After nine months of speculation, intrigue and controversy, UK Prime Minister Theresa May will formally trigger Britain’s withdrawal from the European Union by the end of the month - perhaps as early as 15 March. And with the Prime Minister signalling a cleaner break with the EU than initially thought likely in the immediate aftermath of the referendum, the stakes for the business community could not be higher.
With many organisations caught off guard by the referendum result in June, companies have hurriedly drafted contingency plans for a raft of outcomes from upcoming UK-EU negotiations. Three critical issues will shape the negotiations between London and Brussels in 2017. First, the size of the UK’s liabilities to the EU budget post-Brexit; second, the extent to which the UK will be able to simultaneously negotiate a long-term trade agreement and its terms of exit; and third, whether the two parties can make headway on a transitional or interim arrangement to avoid a ‘cliff edge’ in early 2019.
Untangling the United Kingdom from the EU budget is fraught with particular controversy. The issue carries significant risks on account of the relative lack of manoeuvrability that each side enjoys. EU leaders must demonstrate to their electorates that Britain is left in a less favourable position for leaving the bloc, and forced to pay its dues. On the other hand, making a significant concession to the EU on the UK’s financial liabilities will be politically toxic domestically for Prime Minister Theresa May. The issue carries genuine potential for injecting venom into broader UK-EU negotiations, harming the ability of both sides to reach agreement on other issues such as the terms of trade.
Reports suggest that Michel Barnier, chief negotiator for the European Commission, will seek almost €60bn from the UK government to mainly cover previously agreed spending commitments and pension liabilities. The British government, however, is expected to argue that EU calculations significantly underestimate the assets of the bloc and the UK share of those assets. A report published in early March by an EU financial affairs sub-committee of the UK House of Lords argued that the UK did not have a legal obligation to contribute to the EU budget post-Brexit.
Debate over the legal minutiae obscures the fact that this will primarily be settled as a matter of politics and negotiation rather than in the courts. Indeed, if the courts are required to intervene, this suggest a wider failure in negotiations that will go beyond the size of the divorce bill for Brexit. It is unlikely that the EU will support favourable trade terms for the UK in a wider context of taking London to court for failure to pay what it considers is owed.
Settling the divorce bill and agreeing the respective rights of each other’s citizens are seen as the fundamental priorities by leading figures in the Commission. According to this approach, discussion around a long-term trade agreement cannot commence until the UK agrees to take responsibility for its financial liabilities. There seems to be growing support for Barnier’s position on this in Berlin, Paris and Rome, with 2017 largely dedicated to this issue being resolved before trade talks can be allowed to begin.
For the UK government facing a tight two-year timeframe once Article 50 is triggered to secure a trade deal and settle the divorce terms, the sequential approach favoured in Brussels is problematic. Instead, the British government is backing a twin-track approach that allows the terms of exit and a long-term, comprehensive trade settlement to be negotiated simultaneously. This would give more time for trade negotiations during the two-year period between Article 50 being triggered and the point of exit.
MORE ON BREXIT
Perhaps the largest risk to business posed by Brexit is the UK leaving the EU in the spring of 2019 without any trade agreement. Such a scenario would see Britain falling back onto World Trade Organisation trade terms with the EU in the absence of a wider framework. To avoid such a scenario, there is broad political consensus across party lines in Westminster that a short interim or transitional arrangement will be required to bridge the gap between Brexit and a comprehensive trade pact. There is also growing recognition among EU leaders of the necessity of an interim, transitional agreement, despite Barnier previously stating in late 2016 that it would be “difficult to imagine”.
It is here that the greatest risks of disruption lie. Despite potentially both sides recognising that an interim arrangement is desirable, agreeing on the nuts and bolts to build such a framework could be harder to achieve than is currently estimated. Indeed, an interim deal could prove to be no less difficult to agree than a fully comprehensive trade pact, especially if it is deemed to be a ‘mixed’ agreement, requiring ratification by each EU member state. Attempting to agree an interim deal coming on top of disagreements over the divorce terms and the sequence of the negotiations represents a series of major hurdles. For the negotiators on both sides and the watching business community, the stakes could not be higher.
BREXIT RISK REPORTS
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