Thursday, August 31, 2017

Why the EU will have to start talking about trade soon

Published on Open Europe's blog and CapX
As Brexit negotiations continue, a lot of energy is still being spent on procedure. The EU side is insisting on “sufficient progress” on the issues relating to Britain’s exit before there can be any discussion on the UK’s post-exit trade status. The most sensitive issue here is of course the financial settlement, but there are also the rights of citizens and the challenge of making sure that Brexit does not endanger peace in Northern Ireland.
Despite the fact that the EU has been quite adamant in insisting on this sequence – exit first, then trade – here’s why the EU is likely to become more flexible:
The EU Commission has already watered down its position
The initial stance of the EU Commission was that there had to be a final “agreement” on the money before discussions could move on to trade. The EU27 have basically forced the EU Commission to water this down to only demanding “sufficient progress”, a concept which is up for interpretation, suggesting some EU leniency.
The decision on whether there has been such progress is due to be taken at the EU Summit in October. The EU’s head negotiator Michel Barnier will be the one recommending a position to the 27 EU leaders. Barnier’s preference has always been for trade talks to start in 2018 and it’s clear he’s still pushing for this, despite his earlier defeat on the issue.
Whether trade talks start in November or January has become quite a symbolic issue, so the EU may well be wary of granting the UK’s Brexit Secretary David Davis this victory, especially as EU negotiators were apparently annoyed by an oral presentation given by “young man from Whitehall” slamming the EU’s legal basis for its claims.
Will the UK manage to square the circle and put something on paper regarding financial settlement without committing to any figure? The German Parliament apparently thinks the UK won’t come up with a number. But, according to the Financial Times, “both sides” – so the EU as well as the UK – “recognise that the transition is essential to breaking the deadlock on the first phase of talks”.
In other words, the EU side apparently accepts that a deal on the UK’s status during the transition stage after March 2019 – something which relates to trade – may permit the UK to make a financial commitment of some kind. That’s a clear indication that, despite the rhetoric, also the EU realises trade talks will be necessary to make progress on the settlement talks.
It’s politics versus a technical approach and politics will win
It’s politically unrealistic to expect Britain to agree a figure without getting something in return. Unlike the EU Commission’s initial stance, the EU27 are asking for nothing more than just progress on the departure talks, an indication that they appreciate the political sensitivity of the matter.
It’s no surprise that the less politically savvy Commission takes a different, more technical, approach and was forced by the 27 EU leaders to water down its stance. It’s likely the political approach of the EU27 will again prevail. Barnier’s team have been reminded that, at the end of the day, they are merely executing the wishes of their masters in national capitals. There, people know very well how politics works.
One could maybe argue that the ideal solution would even be for both parties to agree on a neutral expert who would calculate the UK’s financial commitments, but of course that’s not how it works. Expect good old-fashioned political horse trading.
The EU is facing a hole in its long-term budget so it’ll be very tempting to sell trade access to the UK
Without the UK’s €9 billion annual net contribution to the EU, the EU’s budget faces a €63 billion hole for the seven-year budget period starting in 2020, on top of any UK commitments that wouldn’t be made before, as well as the UK’s share of the EU budget’s “reste à liquider” (RAL) or de facto long-term deficit.
Of course, given how bloated the EU budget is, it shouldn’t be hard to figure out where to make spending cuts, for example in the €270 billion handout to agricultural landowners between 2015 and 2020, who aren’t even necessarily farmers. Still, it’s not clear EU leaders are any more prepared for a violent struggle with vested interests they have been in the past, so people may start to get nervous as the end of the EU’s long-term budget period in 2020 approaches. A fight on the new long term EU budget would have arisen even without the loss of the UK contribution.
Member states such as Poland, who receive a lot of EU funds and have thus more to lose from a bad deal on this, are toeing the EU line at the moment, but calls to cut the EU budget as a solution – a sensible suggestion – have already been voiced by the German and Dutch governments.
Naturally, the more market access the UK government secures, the higher the figure of the financial settlement it could get away with when facing UK voters.  Of course we can’t be sure, but as the prospect of losing EU funds draws closer, member states dependent on EU funds have an incentive to push for moving to trade talks as soon as possible.
Discussions on a transition period after Brexit also involve possible payments to the EU Budget
Even if the UK and the EU agree a financial settlement before discussing Britain’s future trade status, they would have to re-open the matter of UK payments into the EU budget straight away, because it’s very possible that the EU would demand this in return for market access during the transition.
An EU diplomat has warned that there is “no time for any special deals. [The UK] will either have a Norway-style deal for up to 3 years or nothing”. But Norway is paying into EU programmes, so it’s a bit bizarre for the EU to want to separate negotiations about money, especially if behind the scenes it is speculating that Britain may well want to move on this issue if it can secure success on the transition issue.
The clock is also ticking for Northern Europe’s manufacturing heartland
In the grand schemes of things, the amounts regarding the UK’s financial settlement are relatively small. It is much more important to ensure that trade isn’t disrupted after March 2019, when Britain will have automatically left the EU, including the single market and the customs union.
The British government has made a lot of progress over the summer, having proposed to agree a common customs union with the EU at least for the transition period. Given that this truly diminishes the UK’s trade powers and that Ireland has actually been demanding such an arrangement – although as a permanent fixture – it’s hard to see why the EU would not agree to this.
Still, tense negotiations are to be expected on the conditions for the UK to receive full access to the single market during the transition period. In its guidelines, the EU has suggested that to get market access during the transition, Britain should become a full rule-taker, accepting all EU rules and supervision by both the European Court of Justice and the EU Commission.
This is unlikely to fly in the UK, so if EU countries truly care about avoiding a cliff-edge Brexit, which may hit Britain harder but which would also damage Northern Europe badly, it better ditch its obsession with the money. For all the talk of the proverbial German car producer reorienting its sales to poorer EU member states if the UK market becomes harder to access, it doesn’t make any sense to bring this prospect closer by a stubborn refusal to discuss the UK’s future trade status.
If the EU truly thinks Northern Ireland is a priority, it should start discussing the customs union
To be fair, the EU isn’t only interested in sorting out the effects Brexit will have on the EU Budget. It also wants to safeguard the rights of citizens – during the first round of negotiations some decent progress was made on that – and it wants to prioritise Northern Ireland.
The issue that concerns people over there is that Brexit would result in the reintroduction of a hard border, something that neither the UK, Ireland or the EU want. Unlike the EU, the UK has already published a position paper on the issue.
Irish Taoiseach Leo Varadkar has stopped short of urging the EU to start talking about trade as soon as possible. But he did implicitly endorse the UK government’s position that the future of the Northern Irish border cannot be settled until the shape of Britain’s post-Brexit trading relationship with the EU emerges, describing this as “common sense”.
As mentioned, the UK’s idea of a common customs union during the transition period is likely to be accepted by Ireland and the other EU countries. Most importantly, this gains some time to discuss possible technical solutions to reassure people living in Northern Ireland and Ireland that a hard border will indeed not appear – even if the UK would then exit that common customs union. However, as long as the EU drags its feet on starting to settle these kind of issues, the uncertainty remains.

Thursday, August 03, 2017

Don’t believe the bad news about Brexit

Published on CapX
Nobody should blame the British media for taking a critical look at whatever the British Government does. A scrutinising media is a great asset and mainland Europe can probably learn something from the UK. But when it comes to Brexit negotiations, there’s plenty of negativity being reported, and not enough attention paid to the progress being made.
Take, for example, the rights of EU citizens in the UK and British in the EU. After only three days of negotiations, agreement was reached on 50 per cent of issues listed in a joint negotiation document.
The most sensitive point here is the EU’s insistence that its own top court, the European Court of Justice (ECJ), where the UK will have no judge, is the arbiter of citizens rights and judicial disputes. But this particular demand has already been undermined by the Germans, who have said they would be open to a solution whereby a joint EU-UK panel serves as the ultimate judge.
The UK’s Brexit Secretary, David Davis, agrees with the Germans and has suggested that a judicial body including “a mutually agreed chairman and somebody nominated from both sides” might be acceptable. Indeed, some EU officials have intimated the EU is willing to drop this particular demand.
So rather than the talks stalling over the ECJ, it looks like EU negotiator Michel Barnier only needs ask EU member states if they can update the list of demands he’s obliged to defend. (It’s worth remembering that Barnier’s room for manoeuvre is limited – he has to work within the mandate set by the European Commission). If a solution is found through a joint panel, that may serve as a precedent for a long-term arrangement in the relationship between the UK and the EU.
True, there are other tricky areas. No deal has been struck over the thorny issue of the “financial settlement” of Britain’s obligations towards the European Union. But the UK government did try to smooth things over by stating that “the UK has obligations to the EU”. This was deemed by Brussels to be a potentially important development, and dissuaded them from stalling negotiations – although Barnier has since repeated his threat.
In fact, Britain’s plan seems to be to sign up to the principles of the financial settlement, while delaying any deal on a specific figure until the very end of the negotiations. But Barnier has already said that for the EU “to compromise … we want clarity on [the financial settlement].” If the UK were to publish a position paper on the methodology for the divorce bill, this could persuade the EU Commission to relax its initial decision not to open talks on Britain’s trade status before there is material progress on the financial settlement.
The EU certainly seems open to suggestion. It has also substantially relaxed its earlier refusal to discuss any issue besides citizens, finances and Ireland. Since it has agreed to opening talks on “wider separation issues”, which include trade in goods but also Euratom, police and security cooperation, it may as well agree to start proper trade talks in October.
One of the loudest complaints from the media has been the lack of clarity regarding what the UK wants its future relationship with the EU to look like. In reality, there aren’t many options to choose from. In my opinion, there are two models: the Norwegian, whereby Norway enjoys full market access in return for essentially implementing all of the EU’s trade rules without being able to vote on them, and the bilateral Swiss-Canadian, where market access and the extent to which both sides adapt their market regulation is subject to negotiation.
Britain’s financial sector is expecting the bilateral model to win out – and they may well be right. Could anyone really imagine the UK being bound by EU legislation without being able to vote on it? Of course not, especially as British membership of the Single Market seems now completely off the table.
But regarding the issue of whether the UK should leave the Customs Union, the decision is being taken on the ground. Now that the American President has shown such enthusiasm for a US-UK trade deal, it sounds increasingly unrealistic that the UK will not leave the Customs Union at some point, perhaps after an interim period.
Progress has also been made in the debate on how to move to a permanent Brexit settlement. The UK Government has agreed that there should be a transition period, after the idea was backed by “Brexiteer” Trade Secretary Liam Fox. He has, however, stressed that this should be “time-limited and limited in its scope”, and end “before the election” in 2022.
The fact that the UK is happy to accept a transition stage may also make discussions over the financial settlement easier, given that Britain could be willing to contribute to joint projects during that period.
A point which does still need to be resolved (though, tellingly, it’s also a bone of contention within the UK government) is whether the UK will be allowed to restrict immigration from the EU during that period. There’s a way around the difficulty: the UK could join the European Free Trade Association (EFTA) and then rejoin the Single Market or “European Economic Area” temporarily. It’s how Lichtenstein is able to restrict freedom of movement while being a member of the Single Market.
 If Britain wouldn’t join EFTA, the EU could still in theory tolerate restrictions on freedom of movement. Part of the transition debate must therefore be how to arrange British control over EU immigration in this eventuality (even though EFTA membership could protect national sovereignty better, affording, for example, the power to delay the implementation of EU rules).
The UK Chancellor, Philip Hammond, and some of his colleagues would seem to have ruled this out. It looks like the Chancellor prefers the EU’s offer that in return for full market access, Britain would – during the transition – respect EU rules, oversight and judicial supervision, and also allow unrestricted freedom of movement, with some minor adjustments. Be this as it may, a statement by the British PM seems to have overruled him, as it stressed that “free movement will end in March 2019” – when the transition stage after Brexit is due to begin, adding “precisely what the implementation model will look like is up for negotiation”.
In any case, the EU side also seems keen to prevent the UK from remaining in “transition” indefinitely, as the European Parliament has explicitly insisted in its “red lines “ that the transition “must not last longer than three years”.
So with both sides showing willingness to be flexible on certain matters, and with MEPs on the same page as Liam Fox, then surely Brexit negotiations can’t be going so badly after all.