04 Jul 2018

The storm before the calm. A month of high drama on Brexit that may not be all that it seems

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The build-up to this Friday’s marathon Cabinet Brexit session at Chequers has been not unlike that witnessed before the classic World Heavyweight Boxing encounters of the 1970s. The negotiations between the EU-27 and the UK have been portrayed as at a state close to stalemate. Ministers are apparently at loggerheads with one another to the point where cursing at the business community and ripping up copies of policy proposals have become public knowledge. Various Conservative MPs of different shades in this debate have been engaged in open disagreement. The media have lapped all this up and offered the impression to readers and viewers that Armageddon is almost upon us.

It is, in fact, not war-time although the famous World War II slogan “keep calm and carry on” would not be inappropriate. It is possible, of course, that Brexit might fall off the rails but that is unlikely. What is true is that the UK is coming closer to the moment when it has to make a choice between two basic models for its preferred future relationship with the EU, a division that BVCA Insight has long described as being between ‘Switzada’ and ‘Canland’.

That choice is not, however, as binary as it might seem and can be blurred if it suits all concerned within the Government to do so. Continued references to ‘Norway’, which occur quite regularly in newspaper and television reports, are neither accurate nor especially helpful as Norway is a member of the European Economic Area, and hence is fully integrated into the single market, which is an option that the House of Commons was offered via an amendment to the EU (Withdrawal) Bill last month and which was rejected by a large margin. The Cabinet is already committed to leaving both the single market and the customs union. What is to be thrashed out is how close to those entities the UK wants to be to them while outside of them. To use an astronomical analogy, the question is whether the country sees itself as a satellite to the planet that is the EU or as a comet in an orbit of its own around the star that is the world economy.

So stand by for a month, well the better part of six months actually, of drama that may be illusory. That appearance and reality might not coincide is down to a few fundamental issues of importance.

The ‘backstop’ negotiations are proving difficult but are not ‘deadlocked’ beyond resolution

Some eight months ago, Theresa May and her counterparts reached a political agreement on the terms by which the UK would withdraw from the EU in an orderly fashion. The most challenging issue then was what the default or ‘backstop’ solution would be for the Irish border in the event that by the end of the agreed transition period (December 31, 2020) no technological innovation had emerged to prevent physical apparatus having to be installed at that national boundary. The dispute was resolved back in December by linguistic dexterity. The process of drawing up the legally required text for this section of the Withdrawal Agreement requires more, alas, than ambiguous wording.

So about six weeks ago, Mrs May convinced a clear majority of the Cabinet to support a new version of the ‘backstop’ in which, if required, the whole of the United Kingdom would in effect shadow the customs union (or more relevantly the common external tariff aspect of it) for a ‘time-limited’ era. While there is not a huge amount of enthusiasm for this concept in Brussels, it has not been rejected outright by Michel Barnier or the EU-27. It remains the most likely model to be adopted. Where there is disagreement is on what else needs to supplement it to render it more acceptable to EU leaders.

This is destined to require three additional compromises by the UK authorities. The first involves a series of assurances that such a scenario, were it to come to pass, would not be a means by which the UK was effectively part of the single market as well as the customs union yet not obeying all its rules (notably around free movement). The second concerns animal livestock (a substantial proportion of North-South cross-border trade) where the UK will have to state that it intends to have regulations that are at least as stringent as that of the EU in the agricultural sector. The final element is who will decide whether the future arrangements surrounding the border are sufficiently frictionless. Is it to be the UK alone? The UK and Dublin together? The EU-27 as well? A new independent commission? All three questions are admittedly awkward politically but they are not incapable of resolution.

The Cabinet is likely to find a sufficient degree of consensus this month on the ‘end state’ ideal

As BVCA Insight noted recently, the differences on the ‘end state’ ideal around the Cabinet table and inside the parliamentary Conservative Party relate less to the substance of the matter (almost everyone would like a tariff-less free trade deal on goods, a framework to deal with services and for the UK to remain associated with a small number of EU agencies and agreements), than what would be the acceptable price to pay for such an accord to achieve it. That opinions on this differ should not be a surprise allowing for the fact that about a third of the current Cabinet were enthusiasts for ‘Remain’ at the 2016 referendum, a third were in the ‘Reluctant Remain’ camp and a third were ardent advocates for ‘Leave’. Indeed, it would be staggering if there was unanimity on the subject.

The crucial aspect of this, nonetheless, is that the White Paper which has been promised does not have to address the matter of price (which will be the essence of the negotiating process later). It only has to deal with the first principles of what the end state might resemble. The objective of this document is to serve as the basis for what will be a political (not legal) declaration in advance of the UK’s formal departure from the European Union and hence as a preamble for a dialogue between the UK and the EU-27 that will take place during the transition period itself.

While the Cabinet debate will result in somewhat more weight being placed on ‘Switzada’ or on ‘Canland’, it will far short of an irreversible choice between the two, not least because it depends on what the EU-27 decides that it wants to concede to the UK and that determination will not be taken in 2018 but at a moment in late 2020 when who knows who the most influential individuals will be. Finding a form of words that all three factions in the Cabinet (and the wider Conservative Party) can live with should thus not be the most demanding exercise ever undertaken in British political history. The balance of possibility is that sufficient consensus will be found to publish a White Paper on time.

All of which means that an outright ‘No Deal’ outcome is still a distinctly improbable possibility

If one accepts that the backstop issue is fixable and the end state ideal is fudgeable, then the chances of the UK and the EU simply failing to agree any form of terms for an orderly departure by March 2019 are really quite modest. After all, if that were to occur then the EU would not get the money promised to it (which it wants and needs), the rights of its citizens living in the UK would be solely at the behest of Whitehall and Westminster, and there would be the hardest of hard borders between Northern Ireland and the Republic of Ireland (which would be a bigger disaster for Dublin than it would be for either London or Belfast).

If, despite all of the logical incentives to agree a pact, the pressure of the clock worked against a bargain being secured, then if all else fails there would be the option of triggering that part of Article 50 of the Treaty of Lisbon which allows the two years set out for a withdrawal of a member to take place to be extended. That would be a most embarrassing move to have to make but if push came to shove it would be considered better than the alternative.

To put some numbers on the possibilities in conclusion. The chances of a deal being reached by the October EU Council is about 60%. By the December Council closer to 85%. Failure to conclude a deal by March 2019 but with the deadline being extended about 10%. A true ‘No Deal’ scenario just 5%. Not that anyone will acquire any sense of that by reading the UK newspapers or watching television.

Tim Hames
Director General, BVCA


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