© 2017 Kirsty Hughes
There is a half-optimistic myth growing around Brexit, partly fuelled by May’s Florence speech. This suggests the Tories are making such a mess of it that, while the UK will leave the EU at the end of March 2019, it may stay indefinitely in a transition stage, part of the single market and customs union but without a vote or voice.
There is little evidence to support this myth. Nor is it a desirable outcome: if the UK had no say in future EU trade deals with the rest of the world, no vote on new regulations across different sectors of the economy, this ‘soft’ Brexit status would soon enough become contentious as a range of EU27 decisions, big and small, were taken that cut across or damaged UK interests.
And if those growing problems drove public opinion to want to re-join the EU, rather than to get on with a hard Brexit, the UK would find – having left in 2019 – that as a new, re-joining member state it would no longer get its budget rebate; it might not get a full opt-out from the euro; and it wouldn’t get its highly flexible opt-in to justice and home affairs measures. Whether public opinion a few years down the line would buy this must be doubtful, even amidst the economic pain that hard Brexit will undoubtedly bring.
Hard Brexit ahead
Theresa May has, in fact, been remarkably consistent over the last year in describing the ultimate destination as a ‘hard’ Brexit. The UK, she repeated in Florence, will not stay a member of the EU’s single market or its customs union. It will implement its own, more restrictive migration policy – and it won’t come under the European Court of Justice.
So the fact that May said she wanted a bespoke deal with the EU27 – adding no further detail to what that might look like – and that she didn’t want either a Norway or Canada ‘off the shelf’ model, does not mean there is everything to play for between a soft and hard Brexit. The UK prime minister has clearly rejected staying in the single market and customs union.
That means the UK won’t be in the European Economic Area like Norway and Iceland. And it won’t have a customs union like Turkey – which is anyway not a comprehensive customs union (and only EU member states can be its full customs union). So, very simply, the only route ahead is for the UK to negotiate a free trade deal with the EU27. It can be called ‘bespoke’ or ‘deep and special’ but it will be a free trade deal negotiated as a third country.
What May said in rejecting a Canada-style deal is instructive – since clearly she knows it’s the most obvious template. Firstly, she said, it would take too long (Canada’s deal took seven years to agree). Secondly, despite acknowledging it as the EU’s most advance trade deal to date, May plaintively urged: ‘We can do so much better than this’.
This is not too hard to de-code. Canada’s deal principally covers goods, not services. It does not do away with all regulatory checks or issues around ‘rules of origin’ (to ensure other countries do not avoid EU trade rules by exporting via Canada to the EU). So it would still impact on cross-border and just-in-time production for pan-European firms in many UK sectors of the economy. And, crucially, the Canada-EU deal does very little on services – 80% of the UK economy.
The National Institute for Economic and Social Research has estimated that a standard free trade deal between the UK and EU could lead to a 35% drop in goods trade and a 60% drop in services trade. That is what hard Brexit will mean – along with many firms shifting staff and headquarters to other EU countries and cutting back on investment in UK plants that are currently part of cross-border supply chains. No wonder May is still desperately hoping the UK public won’t cotton onto this yet a while – and that the EU27 may offer something to help.
Soft Brexit myths
Where does this leave the negotiations and the hopes of some that a ‘soft’ Brexit transition might just run and run? The EU27 – and the European Parliament – have been clear repeatedly that an open-ended transition is not on offer. Theresa May talks of around two years – the European Parliament’s resolution in April suggested a limit of three years.
Does this mean the UK will face a cliff-edge Brexit after all – leaving its cosy transition in 2021 or 2022 without even a Canada deal? Not necessarily. Some in Brussels think a basic free trade deal, even one with some of the advantages of the Canada-EU deal, might be done more quickly than the seven years that one took. If work on that starts at the end of this year, then in four years’ time perhaps something could be in place provisionally (albeit needing ratification across the EU).
But, while the UK will doubtless push for a much better ‘deep and special’ deal including services, not only is this unlikely to be on offer from the EU27, but also any more complex negotiations on services could certainly not be done in a 2-3 year transition period. A more comprehensive deal could take a decade – and still would not match the degree of integration and trade the UK currently has within the EU. Nor would the EU27 let the UK sit in its ‘soft’ Brexit passive membership of the single market and customs union for the next ten years, even if Tory party politics allowed it – which seems unlikely.
The UK is heading, at best, for a hard Brexit – assuming a divorce deal is done, a transition agreed, and an outline framework of a realistic free trade deal set out. This will be very damaging for the UK economy. It will raise enormous difficulties for the Ireland/Northern Ireland border. But while the current government is in power, and while there is no cross-party support for a second EU referendum, this is what the UK faces. Florence has made the time-scale and route a little clearer. Hard Brexit is the destination.