Stalemate in Brussels – Is the Brexit Cliff Edge Closer Now?

Anton Muscatelli | 15 October 2017

© 2017 European Union

Last week brought, as many predicted, a virtual stalemate in the Brexit talks. After five rounds of negotiations, the UK has failed to persuade the Commission and the EU27 to move onto the territory of discussing the future framework and, crucially, the future UK-EU trade regime.

It will be December before EU leaders will reassess the situation and, only if significant progress is made, will it allow formal guidelines to be adopted for EU negotiators.

I hear some increasingly pessimistic tones in Brussels. Although some EU27 countries are concerned about the slow pace of talks, and might be willing to begin to sketch out some of the future framework discussion, crucially major players like Germany and France are holding firm. They want to see progress on the ‘divorce bill’ discussions, and citizens rights. (The Irish border issue is of course also a matter for phase 1 of the negotiation, but is seen as interlinked with the future framework discussion.)

On citizens’ rights the UK position has shifted considerably, but there is still pressure to ensure ECJ oversight of EU citizens rights, and to protect future rights dynamically. On the financial ‘divorce’ settlement, the existing commitment to pay around €10bn per year during the two-year transition trailed before the PM’s Florence speech is seen as well short of the mark.

Germany, France and other EU countries want to see a concrete offer which sets out the UK’s logic chain behind the proposed settlement, and also addresses future obligations. Some observers judge that the UK offer would need to be in writing and rise to at least €40bn, with some indication of how this figure might evolve as a result of the future framework discussions and future obligations.

On both these issues, the biggest barrier for the UK of course is the internal politics within a fractured government. Can it afford to make concessions in these two areas to unblock the negotiations without bringing itself down? EU capitals are also engaged in a careful calculation: What do they think might happen in the case of further political crisis in the UK? Some of the rhetoric seen in recent days in Germany by Economic Affairs and Energy minister Brigitte Zypries about the potential gains from companies moving from the UK to the EU post-Brexit, and the pessimistic outlook on Brexit offered by Joachim Lang, managing director of Germany’s main employer federation (the BDI) should be interpreted in this light. Both seem to be stiffening the EU27’s resolve.

Against this backdrop, British businesses are quietly, but much more firmly than before, explaining to the UK government that time is running out. For them the cliff edge is not March 2019, but early 2018 when contingency plans have to be executed.

Most financial services companies have made these contingency plans, and many tell me that they are stepping these up plans from ‘Brexit-min’, where they were moving some minimal operations to take advantage of being inside the single market in the case of a cliff edge, to ‘Brexit-max’ (i.e. plans to scale up operations significantly in Frankfurt, Dublin and elsewhere). Once gone, these jobs will not come back if, following a cliff edge Brexit, the UK seeks ex post facto to recover the situation.

This week, former civil servant Sir Martin Donnelly reminded everyone that those confidently talking about ‘no deal being better than a good deal’ simply don’t understand that they are proposing that UK business should operate in a legal vacuum. Realistically, traded services cannot do business in such a vacuum. Those who advocate ‘no deal’ seem stuck on a world vision of 19th century UK trade of physical goods on the high seas rather than one where modern 21st century business operates.

A good illustration of the importance of the single market was provided last week by the Scottish government publication Brexit: What’s At Stake For Business. It highlights in very clear terms the importance of Scotland and the UK being inside the single market and the customs union. In terms of single market access, the importance of certainty is highlighted from industries from aviation to asset management to high-tech manufacturing.

But it also underlines the importance of access to skills to an economy like Scotland’s. For organisations from farms to food manufacturers and universities, the paper shows that we are critically dependent on free movement for our economic growth and productivity growth.

If business thinks that a cliff edge in March 2019 requires action now, then there is very little time to reach a deal. This begs the question of whether a ‘transition deal’ where the UK maintains the status quo (staying in the single market and customs unions) can be seen as a means to avoid a cliff edge?

I argued for this strategy as a way of creating a Brexit truce a year ago, at the start of the negotiations. But as the negotiations have evolved it seemed clear that on its own it would not be acceptable to the EU27. As I highlighted in a recent piece, the EU27 will not accept a transition which would simply be seen as a two-year (or more) extension of the Article 50 negotiations.

They want know what the UK is transitioning to. There is a clear procedure within Article 50 for extending the negotiations, and accepting a transition would be seen by the EU as strengthening the UK’s negotiating hand, and perpetuating Brexit uncertainty for the EU27. But we now hear that some in the EU27 might be willing to look at scoping a transition as a way of avoiding a cliff edge, especially if public opinion and political positions in the UK on Brexit are shifting.

However, and this is a crucial point, this would require acceptance of three key requirements by the UK: (1) an acceptance that EU legislation and ECJ compliance would be adhered to dynamically during the transition; (2) continuing adherence to the four freedoms; and (3) UK contributions to budget for programmes that are seen as integral to the single market (e.g. for social cohesion). In effect, a status quo transition.

This would push the UK into the territory of Brexiteer apoplexy. It would require a major political realignment at Westminster. We are beginning to get some hints across the political spectrum that ‘no deal’ might be blockable by Westminster. In all major international treaty negotiations, there is a crucial phase: we are about to enter one as far as Brexit is concerned.

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University of Glasgow

Prof Sir Anton Muscatelli is Principal and Vice Chancellor of the University of Glasgow. He is Chair of the First Minister of Scotland’s Standing Council on Europe and Advisory Board Member of the Scottish Centre on European Relations.