Over the Bank Holiday weekend in the UK, the country’s headlines were dominated about last week’s meeting between Theresa May and European Commission President Jean-Claude Juncker – and how badly it was supposed to have gone. The UK has dismissed the reports as “Brussels gossip”. However, David Leggett suggests we should expect the next two years to be tense.
Brexit is going to be a drawn out and complex business. Besides the nuts and bolts of squaring off budgets and liabilities, working out where lines of future cooperation will really lie, there is a political track to the issue that is subject to spin and leaks.
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Over the Bank Holiday weekend, the UK media has been full of reports, originating in a German newspaper, that London and Brussels are very far apart in their understandings of how the ‘divorce’ negotiations – yet to actually start – will proceed. I am not surprised.
The media coverage following the apparent high-level leak adds weight to the Brussels narrative that there is solidarity in the EU position among the 27 member states and that being in the UK’s isolated position is ill-advised, to say the least. Well, there is an important election run-off coming up in France, with one candidate very pro-EU and the other one very anti. If France were to leave the bloc (‘Frexit’), that probably would spell the end for the EU. The stakes are therefore pretty high. The EU faces some big challenges, not least is the need to contain the forces that have led to a level of dissatisfaction and sense of ‘democratic deficit’ that is felt way beyond the borders of the UK.
From the EU side, stressing the benefits that flow from international cooperation and economic integration is likely to be a theme that is picked up regularly over the course of the Brexit negotiations. You are better off in the club than outside of it, will be the message emanating from Brussels – and Berlin and Paris.
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Berlin’s commitment to the European project is very clear. Obituaries written for the eurozone and its sometimes volatile and vulnerable currency in the past miss the critical point the weak currency has massively assisted German companies in world markets (a German currency would surely be valued much higher). When push comes to shove, money is found for large bailouts to countries like Greece. Keeping the EU show and its currency on the road trumps everything. A disorderly unravelling of the EU is seen as a doomsday scenario; indeed, there are proposals for reform of the EU starting to emerge. The UK’s Brexit experience can serve as something of a warning.
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By GlobalDataAnd yet, the UK is a very important trading partner for its European neighbours; it is a rich nation of 65m people situated right next door to the EU. Broadly speaking, British cultural values are aligned with European ones. The UK’s history is utterly intertwined with Europe’s. Security cooperation and defence interests, as well as economic interests, are closely aligned. The UK remains an essential part of Europe, even if no longer a part of the EU. When the politically existential threats to the EU have subsided later this year (major elections over, no more EU referenda planned), it is in the interests of the EU as well as the UK to have a smooth and friendly transition to the UK being outside of the bloc.
My guess is that there will eventually – after a politically difficult start – be progress in the two-year negotiations that start next month. And I suspect that there will be parallel talks on a trade deal (and post-2019 transition period, if needed) started before the end of this year.
The mechanics of a trade deal itself will be interesting to see. We are moving from ‘frictionless’ trade to, potentially, introducing some friction. It’s the complete reversal of the usual direction of a trade deal. The EU’s free trade deal with Canada did take a long time to do, as the European Commission’s Mr Juncker likes to point out. But the UK is already free trading with the EU. There is, in theory, no need for a detailed sector-by-sector analysis of standards and new tariffs; the UK already meets EU industrial standards and is inside the customs union currently. The potentially straightforward technical analysis (pointing towards business as usual), however, will be overshadowed by political considerations. Any one of the 27 member states can kick up a fuss for any reason. There is plenty of scope for any member state to see unrelated political leverage opportunities in holding up a deal.
Also, the full benefits of being inside the EU trade bloc – and the single market – can’t be seen to transfer seamlessly to a third country outside of it. I suspect there will be provision for new customs controls and selected tariffs applying to UK goods and services exported to the EU. It will be drawn up and will cause some fright (and will be designed to do so). Attention then turns to measures that could reduce or mitigate additional costs to UK-EU trade – both in terms of tariffs and future customs arrangements. That’s where some give and take comes in – it’s a negotiation.
There is, of course, a compromise out there that works – as well as can be expected, anyway – for both sides. The UK’s trade arrangements with the EU will be changed, but not necessarily dramatically so. The UK will be formally outside of the customs union and that suggests new arrangements and checks to UK-EU trade are all but inevitable. They can, though, be at the light end of the cost spectrum of possibilities, technologies and political will permitting. Trade between the UK and EU could carry on much as before. Finding the compromise solution will take some doing. And you can be sure there will be plenty of posturing, spin and leaking to the press before we get to that point. No-one said it would be easy. On that, at least, everyone is in full agreement.
