Monday, December 07, 2020

Beyond the smoke and mirrors, a Brexit deal remains likely

Published in The Telegraph

Will this be the week when the shape of Brexit is finally settled? Yes, if the UK and the EU can agree their future relationship, to enter into force from the end of the “transition period”, on January 1, in a way that is legally clean.

But difficulties persist in three main areas: First of all, fisheries. Secondly, the EU’s demand for the UK to accept a “level playing field”, a regulatory “straight jacket”, in return for a degree of tariff-free market access. Thirdly, the question on how to police the terms of the deal: “governance”. On top of that, a deal is also needed on the implementation of the Northern Irish aspects of the “withdrawal agreement”, which entered into force early this year.

Irish foreign minister Simon Coveney has stated he is "more optimistic"; now about progress made by the so-called EU-UK Joint Committee here. This follows rumours that the UK would be prepared to drop elements from the UK Internal Market and Finance Bills, which the EU sees as violating the terms of the divorce deal, if an EU-UK free trade deal is concluded.

As always with these kinds of high-stake negotiations, everything is linked to everything else. When it comes to fisheries, the reports are that there has been progress over the past week, but no deal yet, despite some rumours on Sunday. France has now accepted that the EU will suffer reduced access to British waters, while there is also more awareness now in the UK that a no-deal would badly damage the fishing industry, particularly in Scotland, which relies heavily on being able to sell its fish to EU customers.

The EU is thought to be asking for 10 years of "unfettered" access to British waters while the UK is offering only a 3-year status quo on certain fisheries access so far. Even if both sides would somehow meet in the middle, concessions here will in any case be linked to concessions on the other sticking points.

The level playing field sticking point very much relates to the heart of the changes Brexit will bring about: to what extent will the United Kingdom still need to take EU regulation into account in return for receiving a degree of EU market access? In the EU’s ideal world, the United Kingdom would receive full market access, in return for taking over all of the EU’s relevant regulations, as Norway, Iceland and Liechtenstein do.

Given that this is a no-go, the EU now aims to impose some kind of level playing field straitjacket in return for a so far unknown degree of market access. Interestingly, Stefaan de Rynck, an advisor to Michel Barnier has stressed that there is a “huge difference” between 'no-deal' and a deal, especially for certain sectors like the car industry and agriculture. In my opinion, this means that UK-based manufacturing is likely to continue to enjoy a large degree of market access.

For car manufacturers, but also the chemicals and aerospace industries, it is of great importance that UK regulations covering products manufactured in the UK are recognised as “equivalent” by the EU, so these products can enter the EU, even if no tariffs were levied on them, something which seems likely, even with a degree of customs bureaucracy.

Equally, for EU food or textile producers, it’s very important that the UK accepts EU standards of production, even given the absence of tariffs. Switzerland enjoys proper EU market access for manufacturing, but not for financial services, and this is in line with Switzerland taking over most EU rules for the former sector but not for the latter.

A likely compromise between the EU and the UK could involve the EU agreeing to water down the scope of its “Level Playing Field”, meaning that the UK would accept some concessions, mainly on state aid, but not so much on environmental and social standards, which are typically quite uncompetitive in the EU.

In return, the UK would probably give some way on the core Brexit question: “governance”. This concerns the degree to which the promises made by the UK can be legally enforced: through an arbiter, or not? With a means for the EU to punish the UK by restricting market access if it violates the terms agreed? Through a unilateral EU decision or not? Those questions are of prime importance for the EU, and to the extent there will be points of EU law to be interpreted –  the EU is legally required to demand that only its own top Court - the European Court of Justice – is able to settle those questions.

In a nutshell: as long as the EU agrees to a watered down straitjacket and the UK to a binding way to enforce this, a deal will be agreed. Given the high stakes, with Covid continuing to plague the economies on both sides of the Channel, one would expect both sides to make an extra effort to avoid the damaging effects of a 'no-deal' outcome. That this would not be a rosy prospect for Britain, which would suddenly risk tariffs on half of its trade, has been widely accepted, but also for EU member states, it would mean massive economic damage at a most unwelcome time.

Germany would face a cost of 8.2 billion euros in annual exports, thousands of fishing jobs are at stake in the coastal member states and Ireland could potentially face even more damage than the UK itself, while it may even face extra checks on its exports to other EU countries, in the absence of a Northern Irish border.

Perhaps even more troubling than all the economic damage is that diplomatic ties would be hurt, at a time when the EU is witnessing ever greater political tensions between East and West, North and South. With all that in mind, EU leaders and especially Prime Minister Boris Johnson are likely to prefer to push through and seal a deal.


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