2018: The year of Brexit decisions

This year will decide Britain’s future. Will there be a transition period after Brexit? What will the UK’s economic relationship with the EU look like? And will all be “smooth and orderly,” as Theresa May has promised?

Phase I: Early January to late March — The transition period

Brussels: More than two months have been set aside at the beginning of the new year to firm up the conditions for the post-Brexit transition period requested by Britain. The EU has offered a continuation of the status quo after Brexit until the end of 2020.

During this period Britain would still be under all the obligations of an EU member: it would have to continue to pay contributions and to guarantee freedom of movement, and it would remain a member of the single market. However, the UK would lose its voting rights in the EU, meaning its status would be similar to that of Norway.

Brussels is prepared to make one concession concerning the new trade agreements the UK would like to establish for its post-EU future: During the transition period Britain would be allowed to negotiate and make agreements, but not implement them.

At the same time the EU Commission wants to hold a series of seminars for member states, during which they would present their respective economic relationships with the United Kingdom and formulate their preferences on what these relationships should be like in future. Individual interests would then be combined to create a mandate for the EU’s chief negotiator, Michel Barnier, to proceed. Fundamental European principles and treaties must be upheld going forward.

London: The British Cabinet held its first detailed discussions about the country’s post-Brexit trading future with the EU just before Christmas 2017. Broadly speaking, the Cabinet is still divided into two opposing camps. The Brexiteers want to leave the single market and the customs union, and to abruptly ditch all EU legislation. They dream of a “free Britain,” signing international trade agreements and standing up to the EU in economic might. Foreign Minister Boris Johnson, Trade Secretary Liam Fox, and hardline Conservative MP Jacob Rees-Mogg are some of the politicians belonging to this faction.

In the other camp, Finance Minister Philip Hammond, Interior Minister Amber Rudd and their supporters want as soft a Brexit as possible. They fear a collapse of the British economy. They want to retain as much EU regulation as possible in order to protect access to Britain’s biggest export market. They only support Brexit out of loyalty to the Conservative party.

Prime Minister Theresa May has announced that she will make another speech at the beginning of the year in which she intends to outline what Britain wants. In principle, she and Brexit Minister David Davis want a tailor-made solution that would allow the British to retain many of their rights while freeing them of their European Union obligations.

March 22-23, 2018: EU summit in Brussels

This is where the transition phase will be decided, the divorce bill legally drawn up and Michel Barnier given a mandate to negotiate the EU’s future relationship with Britain.

What is still not clear is whether or not the British government will have defined a realistic position by then. It is also not a given that EU member states will remain as united as they have so far: Conflicts of interest may arise.

Phase II: April 2018 to late October 2018

Brussels: The goal for October 2018 is to finalize a withdrawal treaty governing the UK’s departure from the EU as well as a political framework agreement covering the future relationship between the two entities. In order to achieve this goal in just six months, the British side will have to get involved in much more intensive and frequent negotiations than it has up till now. A joint declaration of principles of this kind would need to define the basis for subsequent trade talks, which would start in 2019.

The EU heads of government recently said that the aim is to guarantee a level playing field and fair competition. If the EU-UK relationship is seen as a sliding scale, then the more EU regulation the British side retains, the more access it will retain to the single market, and vice versa. However, Brussels has warned that there can be no cherry-picking, i.e. the British will not be able to pick and choose its preferred rules for crucial business sectors. The EU is under pressure not simply to give away the advantages of membership. German Chancellor Angela Merkel has emphasized that Britain’s situation in relation to the EU will be worse after it leaves.

To date, Michel Barnier has been describing the EU’s offer as “Canada Dry.” This reference to Brussel’s economic relationship with the North American nation indicates a simple trade agreement with broad exemption from duty for goods, but with no market access for services.

London: Much depends on whether Theresa May remains head of government. At present, the majority of Tories want to keep her in office because she balances out the Brexit contradictions. However, the political situation in London could change.

Until now, May’s government, including Brexit Minister David Davis, have been seeking an agreement that he describes as “Canada plus plus plus” — market access for goods and services, including the financial market. The British want to make their own rules, and they want the EU to recognize these rules as equivalent to its own. This essentially corresponds to the promise of prominent Brexiteer Boris Johnson, who claimed that the British could have their European cake and eat it too. This possibility is categorically rejected by Brussels. The question is whether there is a line of compromise somewhere between these irreconcilable visions. In principle, as the divorce talks have shown, the EU, being the biggest trading bloc in the world, has the upper hand.

EU summit on October 18-19, 2018

By this point the final draft of the Brexit withdrawal deal and the plans for a future trade relationship need to be in place and gain approval from the EU Council. This is because after the summit, the EU parliament will need to sign off on the package. The bloc’s member countries will also need several months for their national parliaments to consider the proposal for the new EU-UK economic agreement, and the UK parliament will review the terms of the final withdrawal agreement, as well. Skeptics believe this deadline will be impossible to meet.

Grace period: End of October until the EU summit on 13-14 December

There may be a great deal of argument towards end of the process, and these two months could serve to bring in last-minute compromises to end disagreements on all sides. Up till now the Brexiteers have firmly suppressed the reality that any new agreement is going to be extraordinarily complex. New rules will have to be written for every field in every sector, from air travel to scientific exchange to financial services and beyond. Even a basic agreement on this will inevitably contain a lot of explosive material, for both the European and the British sides.

Open questions

Until now, ideology has been the driving force behind Brexit. Between now and the end of next year, however, economic factors will presumably also influence Britain’s negotiating strategy. Researchers have calculated that Brexit has already cost Britain around one percent in economic growth in 2017. At the same time, inflation has gone up by three percent, principally because of the drop in the value of the pound. Stagnant wages mean living conditions for employees are deteriorating, and as many British private households are heavily in debt, there is the danger of a wave of bankruptcies. The United Kingdom is already losing more money as a result of Brexit than it pays in EU contributions, according to the Financial Times, which calculates the loss at around 340 million pounds (€382 million; $455 million) a week.

If no agreement is reached on the transition phase by March 2018, companies are likely to start implementing Brexit emergency plans. Banks have already started setting up subsidiaries on the continent. Time will be getting tight for pharmaceutical companies and others that need EU licenses for their products. If the British government is not in a convincing position by next summer, we may see the start of a “Brexodus” of companies moving abroad.

There is no guarantee that a majority of the British Cabinet will be able to agree on a Brexit model for the framework agreement with the EU by autumn of next year. There may be fresh elections with unforeseeable outcomes. A recent survey indicates that public opinion on Brexit is beginning to turn. It’s not clear where a new, possibly Labour, government would stand on the issue. As we head into 2018, on the British side almost all the crucial questions about Brexit are still open.

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