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Who is Driving Brexit and Where?

Tue, 03/27/2018

Brexit and the whole post-exit journey remains tortuous, but a new dynamic of cooperation between the negotiating parties can be beneficial to both.

At the 2018 spring Summit of 23 March in Brussels, the 27 EU leaders took less than two minutes to endorse the 129-page draft withdrawal agreement of the UK from the EU block and the EU guidelines framing the forthcoming round of negotiations on future relations with the UK. One year after the UK formally launched the “divorce” procedure as a result of its June 2016 Brexit referendum, even the most cynical Eurosceptic will have to limit the rhetoric and cope with the crude reality, as PM Theresa May and her government have finally done. An orderly and predictable dis-engagement of the UK from the EU and its rules-based structure with overarching regulatory influence in businesses, economies and the daily life of 500 million Europeans, is a legitimate business and citizen’s need that requires more than the self-referential filibustering of politicians.

UK PM Theresa May
UK PM Theresa May before joining the EU Summit in Brussels, incidentally in the back scene EU Chief Negotiator Michel Barnier and his Deputy Sabine Weyand

As Paul Taylor summed up in an editorial in Politico, Brexit so far has been a process of “managed surrender” for the UK.  The agreement has been based largely on the draft withdrawal rule book prepared by the EU Brexit negotiation team led by Michel Barnier, and jointly finalised with  David Davis, Brexit Secretary for the UK and his team. Three-quarters of the draft withdrawal text, highlighted in green in the document released just before the EU Summit, are now agreed by both parties. 

David Davis and Michel Barnier
© European Union , 2018 /EC - Audiovisual Service / Photo: Mauro Bottaro

David Davis and Michel Barnier at their press conference of 19 March in Brussels presenting the draft withdrawal agreement.

From the beginning of the mandate, EU lead negotiator Michel Barnier and his team have been driving the Brexit process in full transparency with a level of rigorousness, legal consistency and non-complacency that  EU detractors have seen as “legalese”, “technical pedantry” or arrogance. But this approach has been instrumental to make progress while keeping the EU 27 bloc united and gaining the backing of both the Council and the European Parliament, without really compromising on most important Brexiter’s claims that, if accepted, would have jeopardized the certainty of EU laws and of EU governing principles.

On the short term, the EU-UK delegations still have to tackle outstanding issues of divergence, such as avoiding a hard border between Ireland and Northern Ireland. Full certainty on the actual withdrawal will only be guaranteed after the endorsement of the final text by the European Parliament and by at least 20 out of 27 EU Member States at the Council by October 2018. 

Longer term, the rule book for future EU-UK relations is still to be drafted. The generic political statements of both sides toward establishing one of the most comprehensive bilateral trade and partnership agreements ever signed by the EU with a third country, are more aspirational than real when assessed against the red lines that each of the parties have anticipated. For sure, the new deal will not be able to guarantee the same benefits and conditions of EU membership, from the free movement of people, capital, goods and services across national borders to the right of establishment for business, from a pan-European custom zone with no duties and restrictions between Member States, to the preferential terms found in 750 EU bilateral agreements signed by the EU with a wide range of jurisdictions. 

The EU side will not agree to grant free access to its Single Market only for specific domains, without the UK’s acceptance of the EU body of laws and the role of European Court of Justice for the whole four single market freedoms that the EU considers “indivisible”. This stance is not new; it has been already applied in previous agreements with countries such as Switzerland.

In a crucial sector such as financial services, UK based companies will lose after 2020 the “passport” that today’s allow them to service the European Economic Area. Beyond structural and organizational changes for future market operations, according to the Financial Policy Committee of the Bank of England, there is a risk of disruption to end users with potential far-reaching consequences in terms of liabilities even for existing contracts in derivatives, insurance and clearing services if the EU and UK parties will not tackle in time the issue of contractual continuity. For post 2020 operations, the principle of unilateral EU recognition of “improved equivalence” of UK rules – with limited and revocable access to UK financial institutions rather than the more comprehensive “mutual recognition” principle to operate in the EU territory - seems to be the most advanced EU orientation for this sector. The principle of equivalence already in use with several countries, implies an EU discretionary decision that facilitates trade in specific domains, but doesn’t leave any contracting power to the other party, notably if the EU suddenly decide to revoke its equivalence grade.

Beyond trade, in policy areas such as defence and security, it should be easier for the two parties to find a common base for cooperation, given the wide range of hybrid threats and geo-political interests that EU and the UK share in their strategic roles on the global scene. The EU Council’s prompt expression of solidarity around the recent attack in Salisbury, where 28 EU countries agreed that the Russian Federation’s complicity was “highly likely”, reinforces the opportunity for success in this area.  In the field of aviation, the EU Council guidelines of 23 March explicitly envision a cooperative agreement on air transport and aviation security. But here also there is the risk that UK remains out of the 10 billion EUR Galileo satellite project and the European Space Agency, with a direct negative impact on British space industry that could lose the participation to forthcoming contracts due to be awarded next June. For other EU subsidised programmes, from R&D to culture, education and training, the participation of the UK parties will be conditional to making a financial contribution to the EU budget in line with what applies to other non-EU countries.

Brexit and the whole post-exit journey remains tortuous, but these interim decisions show that a new dynamic of cooperation between the negotiating parties is not only possible, but can also be beneficial to both. The March decisions mark an important step and a pre-condition for understanding the timing and possible terms that will govern the transition period between the UK’s “formal” exit from the EU, set at 23h.00 UK time of 29 March 2019, and the date of the “operational” exit from the EU, now agreed to be 31 December 2020. The formal exit day will only have consequences on the UK decision-making role within the EU and will trigger the formal opportunity to negotiate and sign a new trade and partnership agreement with the EU as well as with other non-EU countries. During the transition period, the UK will be obliged to apply any new law adopted by the EU 27, will continue to be subject to EU Court of Justice and must honor EU-related financial engagement and liabilities, but will not be allowed to participate in the Parliamentary and Council decisions. Meanwhile, during this period there will be no consequence for businesses, as they maintain the same rights and obligations of today until the end of 2020, while workers and citizens from both sides will substantially maintain their EU acquired rights under the supervision of the Court of Justice that will keep its judicial prerogatives on citizens issues until 2028. From January 2021, the EU-UK trade and partnership relations will be governed by a new agreement, provided that it is finalized and ratified by the UK, the EU institutions, and individual member states before the end of the transition period. Without a new agreement in place at that date, or the unlikely extension of the transition period to be granted unanimously by the 27 Member States the cumbersome WTO trade and tariff framework for non-EU countries without a specific bilateral agreement in place will apply. 

A recent study carried out by Professor Piet Eeckhout, Dean at London University College, for the European Parliament's Committee on International Trade, assessed various options for the future trade relations between the EU and the UK after Brexit. By examining the various models against two distinct paradigms: market integration and trade liberalization, the study found that an intermediate model, which would allow for continued convergence and mutual recognition in some sectors but not others, doesn’t exist and cannot be easily constructed for legal, institutional, and political reasons. According to professor Eeckhout, the stark choice is between a customs union/free-trade agreement, or continued internal market membership. However, the internal market membership option (along the lines of what applies to EU-Norway and EEA trade relations) and the custom union / free trade  option (as is the case for EU-Turkey agreement) have been already ruled out by the UK’s “red line” positions. Without a change in UK direction, the EU trade and partnership agreement will more likely mirror those signed with Canada (CETA) or South Korea (FTA),  but with an additional spin given the past few decades of EU-UK membership.

A year ahead of the UK exit from the EU, the uncertainty surrounding the nature and scope of future EU-UK relations are directly influencing business and public policy plans on the ground. Several large corporations are preparing already for the worst-case scenario of no deal, an outcome that is already more unlikely that a week ago. For small and medium-size enterprises that maintain high levels of confidence in the current business environment thanks to increasing domestic demand, the main concern remains uncertainty over Brexit, and the widening gap between the UK, its close partners and the rest of Europe. For EU regions and cities there is a lack of awareness, information and preparation on Brexit that complicate the already tough process of on-going adjustment driven by other economic, environmental and social factors affecting their operations and territories. 

The impact of Brexit will vary from one latitude and business to another, and for sure nobody is immune from its effect. Viewing the implications of Brexit through multiple scenarios will help minimize the negative consequences and better highlight the ways to leverage the opportunities that Brexit may open.

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