Fabian Zuleeg / Mar 2017
Photo: European Union
Theresa May is moving closer and closer to triggering the Article 50 negotiations, setting off a process that is expected to take two years as specified in the EU Treaties. While some argue that this period might have to be extended, given the sheer difficulty and scope of issues, such an extension seems rather unlikely in light of the required unanimity among the EU27, unless it is a purely technical provision to allow for smooth conclusion.
The initial negotiations will focus on the withdrawal process, only taking account of the framework for the UK’s future relationship with the Union. They are not intended to pre-negotiate a future trade and investment deal, which will take a number of years to conclude with negotiations only starting in earnest after the UK has left the EU. But there is at least hope that some kind of transitional deal can be found to bridge the time between withdrawal and the future deal.
Towards a trade deal?
This long-term deal will not be a soft Brexit – i.e. the UK remaining within the single market and/or the customs union. The UK government’s red lines - freedom of movement of people and the role of European law and the ECJ - made it impossible to avoid a hard Brexit. The UK is now seeking a deal that minimises the impact on trade and investment while at the same time aiming to control in-migration and strike trade deals with the rest of the world.
It remains to be seen how likely such a trade deal will be. It would have to meet the interests of the EU27, as well as satisfy the European Parliament, which will probably react unfavourably to any mercantilist behaviour, e.g. regarding corporate tax. But before both sides can even enter these negotiations there will have to be a successful conclusion of the withdrawal agreement.
First things first
With respect to the withdrawal, London’s expectations and demands are still highly unclear. The UK government has repeatedly noted the need to avoid going over a cliff’s edge, but the White Paper also emphasises that no deal is better than a bad deal. There will certainly be a number of tricky issues in the Article 50 negotiations, including the legacy payments the EU is going to demand from the UK, likely to be strongly opposed by the Brexiteers and the Eurosceptic tabloid press. So far, at best, this payment has been portrayed in the British debate as the price the UK will have to pay for continued market access. But given the sequencing of the negotiations, this is unlikely to remain a convincing argument.
From a negotiation perspective, reaching a withdrawal deal without any payment is highly unlikely. After all, the EU will not simply scrap its demands in the face of UK opposition. But without a withdrawal deal, there is little chance of transition arrangements or a long-term trade deal. This will add fuel to the arguments of those in the UK who believe that a quick exit will be better in any case: if you can’t reach a long-term deal, better to strive out on your own now to be able to conclude trade deals with other countries.
In addition, there is a domestic reason why Brexfast is desirable: the Scottish government has announced its intention to hold an independence referendum before the end of the two year period. Leaving the EU before this referendum might make it harder for the Scots to vote to leave the UK into a more uncertain waiting stage for EU membership.
Consequences of a breakdown
There is thus a significant risk that there will be a breakdown in the withdrawal negotiations. This would economically be highly detrimental for Great Britain, with companies bearing high costs and with significant legal uncertainty. There could be global financial turbulences and the UK’s credibility as signatory to international treaties would be undermined, jeopardising its ability to conclude trade deals.
Uncertainty would also be a significant cost for the EU. In addition, an immediate cessation of UK budgetary payments would create financial difficulties. But a messy Brexfast would also have a positive effect: it would pull the EU27 closer together and provide an example to avoid for Europe’s populists.
Is Theresa May willing to do what it takes to avoid going over the cliff edge? There might well be a real appreciation of the costs such a step could entail. But given the UK government’s focus on keeping the Conservative Party together and winning the next election, domestic politics might override economic reasoning. At the very least, we need to start contingency planning for how to deal with the real possibility of a messy Brexfast.