Tuesday, June 06, 2017

Despite everything, Brussels and the UK largely agree on how to implement Brexit

Published on BrexitCentral

When Theresa May delivered her grand speech on Brexit in January, this was received by many as the Conservative government pushing for a “hard Brexit”. While presenting their own view on Brexit, Labour have pledged to “fight hard Brexit”. Meanwhile, the European Commission has been trying to paint the UK government as an unreasonable partner, by leaking some of the discussions between May and Commission President Jean-Claude Juncker.
In reality, however, despite the fact that there is a risk that negotiations go off the rails, the EU and the UK aren’t that far apart. The simple reason is that there aren’t so many different ways to implement Brexit. In what follows, I provide an overview of how the Conservative Government plans to do it. This was entirely predictable and leaves few alternatives, apart from perhaps a disruptive “no deal” scenario.
By Spring 2019, the EU and the UK will on the one hand need to agree on the terms of Britain’s exit from the EU club: can EU citizens stay in Britain and can UK citizens stay in the EU? How high is the outstanding bill the UK would need to pay? On the other hand, the UK’s trade status needs to be agreed. Will British companies still be able to export to the EU and under what conditions and how will their Continental counterparts fare when exporting to Britain?

I. The exit deal

Two main things need to be agreed. First of all: the money. There, the European Commission is showing itself from its pettiest side: leaking calculations amounting from 60 billion euro up to 100 billion euro gross, even as EU Commission negotiator Michel Barnier publically denies that it has made an official estimate but only wants to agree a calculation method, which wouldhowever involve going back as far as 2007.
That said, the EU is known for demanding an arm in order to get a finger, and even EU funded think tank Bruegel admits that the Commission is leaking “the most extensive possible liabilities for the net bill”.
Moreover, the EU now only wants there to be “sufficient progress on the exit negotiations before starting to talk about the trade deal, a notion which can be stretched and would be decided by Barnier. He seems more reasonable than Juncker, who is keen on having a deal on an exact amount before trade talks can start. Furthermore, despite the fact that the House of Lords has claimedBritain is not liable to pay a single pound or euro to the EU under international law, the UK government has also stated it wants to have a good relationship with the EU and is happy to “discuss in detail what the rights and obligations are”.
Moreover, in the grand scheme of things, these amounts are relatively small. Few people therefore think that, for all the drama about money, it won’t be possible to reach a compromise somewhere in the middle. After all, the EU’s core business is horse trading.
The second issue to be settled in the exit deal is the rights of citizens. Also here, both sides are very likely to agree. The UK government has basically said it will guarantee the rights of the 3 million EU citizens in the UK but it is only waiting for a reciprocal guarantee by EU countries that British citizens can stay there as well. A fair request, which is very likely to be honoured. Spain, which hosts most British citizens, has already made clear it will be more than happy to allow the British to stay there, while they would also keep their social security rights, if the UK would replicate that. A no-brainer for Spain, which, despite the drama over Gibraltar, is one of the biggest proponents of a friendly Brexit, given the economic interests the British in Spain represent.
So why is there no deal about this then just yet? Because of two things: first, the EU wants to follow its own procedure, whereby no negotiation has been possible before the UK triggered the start of the negotiation, in accordance with Article 50 of the EU Treaty. Second, because the EU hasn’t been able to restrain itself and is now demanding that the European Court of Justice gets a say over the social security and residence rights Britain would guarantee to EU citizens.
That’s not very reasonable. Switzerland, which even accepts EU freedom of movement, something the UK most certainly won’t do after Brexit, does not have to accept ECJ rule, while the “courts of England and Wales” are named as arbiters in commercial contracts across Europe and the world, so it is somehow bizarre for the EU not to trust them to make the UK government respect the exit terms.
Logic dictates that in order not to risk a deal for its 3 million citizens, the EU will need to drop this excessive demand, likely yet another example of the EU demanding an arm in order to get a finger. That’s not to say that working out the details will be easy or that the legal position of EU citizens would remain entirely unchanged, but it should be seen as highly unlikely that no deal would be found here.

II. The trade deal

Much more challenging is to agree a long term bilateral framework in less than two years. But even here, the sides aren’t that far apart:
– First of all, the UK government has pledged it wants to be able to restrict freedom of movement. While already having stated Britain will remain open to immigration, the UK government wants to be able to fully control who can enter Britain and who can not. This was only possible by leaving the EU – it was a cornerstone of every different faction of the Brexit campaign and is also supported by Labour. One can’t go more predictable than this.
Interestingly, the biggest proponents of freedom of movement in the EU aren’t as passionately in favour of this any more. The Czech Foreign Minister has saidthat “due to [freedom of movement] the EU may break up.” The central European ‘Visegrad’ countries seem to have shifted towards Hungary’s position, which is that it shouldn’t be too easy for citizens to migrate, as this may aggravate the “brain drain” problem. Most likely, anyone who wants to leave will leave, perhaps not to the UK then, but this development is quite a game changer. It means migration is becoming less of an UK-EU issue and more of an intra-UK issue where employers are – rightly, I think – stressing the economic benefits of open migration.
– Secondly, the UK doesn’t want to be “a part of” the EU’s single market but it wants to secure as much access to it as possible. This apparently came as a surprise to many but should it really? For if the UK would be “a part of” the EU’s single market or “European Economic Area”, just like Norway, Iceland and Liechtenstein but unlike Switzerland, this would mean that the UK would copy and paste EU rules without being able to vote on them.
Norway’s former PM, Jens Stoltenberg, who is now the head of NATO, has described his own country as a “fax democracy”, as it basically takes over all EU rules in return for full EU market access. It can be argued that this isn’t a bad deal for Norway, given that it would only have little say over EU rules as an EU member and given that it still can influence and delay the implementation of EU rules, while demanding to adapt those to the EEA.
Clearly, to become like Norway is a total no-go for a country like the UK, which is keen on its sovereignty, at least as a permanent arrangement, as we’ve pointed out many times at Open Europe. For the same reason, Switzerland has opted for a “bilateral model”, effectively negotiating on a sector-by-sector basis whether it takes over certain EU rules and, if it doesn’t, whether it still keeps market access.
Given that also Labour doesn’t want the UK to be “in” the single market but only to gain as much access as possible to the single market, this model of perpetual negotiation is likely to be the future of EU-UK relations. Surely it will be in an adapted form and perhaps with more, perhaps with less market access, depending on whatever the UK manages to negotiate. In any case, those saying the UK should be “in the single market” should realise that this will mean Theresa May constantly having to get on the phone to remind Jean-Claude Juncker to fax over EU rules as quickly as possible for Parliament to eagerly implement them.
The EU has now completely accepted that Britain won’t be in the single market, and understands fully well that the negotiation will be about the degree of access to the single market. Newly elected French President Macron is probably not going to differ much from his predecessor on this. During Cameron’s negotiations he was quite friendly to the UK, but more recently he stated that “you cannot enjoy rights in Europe if you are not a member – otherwise it will fall apart.” What he doesn’t get, however, is that the point of the EU is to safeguard open trade, not to reserve it to its members.
Restricting trade access goes against the heart of everything the EU stands for. As I have argued here, it is in the European Union’s interest to grant a lot of trade access to Britain, not least because if the EU were to restrict investment from the City of London, it would inflict a lot of self-harm. This line of thinking is gaining ground. German Finance Minister Schauble recently said that it is in Europe’s interest that London remains a “strong” financial centre after it leaves the EU, while Germany’s German banking watchdog Bafin has warned against rushing to move euro clearing out of UK after Brexit. Even Michel Barnier has warned that any Brexit-developments related to the City of London shouldn’t lead to financial instability in the Eurozone. Then again, of course the EU may just go full political and inflict self-harm, but at least we should recognize there are some positive forces here.
– Thirdly, Britain doesn’t want to stay in the EU customs union. Turkey is the only country outside the EU that has a customs union with it, and as a result, it cannot close its own trade deals. It’s hardly a surprise that the UK government is keen to close its own trade deals. With Open Europe, we’ve pointed out that the UK has massive opportunities to boost its trade after Brexit, especially with China, India, Pakistan, Bangladesh, Israel and Nigeria. The UK government has been spreading around lists with countries who have expressed the desire to do a trade deal with the UK. Is anyone surprised? Is there anyone who can imagine the UK would keep on outsourcing its trade policy to the EU after Brexit?
A complication will be that some kind of technical customs arrangement will be needed to avoid a “hard border” between the UK and Ireland. Both the UK government and the European Commission have gone great lengths to stress that they absolutely want to do everything to achieve this, to guarantee peace in Northern Ireland, so there is ground for optimism here. The EU’s customs borders between Norway and Switzerland function relatively smoothly, so there is no reason why such an arrangement couldn’t be found for Northern Ireland and the other customs borders of the UK. In all likelihood, if there is a delay in this process, it may not be coming from the EU side but from the UK side which may demand to stay a little longer in the EU’s customs union in order to adapt its own customs bureaucracy to that, as we have suggested.
– Fourthly, in terms of defence and security cooperation, the EU is unlikely to spoil the prospects for cooperation, simply because Britain is so important in these two areas. Surely, a lot of technical challenges will come up, and also here there is the EU’s demand for the ECJ to have a say, but there is a firm belief on both sides that Brexit should in no way mean the end of cooperation with regards to counterterrorism, defence, police or justice matters. The UK will likely try to move to an opt-in model in matters of justice and home affairs cooperation, and even if the UK may not get everything it wants, its importance in this area should make it possible to achieve a deal with the EU.

What about time pressure?

It’s one thing that the EU and the UK may not be too far apart on how they see their future relationship, but it’s quite another to work this all out in less than two years. March 31st 2019, when the UK automatically leaves the EU – unless the UK and the EU27 decide to extend it for another year – will be a real cliff-edge point.
Here most observers agree that two years may be very short. It took Switzerland about eight years to work out a bilateral framework with the EU after its population rejected being a member of the single market in 1992.
Many people think the UK will secure less market access than the Swiss, given how it may have hurt the feelings of some EU leaders by voting to leave. To Britain’s advantage, it can be said that it is an important geo-strategical player in a world where EU relations with the U.S., Russia and Turkey are less friendly than before, that it has all EU legislation already in place to start with – given that the UK is likely to copy paste all EU legislation into domestic law before it exits the EU – and that any EU restrictions for the City of London would drive up the cost of investment in mainland Europe – meaning this isn’t such a strong card for the EU as it thinks it is.
Obviously, if both the UK and the EU would simply grant unilateral trade access to each other, we wouldn’t even need two years and even less this perpetual horse trading, but unfortunately we are living in a world of managed trade, not free trade. So if it is then managed, it is better to make sure that it’s managed in a smooth way. This means some kind of transitional arrangement will be needed.

How could a transitional arrangement look?

One option is for Britain and the EU to agree by April 2019 which sectors would suffer market access and which sectors wouldn’t for the next five years or so, but apart from the technical complexity one may also wonder what the point is of negotiating something only for a temporary period then. Therefore, I think it really will be all or nothing: either the UK simply keeps all market access or it loses it all. That’s if there is no deal and the UK falls back on WTO terms, if it by then has adapted its WTO status. Any partial market access would necessitate extensive and complex negotiations which are very hard to complete in only two years.
Of course, the EU will only grant full market access to a non-EU member under one condition: that the UK after it has left the EU takes over all changes to EU legislation automatically, without being able to vote on it – as it will then no longer be an EU member. Interestingly, this precise option is reportedly being considered by the European Commission, Politico has reported. Interestingly, the news site also obtained a statement from a UK government source that the UK does not exclude this. To be clear: I am not advocating this, as I’d prefer to see both sides granting unilateral open trade to each other, but it looks like a messy solution along these lines would be the politically convenient way out of the conundrum.
This basically would provide the UK a similar status as Norway, but only for a temporary period. It can be expected that the UK would never accept this unless there is a strict time limit to it, to create a new cut-off point, for example after three years in 2022, to give the EU an incentive to actually agree a bilateral framework. The UK used to be in EFTA before it joined the EU. EFTA currently only has Switzerland, Norway, Liechtenstein and Iceland as its members. The latter three are subjected to the “EFTA Court”.
Technically, if this option were to be realised within the same legal framework as Norway, which seems to be the easiest way, the UK would first need to join the European Free Trade Association (EFTA) after it has left the EU in order to then re-join the European Economic Area as an EFTA member. Legally, there are no major hurdles to this, but of course both sides may prefer to go for a similar, newly-created framework outside of EFTA.

Why would Britain agree to this?

First of all, UK full market access to the EU’s single market would be guaranteed.
Secondly, EFTA members that are in the EEA, like Norway, may not be able to veto EU rules but they can delay them. If the EU comes up with some new piece of banking legislation the UK doesn’t like, it would simply be able to delay implementation until the end of the temporary period during which the UK has a similar status as Norway. In short, during this temporary period, the UK would have a de facto veto over all EU rules and would even be able to delay the implementation of EU decisions agreed with qualified majority voting – something it couldn’t do as a full EU member.
Thirdly, the UK would be able to close trade deals, as it would no longer be in the customs union. It would however take some time grandfather or renegotiate the Free Trade Agreements the UK had via the EU, which would cease to be in force after the UK’s exit, as there are 60+ deals with 30+ countries. Perhaps this is another consideration, apart from the challenge to adapt the UK’s custom bureaucracy, why Britain may take a bit more time to leave the customs union. The UK could technically re-enter the EU customs union for a while right after having left the EU.

Why would Britain refuse this option?

Obviously, the UK won’t like the fact that it would be subject to the EFTA Court, even if it would be less intrusive than the European Court of Justice (ECJ). If the Norwegian model isn’t used to apply this solution, the UK may even be subject to the European Court of Justice, which is even more intrusive than the EFTA Court. Switzerland has always refused to be subject to such a supranational court, but the UK may perhaps go for it given that it would only be during a temporary period.
UK Prime Minister Theresa May’s decision to call a general election is probably inspired by the consideration that it may be easier to make some concessions after the election rather than before, apart from Labour’s weakness in the polls and the desire to increase the number of Conservative MPs to obtain a more comfortable majority.
Perhaps then the EU will respond to the UK’s flexibility to accept a supranational court for the transition period by allowing it to restrict freedom of movement to a certain extent at least. Not only will the UK be able to do this anyway at some point but the UK could also make the point that EFTA and EEA member Liechtenstein has been allowed to do so, so any EU claim that this would be absolutely impossible for whatever legal consideration would therefore not be credible.

Making EFTA great again?

When the long term bilateral framework has then been agreed, the UK could leave the EEA again but stay within EFTA. Some preliminary force could be given to the EU-UK FTA after the signature by the 28 heads of state and government, allowing the national and regional parliaments as much time as they need to rubber-stamp it, in case their consent is required.
The UK joining EFTA would increase the weight of the organisation. EFTA could become an alternative in the – now unlikely – event other EU member states choose to leave the EU. EFTA membership could also be presented as a prize to the six Balkan countries that aren’t in the EU yet and perhaps even to Turkey. When public opinion in the EU is happy, some of these countries could then join the EU, but at least they wouldn’t get the feeling that they were not making any progress in the meantime. These countries then wouldn’t see EFTA as a second rate club, given that the UK would have preferred this over EU membership. In this way, Brexit could put the relations between the UK and mainland Europe on a more friendly footing, turning Britain from a bad tenant into a friendly neighbour, while it may help to stabilise the EU’s neighbourhood. At least, that is one relatively benign outcome that may well still fail to materialise, but is at least still on the cards.

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