With the recent inclement weather hitting Europe, it doesn’t feel like March. The (notional) turning of the season does, though, mean we are at the halfway point of Britain’s two-year notice period to leave the European Union (EU). Here, we assess what has happened to date and how things are likely to proceed going forward.
Progress to Date
Modest advancements have been made since Prime Minister Theresa May invoked article 50 – starting the two-year notice period on 29 March 2017. The European Commission promptly said that they wanted to focus on three main areas at first: citizens’ rights; agreement on the financial settlement (the so-called “divorce bill”); and mitigating the effect on the island of Ireland.
After some delay, and a false start on the British side, broad agreement was reached in early December. Citizens’ rights seem to have a fairly robust agreement although some detail remains, for example for citizens arriving in the transition period. The settlement package proved to be the dog that didn’t bark; Brexiteers, who had campaigned on a leaving dividend being allocated to the NHS (Britain’s public health system) seem unperturbed about a reported GBP 40 billion going to the EU.
The real drama came on the Irish border – the first draft of wording Mrs May hoped to sign was blocked because it proved unacceptable to her parliamentary backers, the hard-line unionist Democratic Unionist Party. A compromise was patched together which allowed talks to move onto the next stage – but it was only a holding position. And even that started unravelling quickly in an unseemly row as to its legal validity. It seems that the most difficult points were put to one side – and the main issues will arise in the coming months.
Canada or Norway?
One thing the EU has been adamant on is that the final negotiated position must balance rights and burdens; so the more obligations the UK is willing to take upon itself, the more access it will gain. The EU argue this on the basis of symmetry, and that if there were no trade-off then any party could leave to seek a better deal.
This has led to discussions of two main possibilities – the Norway option and the Canada option. Norway is a member of the European Economic Area and thereby accepts most of EU legislation, including the principle of free movement and pays into the EU budget. On the other hand, it has almost full access to the single market. Canada has only a free trade agreement with the EU. It therefore has much more autonomy and makes no contribution to the EU budget – on the other hand it has much more limited access to the single market, particularly on services.
Mrs May is adamant that neither the Norway model nor the Canada model is suitable for the UK. This is not only her choice to make though and, with the EU position firm, it seems clear that there will be symmetry. An eventual deal may not be exactly like Norway’s; or exactly like Canada’s – but will invariably be more broadly similar to one or the other. The two models are therefore useful tools to discuss whether more weight should be given to autonomy (like Canada’s) or single market access (like Norway’s).
What Has Been Ruled Out
The Prime Minister announced shortly after being appointed that leaving the EU meant also leaving the single market and customs union. Remaining in these would, she said, impact on British sovereignty – thereby, according to her (unscientific) interpretation be incompatible with the referendum result. This has effectively ruled out the Norway option, leaving the UK to think creatively as to how it can leave the EU without overly impacting its economy.
The British government’s most recent attempt at squaring the circle is the “three buckets” approach. This would put various EU legislation in three buckets:-
- The first would be for industries where the British and European economies are intertwined, like aviation and pharmaceuticals. The UK proposes being bound by all European legislation, accepts the jurisdiction of an international court, and pay a form of “access fee”. In these areas, therefore, business would go on very much as now and continuity would be advantageous all-round.
- The second bucket would be areas where the UK would have equivalent legislation to the EU. In practice, its legislation would have a similar broad effect but there would be an element of flexibility as to the exact terms and thereby UK suppliers would have a form of preferential status. Financial services would fall into this category.
- The final category would be sectors where there is currently little legislation (like artificial intelligence) where the UK would set its own rules and would be free to diverge from the EU’s legislation. The philosophical underpinning seems to be that as there is currently little legislation, it would be unreasonable for the UK to be bound by streams of future legislation.
From the UK government’s point of view this was a carefully constructed compromise of ensuring the post possible access whilst retaining flexibility. The more ardent Brexiteers have grumbled privately about the likelihood of British courts not having full and complete jurisprudence, particularly on the first point. Most recognise, however, that this represents a practical position.
The problem is likely to be that the European Commission do not share the same view. They are aware of the narrative in section of the British press, notably the Daily Telegraph, that Brexit is an opportunity to cut regulations. Therefore, a logical analysis would suggest that the UK chooses it’s buckets according to tactical advantage – the first one for highly integrated industries where it sees little to be gained, and potentially a lot of business to be lost, by not following EU rules. Areas where the UK could seek to become a market leader by reducing regulation, would be pushed into the third category. One leaked note of European Commission talking points referred to the proposal as “double cherry picking” (the best part of being in and out of the EU). In this light it is difficult to see the option getting serious traction.
A more realistic version of it could include the two bucket approach with the third one removed – i.e. the UK could strictly follow some rules but pledge to be equivalent on others. By removing the third bucket this would smooth EU concerns about tactical selection – by definition, if legislation must, as a minimum, be equivalent, then there is little comparative advantage to be gained. This would, though, be problematic for Brexiteers though – if there is little regulatory sovereignty then what would remain of the business argument for Brexit? This touches on a more general point that was rarely broached in the referendum – the business case assumed the UK could continue to have preferential single market access whilst having new advantages, but this starting point may not hold in reality.
The pitfalls above all point to the same thing – the UK is heading for a Canada style deal. This would mean a comprehensive free trade agreement for goods with some add-ons for uncontroversial areas – aviation, for example, as there is widespread recognition that continued co-operation would be important; likewise, for higher education. The most heavily discussed add-on is likely to be for financial services. This is one of the major industries in the UK – although the EU’s attitude is ambivalent. On the one hand, EU companies benefit from London’s deep and liquid markets; on the other hand, financial centres like Paris or Frankfurt have an agenda to take (particularly Euro denominated) business from London.
The Canada style deal would allow Mrs May to meet her self-imposed interpretation of the referendum result. The UK would leave the jurisdiction of the Court of Justice of the European Union; it would stop making direct financial contributions to the EU budget; and freedom of movement, in particular, would no longer apply. It will come at a cost though. Even if a deal for financial services were struck, it would be inferior to what the UK has now; and what about the huge number of other services the UK provides (which are currently covered by EU law but which would under a Canada style deal)? Additionally, leaving the customs union will be a huge practical headache for companies, which have supply chains throughout the EU. Nobody knows how burdensome the new regulations will be – what is clear, though, is that there will need to be some. And, with business in a constant race to find a competitive edge, some will conclude that it is easier to cut the UK out of its supply chain and stay within the EU.
EEA Still Possible
There is one other possibility, although it remains unlikely. Polls and anecdotal evidence show that the main concern of the electorate was restricting freedom of movement for EU workers. If there was sufficient will, some sort of compromise could be struck here.
For all the recent talk about customs union, it is the single market which is paramount. Leaving this would mean fundamentally different standards – which could be particularly problematic for services. In this context, the Norway model still makes sense. Domestic British dynamics means that the UK could never join the EEA, which is seen as a watered down EU – but it could have a relationship broadly similar where it respects the free movement principles (bar partly workers); pays some form of contribution; and accepts a supranational decision making body.
Brexiteers could be expected to cry foul but Mrs May has already conceded a lot of the points in principle. She has agreed to keep EU legislation in certain sectors, so why not a few more? And, as long is the decision making body is not the EU’s Court of Justice then this should be possible. The UK is subject to all sorts of supranational bodies and tribunals which create little pushback. The UK has also agreed to pay certain amounts and this could be massaged as intended for specific projects rather than a cheque simple for access. The UK would not be able to have an independent trade policy but benefits there have been overstated. No trade deal is possible with the US without agreeing to their terms – including, most controversially, less regulation of the food industry. And whilst Australia and New Zealand may agree on trade deals quickly, they are small(ish) economies on the other side of the world.
Freedom of movement would be the biggest obstacle but there is still room for manoeuvre. The UK has never fully applied all the options it has available to it – to take just one example other countries, like the Netherlands, restrict certain benefits to people that have spent time in the local labour force. The practical effect of this is that it reduces immigrants access to immediate benefits. By actually enforcing the rules they have available to them, the government could go a long way to improving matters. There is also the possibility of some sort of carve-out; for example, having some form of quota or emergency brake. The EEA provisions are, after all, less absolute than the EU ones. This would require negotiation but if the UK was willing to give elsewhere, it may be able to take here.
This would, of course, not be popular with a particular segment of Brexiteers, who are pushing for as clean a break as possible. There was no instruction from the referendum, though, other than the UK most leave the EU. The Leave campaign made a tactical choice of leaving the process as vague as possible, hoping to be all things to as many as people is possible. This helped them win the referendum; the obvious disadvantage, though, is that there then needs to be a discussion of what this broad instruction means.