a geostrategic and security player
Perhaps even more than its economy, its weight as a security player is a key difference between Britain and Switzerland. Britain is a nuclear power which France is eager to continue working with after Brexit. Cooperating with its security services is seen as paramount to counter Islamist terror.
4. Switzerland shows you can ‘have your cake and eat it’
After the 1992 referendum, Jean-Pascal Delamuraz, a member of the Swiss government, warned that that European economic integration would go ahead anyway and that Switzerland’s “defection” would result in discrimination.  In the 25 years since, Swiss-EU trade has tripled. Key to this was flexibility on both sides.
Swiss political analyst Dieter Freiburghaus described it as follows: “Switzerland was only interested in the economic aspect of European integration, and that we got: we got access to the internal market. So our economy had a lot of gains. We have the cake and we eat it… at the moment.”
The Swiss agreed to some restrictions in market access, especially on financial services, where they have refused to adopt EU rules. The EU in turn agreed to grant market access for areas where the Swiss were happy to align or even go further than EU regulations.
At the moment, the EU is refusing to give Britain market access for goods if it only aligns its regulations on goods. Instead the EU insists that market access means alignment on both goods and services, without “cherry-picking” – even if that’s exactly what the Swiss do.
The EU’s refusal to countenance this type of solution is clearly unreasonable and also makes a deal for the Irish border harder. A report prepared for the Swedish government has proposed Swiss-style bilateral agreements for different sectors of the economy as a possible way to deal with Brexit. It looks like it is becoming ever harder to avoid the Swiss precedent – despite the differences – when dealing with Brexit.

Tuesday, April 24, 2018

Tackling the myths about Brexit and the customs union

Published on CapX
Wild theories are doing the rounds about whether Britain should or should not join a permanent customs union with the EU after Brexit.
Unsurprisingly, Remain supporters have leapt at the idea as a way to soften Brexit. Some even hope that it would constitute such a bad deal that it might just lead to a reversal of Brexit.
Downing Street yesterday ruled out Britain either remaining in the customs union or joining a future customs union with the EU. Nonetheless, the spectre of the customs union continues to loom large. And there are a number of dangerous myths that are badly confusing matters.
Myth number one: Britain joining a customs union with the EU would solve the Irish border issue
The customs union issue refuses to go away because there still isn’t agreement on how to prevent a hard border on the island of Ireland after Brexit. But a customs union would not be sufficient to solve the issue.
If Britain were to remain in a customs union with the EU, there wouldn’t be any tariffs charged on goods travelling across the Irish border. But, given that Britain would have left the single market. there would be divergence in terms of regulation. As a result, goods would be subject to checks at the border. (That is one of the reasons why there are checks on the border with the EU and Turkey, which has a partial customs union with the EU.)
One could, of course, argue that the easy solution to all of this is for Britain to join the single market too. That would in effect deliver undisrupted trade, and many Remainers probably wouldn’t mind. But, as I explain below, that would be even more unsustainable than merely staying in the customs union.
Myth number two: Britain joining a customs union would at least keep the status quo for customs and trade
This simply isn’t the case. At the moment, as an EU member state, Britain can veto trade deals that the EU undertakes. That would no longer be possible if Britain was a in a common customs union with the EU. In such a scenario, Britain wouldn’t be able to block an EU initiative to, for example, start trade talks with Russia. Far from maintaining the status quo, such a scenario would effectively leave Britain powerless over its own trade policy.
Myth number three: Britain joining a customs union with the EU is a sustainable arrangement and would “soften” Brexit
Because single market membership seems to be beyond the realm of what is politically possible after the referendum, a customs union has emerged as the primary tool to “soften” Brexit.
While limiting the disruption the process will cause to both citizens and business of course makes sense, customs union membership would dramatically reduce British sovereignty.
Britain wouldn’t be able to veto and therefore influence EU trade negotiations, for example with China, as the EU would effectively be negotiating to what extent China would get access to the UK market. Moreover, China would not be obliged to grant Britain whatever access the EU would gain to China’s market.  Is there anyone who seriously thinks this is even remotely sustainable, even if it were enshrined in the British Withdrawal Agreement?
It isn’t hard to spot the recipe for trouble. Short of some farfetched strategy that this may convince Britain to reverse Brexit altogether, it would mean a lot of time and energy intended to soften Brexit would have been wasted.
More realistic solutions
Those who genuinely want to soften Brexit, should look at more realistic solutions. Switzerland, for example, isn’t a member of either the single market or a common customs union, while it has a lot of trade with the EU and a lot more daily cross-border travel.
Conservative MEP Daniel Hannan has been a vocal supporter of looking at the Swiss precedent, pointing out that “the Swiss border is crossed by around 2.4million people every day — a colossal figure for a country with a population of just 8.4million… Switzerland also manages to sell more than five times as much per head to the EU as Britain does.”
He has received quite a bit of pushback for this, but at least the “Swiss precedent”, which has been ignored for a long time, is now getting more attention.
There are some very decent reasons why the Swiss-EU border arrangements could only be part of the answer to Britain’s predicament. Some “physical infrastructure” is needed and there are some petty import restrictions for tourists as well as delays and lots of bureaucracy which small companies in particular find difficult to cope with. Even at the border between the EU and Norway, whose single market membership should make things smoother, trucks would face an average of 4 minutes delay to cross the border.
Nobody claims that there are no challenges in finding a solution. A border will bring some disruption. But there are some precedents to smoothen things out and make it work. In Switzerland, the challenges may be bigger than in Ireland, as there is ten times as much traffic as between Ireland and Northern Ireland.
Christian Bock, the head of the Swiss customs service, says that his experience suggests an “invisible border” in Ireland after Brexit is possible. Speaking to the UK Parliament, he has described how there are customs “control points” at locations away from the border, also stating that only about 2 per cent of consignments crossing the Swiss border have to be subject to physical checks.
That said, Britain will be in a common customs union with the EU during the transition period after Brexit and it may well be the case that Britain will stay in it for longer than until the end of 2020, as planned, even if that poses some legal problems.
This because a number of issues need to be solved before Britain can leave. Not only is there the Irish border, there are also the procedures at the Channel ports. Furthermore, what would be the point of Britain leaving the common customs union if no new trade deals have been agreed yet by the end of 2020?
It’s difficult to predict how long it will take Britain to agree trade deals, safeguard the trade access it has enjoyed to third countries as a result of trade deals negotiated by the EU and sort out customs procedures at its borders.
What we know without doubt is that remaining in a common customs union with the EU permanently is certain to reopen negotiations on the UK’s status after Brexit, due to the grave implications this would have for British sovereignty. That is surely also not something the EU would like.
And so rather than obsessing over the customs union, those on both sides of the channel who warn of the perils of a hard Brexit should focus on serious, realistic and sustainable ways of softening Brexit.

Thursday, April 19, 2018

The Selmayr affair risks further damage to Juncker’s legacy

Published on Open Europe's blog 

The European parliament yesterday backed a motion stating Martin Selmayr's appointment as European Commission Secretary-General "could be viewed as a coup-like action." Open Europe's Pieter Cleppe examines the political fallout of this episode for the EU.

A large majority of the European Parliament have condemned the controversial appointment of Martin Selmayr as EU Commission secretary-general in a resolution, which stated that this “could be viewed as a coup-like action.”
The Parliament has asked the Commission to adopt new rules on appointments by the end of the year, so “that the best candidates are selected within a framework of maximum transparency and equal opportunities.” They then plan to “reassess” Selmayr’s appointment under the new rules.
The response of the European Commission came less than half an hour later, with Commissioner Oettinger stating that it won’t reassess his appointment, claiming that it “cannot be revoked,” that everything happened legally and it “[did not] go against the existing practice followed over many years.”
Furthermore, according to a former Belgian judge in the European Court of Justice, Franklin Dehousse, the appointment is “legally shaky.” He argues that the episode will “destabilize the whole institution,” writing that “for the first time since 1952, the appointment of the secretary-general is both legally shaky and widely contested.”
Although there have been calls for Selmayr to step down, a majority of MEPs voted against this. An official of the European People’s Party, to which Selmayr belongs on behalf of his membership of the Belgian Christian Democrats, said: “We are not going to create a political crisis for the appointment of a high official.” This of course also relates to the fact that Commission President Jean-Claude Juncker has linked his own fate with that of Selmayr and has quite aggressively forced his EU Commissioners to toe the line here. Interestingly, MEPs also voted against reassessing the European Parliament’s own – troublesome – ways of appointing their own top officials.
Assuming that Selmayr continues to refuse to go, the episode risks being seen as more proof that the EU is going the ‘wrong way’ where sharp practice goes unchecked, even at the highest levels. It also underscores that the European Parliament – recently described by President Juncker as “ridiculous” – is mainly a motor and not a check on the EU Commission machine.
This affair also risks further tarnishing Juncker’s already troubled legacy, which includes presiding over Brexit and a severe breakdown of relations with Central and Eastern Europe.
Nonetheless, it seems that the Commission leadership have made their choice: Selmayr stays on.

Wednesday, March 21, 2018

The UK’s wins and losses in the Brexit transition deal

Published on CapX
On Monday, Britain and the EU announced a lot of progress on the terms of the British exit from the European Union, specifically when it comes to the so-called “transition stage” which will last until January 1st 2021, and during which Britain will take over EU rules in order to keep access to the EU single market.
Here’s an overview of some “wins” and “defeats” for the UK government.
Some UK “wins”
More control over trade policy during the transition
Britain will be able to negotiate and sign trade deals with third countries during those 21 months, although deals cannot enter into force until after the transition, unless approved by the EU.
EU negotiator Michel Barnier has however made clear that the UK Trade Secretary Liam Fox will probably need to focus more on keeping the trade access Britain enjoys to third countries thanks to trade deals negotiated by the EU, as he said: “They are leaving 750 international agreements. 750! The UK has work to do to reestablish relations with all those partners.”
Also, here, however, the British have obtained a concession. The EU has been convinced to adopt the British strategy of telling non-EU countries to treat the UK as a Member State during the transition period. Whether Mexico and South Korea will be happy to do so is another question, but one would suspect they won’t create a big fuss. They’ll probably save that for later, at the point when Britain would no longer enjoy full access to the EU’s single market.
Out of EU foreign policy, right to opt in to new justice and security measures
According to UK officials, the EU has listened to its concerns by fulfilling its desire to be opted out from EU foreign policy decisions during the transition phase while giving it during that time the right to opt in to new justice and security measures. In times of terrorism, and with a UK Prime Minister who has always been very keen on EU security cooperation during her time as Home Secretary, this is no surprise.
A pledge from both sides to act in “good faith” with a joint committee to oversee the agreement
The main concern for the UK government obviously is for Britain not to be called a “vassal state” during this time when it won’t be able to vote on the EU regulations it will be bound to apply. To make this bitter pill more acceptable, the EU has conceded to insert a promise that both sides will act “in full mutual respect and good faith” and “assist each other in carrying out tasks which flow from this Agreement”. Given that the transition period isn’t all that long and because both sides will be negotiating a new trade relationship at the same time, one shouldn’t expect anything less, but it’s a good idea to remind everyone of the obvious by including it in the withdrawal agreement.
This is no “right to delay rules”, as enjoyed by Norway, that other non-EU country that is in a “rule-taker” status in order to keep full access to the EU’s single market. In a previous commentone month ago, I’ve made clear how Britain is missing out on some of the perks enjoyed by Norway. Some of that has been mended. New is that the EU has also included a provision – in article 123(7) – for Britain to be consulted on newly proposed EU laws during the transition period, while a joint committee will oversee application of the arrangement. These are elements reminiscent of Norway’s deal. For the Norwegians, it is very important to be able to “shape” decisions, short of having the right to vote.
Fundamentally, the question will be how long the transition stage will turn out to be. There are no provisions to extend it, but apparently, many European governments think the duration can be reviewed. Legally it’s possible to extend it simply by having EU leaders and the UK government sign a Treaty to extend it, while enabling the trade aspects to enter into force provisionally, similar to the procedure of the EU’s agreement with Ukraine and Canada. Parliamentary ratification can then follow later. Without any doubt, one can and should raise some legal questions if this method were to be applied, but the urgency and importance of it all may well make this happen. If the “transition” is extended, the UK will likely ask for more sovereignty, as this would be decided right before the 2022 general election. Then, on the other hand, it should be possible to agree a lot. The UK’s pragmatic vision for its future relationship with the EU should stand a good chance of being accepted, as I’ve written.
Some UK “defeats”
Free movement
The UK government wanted to restrict freedom of movement from the point it will have legally left the EU, but it has backed down on this one. Therefore, freedom of movement will more or lesscontinue to apply during the transition, meaning that any EU citizen who wants to move to Britain in order to reside there for the rest of his or her life has time to make such a decision until the end of 2020.
The question is whether we’ll see a last-minute “rush” into Britain. Perhaps it will depend on what the UK’s future immigration laws look like. Given the fact that the UK public isn’t very keen on excessive migration restrictions after Brexit, we shouldn’t expect major restrictions. According to Open Europe polling, 56 per cent of British agreed with the idea of “controlled migration” while only 36 per cent supported simply “reducing the numbers of people coming into the UK”. Those British economic sectors dependent on EU workers will be happy to hear it. The fact that the UK government hasn’t played it hard here with the EU should also be an indication that when the UK has regained control over immigration policy towards EU citizens, it will remain a welcoming destination.
Fisheries policy
When it comes to the annual fishing negotiations on how much EU countries’ fishermen can catch in each other’s waters, the UK has accepted that its share of the total allowable catches will remain the same during the transition period.
David Davis said that: “Through 2020 we will be negotiating fishing opportunities as an independent coastal state, deciding who can access our waters and on what terms.” That doesn’t satisfy Scottish politicians or the Scottish Fishermen’s Federation, which stated that “we will leave the EU and leave the Common Fisheries Policy, but hand back sovereignty over our seas a few seconds later” as “our fishing communities’ fortunes will still be subject to the whim and largesse of the EU for another two years.”
Under the transition arrangement, Britain will only have the right to be consulted, not to vote during the annual haggling on fishing quotas. France has been pushing for the EU to increase its share relative to Britain, so the UK government has negotiated that the British share of “total catch” will remain unchanged during two years after EU exit.
The idea is now to link any changes in fishing quotas to the future EU-UK trade arrangement. Here, Britain has a strong hand, as European fishermen would catch four times the value of the catch allowed for the British fleet in British waters, but then UK fishermen catch a lot more fish than British consumers are able to consume, so the UK will want to keep the ability to sell British fish in Europe. That is why environment secretary Michael Gove had already pledged last summer to continue to grant European fishermen access to British waters.
What’s not agreed yet
Ireland
On the issue of the Irish border, both sides have agreed that there should be a “backstop” option in the withdrawal agreement, which would enter into force if no other solutions are agreed. It doesn’t really go much beyond that, as the legal text is currently “unacceptable” for Britain, so expect quite a bit more drama on this issue, which is ultimately linked with the future relationship between Britain and the EU. Britain has suggested it’s keen to follow the “Swiss model” for selected sectors, by voluntarily cut and pasting EU rules that apply where there’s a lot of trade, to avoid disruption – with the caveat that the UK may still ultimately refuse to apply EU rules, accepting that it would then risk losing market access. A solution may be to apply this to the Irish border issue, with Britain taking over EU rules in those sectors that are relevant for Northern Ireland and the all-island economy. For now, the EU has branded this “pick and choose” – but on the other hand it had agreed in December that Britain should selectively “align” its rules only with the “rules of the Internal Market and the Customs Union which, now or in the future, should support North-South cooperation, the all-island economy and the protection of the 1998 Agreement.“ Supposedly, all other rules shouldn’t be aligned. Isn’t that picking and choosing as well? Never mind that there wasn’t, of course, agreement on the content of the word “align”.
Maybe the EU was a bit frustrated when it suggested that Britain should erect a customs border within its own territory, but let’s hope that following the British outcry, the EU has realised it’s not exactly making a great contribution to solve the Northern Irish puzzle, also given that it was agreed in December that the whole UK – not parts of it – would leave the Customs Union. Also Labour has stressed that the EU’s backstop option for the Irish border as currently drafted could never be acceptable to any British Prime Minister. On March 26, talks will begin between the EU, Britain and Ireland, so let’s hope cooler heads prevail.
Gibraltar
Despite stressing it is acting as a single bloc, the EU has provided a de facto veto to Ireland regarding the border question and to Spain regarding Gibraltar. Barnier has stated that no deal can apply to Gibraltar without a bilateral agreement.
Tensions over Gibraltar and Spanish border checks have been nothing new, but whereas the UK could in the past count on the EU to safeguard a smooth border over there, the European Union suddenly seems much less interested in preserving smooth cross-border movements during the transition – at least as compared with the passion it (rightly) shows for EU citizens in Britain. Are the 10,000 people – including many EU citizens – who cross from Spain to Gibraltar to work every day not worth the attention?
Of course, Spanish politicians are aware they aren’t going to manage to use Brexit to negotiate Gibraltar out of British hands and overturn the 1713 Treaty of Utrecht. Actually, Spain is one of the EU member states most friendly to Britain, given the importance of the UK for its tourism sector. Then, haggling over Gibraltar during Brexit talks constitutes a political posturing opportunity that may be hard to resist for any local politician. Possible Spanish demands mayinclude joint control of the airport and ending what Madrid sees as Gibraltar’s status as a tax haven.
The arbiter
Although Britain has agreed to selected supervision by the EU’s top court, the European Court of Justice (ECJ), over aspects of the transition, for example EU budget law rules, it is still refusing to agree to letting the ECJ be the ultimate arbiter over disputes relating to the withdrawal and transition arrangement, especially as the EU is proposing that the ECJ can impose penalty payments as a remedy.
Is the prospect of a transition period working to avoid disruption for businesses?
According to the Chartered Institute of Procurement and Supply, one in seven European companies with UK suppliers has moved part or all of their business out of the UK. Of course we don’t know to what extent this is due to Brexit – it may well be have to do with the Bank of England’s devaluation. Also, we don’t know for sure if certain economic developments would have been much different in the absence of a transition deal. In any case, business federations are loudly proclaiming their desire to have a transition deal agreed as quickly as possible, so their concerns should be listened to. At a time when the US is experimenting with dangerous protectionist policies and the European Commission is clumsily responding with tit-for-tat threats, businesses shouldn’t have to worry about the EU’s obsession with imposing its own arbiter on a deal or inflexible politics in Northern Ireland and Gibraltar.