Monday, July 10, 2017

Both the EU and the UK have already started to soften their positions in Brexit negotiations

Published on Open Europe's blog
In the Brexit debate, two myths are remarkably persistent. First, that the UK Government is unwilling to compromise and is pursuing a so-called “hard Brexit”. Second, that there won’t be any real negotiation, as Brussels will simply dictate terms to the UK.

Where the UK has shown itself open to compromise

First, it’s hard to think of any other kind of negotiated Brexit than the one being pursued by the UK. Notwithstanding the live debate in Cabinet about how to manage a Brexit transition, the UK Government is pursuing a negotiated deal, with the UK leaving both the EU’s Single Market and the Customs Union, after a transition or implementation period. Sure, Theresa May did say that “no deal is better than a bad deal” – imagine if she had declared she would accept any deal! – but the UK Government clearly would prefer a good or even a limited trade deal over a cliff-edge Brexit without a deal.
Since being in the Single Market and the Customs Union means accepting EU rules without a vote and severe constraints on UK trade policy, can anyone imagine this position being politically sustainable for the UK for any length of time? Even if the UK could gain license to close trade deals on services, staying in the Customs Union would dramatically weaken the UK’s hand. It would not be able to offer more goods access in return for greater services access.
Second, Theresa May put her job on the line to enable a Brexit compromise. Her plan to increase the Conservative majority hasn’t worked out very well, to put it mildly. But there is no longer any necessary need to hold a general election in 2020. If May had not called an early election, the build up to a 2020 general election would have coincided with the immediate aftermath of the Article 50 process and ongoing trade discussions, potentially making a smooth transition more difficult.
Third, the UK has dropped its demand to have perfectly simultaneous negotiations on the exit bill and trade. The EU has insisted on sorting out the UK’s divorce terms before discussing its future trade status. The UK has basically accepted this, despite initially opposing such a “sequenced approach”. That being said, as I note below, the EU side has also compromised on sequencing.
Fourth, the UK Government is open to accepting a role for supranational institutions after Brexit but, for obvious reasons, it cannot accept the ECJ as the ultimate arbiter. Brexit Secretary David Davis has said that he’s open to setting up a new arbitration body to resolve disputes over trade or the wider functioning of EU-UK agreements. This is likely to mean that EU officials or the ECJ play a role, as will UK institutions, but the UK is clear it cannot be the ultimate referee.
The EU’s demand for ECJ oversight has become the thorniest issue regarding the protection of EU/UK citizens’ rights. Here too, the UK has signaled it is open to arrangements that ensure these rights are guaranteed in international law, not simply UK law. This could function under a joint UK-EU dispute mechanism as described above.

How also Brussels has already softened its stance

For its part, the EU side has already softened its stance on a number of issues, perhaps realising that nobody gains if Brexit negotiations go off the rails.
First, the EU has conceded to allowing simultaneous negotiations on divorce and trade negotiations, provided there is “sufficient progress” on the former.  In January, the European Commission’s Brexit negotiator Michel Barnier stressed that “[an] agreement on [an]orderly exit is [a] prerequisite for future partnership”. Under pressure  from moderating voices among member states, this was watered down to a position that it would be sufficient “to agree on the main principles of the key challenges for the UK’s withdrawal”, before progressing to other issues. Whether “sufficient progress” has been made will be assessed at the EU Summit in October. Barnier’s initial plan was to wait at least until December to start talking about trade. Obviously, nobody can predict how these negotiations will go, but the point is that the EU side has softened its stance here.
Second, the EU’s biggest proponents of freedom of movement in the EU aren’t as passionately in favour of this anymore. While politicians in Central and Eastern Europe are of course strongly in favour of securing the rights of their citizens already present in the UK, they are much less keen than they were to preserve the right of their countrymen to move to the UK after Brexit. The central European ‘Visegrad’ countries seem to have shifted towards Hungary’s position, which is that the continual flow of their well-educated citizens to the UK is a “brain drain” that they would like to stem. This development could be quite a game changer.
Third, according to three EU officials quoted by Bloomberg, the EU may be willing to drop its demand for the UK to be subject to direct ECJ jurisdiction, after Brexit. As former Belgian ECJ Franklin Dehousse judge has warned, the EU’s demand makes “a final deal less likely.” Bloomberg quotes officials as saying that the EU “could settle for alternatives” to a direct ECJ role. German Foreign Minister Sigmar Gabriel has suggested that a joint EU-UK court may be a better idea, although he thought it should still follow the EU’s top court “in principle”. The last element may still be an issue, given that the ECJ fiercely guards its position and has previously taken a dim view of rival centres of judicial power, such as the European Court of Human Rights in Strasbourg.
Fourth, the EU has moderated its plans to force London’s euro clearing business to move to the EU27. Attempts to force part of London’s financial clearing industry to mainland Europe pre-date the Brexit vote. It’s no wonder that a new attempt is underway. After Brexit, the EU Treaties will no longer protect the UK as they have to date. Nevertheless, in its newly proposed rules for supervision of non-EU clearing houses handling euro-denominated transactions, the Commission has stopped short offorcing all clearing of euro-denominated transactions automatically to the EU or the Eurozone. This a far more cautious position than the one initially suggested by several senior politicians across Europe, such as the former French President. Indeed, it’s been estimated that the cost of a more fragmented clearing market could be high for banks in mainland Europe, as they would need to post billions extra collateral. For this reason, German banking watchdog Bafin has warned against rushing to move euro clearing out of UK after Brexit and both German Finance Minister Schauble and EU Brexit negotiator Barnier have made clear it isn’t in the EU’s interest to fundamentally damage London’s position as Europe’s financial centre.
Lastly, the tone suggesting Britain has to be “punished” has all but disappeared. To be fair, nobody openly said the UK should be “punished” for daring to vote to leave the EU, but the talk of the town was that in any case, the UK had to expect an ‘inferior deal’, as the Maltese EU Presidency stated in January, with the clear suggestion that this is what the UK deserved. Never mind of course that any good deal for the UK really is a good one for the EU, as trade openness benefits both sides.
That was before the Netherlands and France went to the polls. Those results are, rightly or wrongly, perceived as a disappointment for eurosceptics. Just before the negotiations started, EU Council Chairman Donald Tusk urged “discretion, moderation, mutual respect”. The European People’s Party, the biggest group in the European Parliament, has talked of possibly extending talks after two years, if necessary to conclude a deal. As we witnessed during the Eurozone crisis, the tone of politicians on both sides is often an indicator of the chances of success for the negotiations.
In conclusion, there still are major hurdles to achieving a good Brexit deal, but despite the collective political/media meltdown in Britain following the election, there is actually growing reason to believe a deal can be done. That’s a good thing for both Britain and the EU.