The Brexit Endgame: Key Challenges Ahead – Perspectives from Germany, Ireland and Scotland

11 December 2018

© 2018 IIEA

Brexit: The State of Play

Andrew Gilmore and Kirsty Hughes

As the Brexit endgame follows an uncertain path to an unclear (as yet) end point, our timely joint event looked at the big challenges and questions ahead with high-level German, Irish and Scottish speakers contributing. In this overview, we look at some of the key themes and questions in this Brexit endgame as explored at our event on 5 October 2018 (with specific summaries of each session following this state of play overview).

Uncertainty remains one of the key big issues around Brexit. With the UK’s date of departure less than four months away, and the approval of the UK parliament still needed for the Withdrawal Agreement, the dominant characteristic of the endgame is uncertainty.

The detail of the withdrawal agreement has, of course, now been pinned down, including the ‘divorce’ payment; rights of EU citizens in the UK and UK citizens elsewhere in the EU; a transition period until the end of December 2020, with possibility of extension until 2022; and, most politically contentious within the UK, the Northern Ireland backstop. The backstop was something of a diplomatic victory for Ireland, and was a key red line for the EU27 throughout the latter stages of the talks. Of course, it was also the source of the deadlock in the final months of the negotiations, with Prime Minister Theresa May clearly struggling to get whatever had been agreed at technical level, in the days and weeks before the summit, through her cabinet or past her backbenchers.

For our speakers from Germany, Ireland and Scotland, Brexit was not a desirable goal, better for the UK to have remained in the EU. But if Brexit had to happen, then an organised, negotiated and agreed Brexit was seen as clearly superior to the chaos of no deal. Yet for some Scottish speakers (a view seen elsewhere in the UK too), any hard Brexit deal (or ‘blind’ Brexit deal if the political declaration on the future relationship was very vague and fudged) should, preferably, be opposed at Westminster – and for some Brexit should be opposed in all forms. Any rejection of a deal brought to Westminster, the European Council and European Parliament for ratification would surely lead to an intense political crisis in the UK. But it would also open up the possibilities of a general election (that might or not lead to a major change in negotiating stance perhaps towards a ‘softer’ Brexit) or of a so-called ‘people’s vote’, i.e. a further referendum on whether to accept the deal or remain in the EU.

The Backstop

The commitment to a backstop, in last December’s Joint Report, set out three routes to ensuring the Irish border remained open and frictionless after Brexit. It also laid bare a stark contradiction in the regulatory border between Ireland and Northern Ireland, while also pursuing an independent trade policy for the UK as a whole. This paradox was further underlined by a subsequent paragraph of the report, included at the DUP’s insistence, that any arrangements for the border between Northern Ireland and Ireland would not create barriers to Northern Ireland’s trade with the rest of Great Britain.

Theresa May set out her ‘red lines’ on Brexit very early on – including leaving the EU’s single market and customs union, not remaining under the legal jurisdiction of the Court of Justice of the EU, nor retaining free movement of people. These red lines made it very difficult to see how the future UK-EU relationship could ensure that the Irish border remained open. Hence, the steady emphasis on the need for a permanent, feasible backstop from the EU side.

In addition to all of this, Prime Minister May found herself with a government divided into warring factions, both within the cabinet and across the backbenches, and needing the votes of the DUP’s MPs to sustain her majority. Inevitably, then, the UK government struggled for months with the conundrum of reconciling these contradictory positions. Due to its own domestic political divisions, it struggled to propose a backstop that it could even agree to itself, let alone that would be acceptable to Ireland and the rest of the EU.

The UK’s proposals for a temporary customs agreement as the basis or partial basis for a backstop, was rejected by the EU – as, broadly, were her later Chequers proposals and white paper focused on staying in, effectively, the single market for goods. Yet by early autumn, discussions were under way as to whether there could be a ‘backstop to the backstop’ of some kind or other. Ultimately a solution was found, and on the night of 14 November 2018, the EU published the draft Agreement on the Withdrawal of the United Kingdom from the European Union. The text contained agreement on virtually all of the outstanding issues for the negotiations, including the Northern Ireland backstop. The deal also crossed many of the Prime Minister’s stated red lines, and prompted a string of resignations from within her party, including the Brexit Secretary, Dominic Raab.

A Hybrid backstop

The agreed solution of 14 November essentially amounts to a hybrid of the EU and UK proposals, with the UK as a whole remaining in a single customs territory with the EU, and Northern Ireland specifically remaining aligned with Single Market regulations across a broad swathe of areas. Notably, the UK would also accept the CJEU as the ultimate arbiter with respect to all laws within the scope of the backstop. Furthermore, there is no time limit on the agreed backstop, as the UK had previously insisted upon. However the EU made a partial concession to the UK’s position in allowing for a review mechanism. This review mechanism would allow the backstop to be cancelled, in whole or in part, by mutual consent at an undetermined point in the future, as long as – and if – the future relationship succeeds in achieving the same objectives of the backstop – namely to maintain the necessary conditions for continued North-South cooperation, avoid a hard border and protect the Good Friday Agreement in all its dimensions.

While the proposal of a UK-wide customs union and NI specific regulatory alignment would solve the issue of the border it also inevitably throws up some issues for trade between Northern Ireland and Great Britain – a soft ‘sea border’ arising from regulatory differences between Northern Ireland – following EU single market rules for goods and agriculture – and the rest of the UK. However, these barriers should not be overstated – indeed there are already regulatory differences between Northern Ireland and Great Britain. Moreover, UK ministers have said they would keep British laws aligned with those in Northern Ireland (though such a unilateral move will not remove all EU regulatory checks).

The EU, at the September 2018 Salzburg Summit, attempted to ‘dedramatise’ the backstop issue by putting forward proposals that would minimising the level of checks and inspections that would be necessary at any Great Britain to Northern Ireland sea border, though the issue of phytosanitary checks on animals is more difficult to address – such checks simply must happen at the border because of food safety and animal health reasons. The island of Ireland would remain a ‘single epidemiologic area’, and these checks of this type already occur at the ports of Larne and Belfast.

The backstop would also present a number of issues for the UK in terms of the broader trade environment. As part of a joint customs territory, with a common external tariff, the UK would inevitably face restrictions on its ability to negotiate new free trade agreements – it would also lose access to any EU FTAs that do not contain territorial extension clauses and would need to renegotiate access/deals.

It is also important to note that there are indications in the Withdrawal Treaty that this customs agreement could form the basis for the future relationship between the two – a far cry from the independent trade policy that many pro-Brexit politicians called for in advance of the referendum.

Transition

At the October summit, it appears Theresa May raised the issue of potentially extending the transition period – possibly to obviate the need for either a customs union or a Northern Ireland backstop to come into play (if the future relationship could be negotiated in time and if it allowed for a frictionless Irish border). This extension clause ultimately appeared in the withdrawal agreement – initially, and to the consternation of many Brexiteers, this took the form of a rather indelicate placeholder text indicating an extension to the year ‘20xx’. The sides subsequently agreed that an extension could be granted until 2022 – indeed this option may very well be needed, in light of the complexity of negotiating an ambitious future relationship, and the undesirability of the backstop. If this came to pass, it would leave the UK as a rule-taker for up to four years after the date of departure, and no fewer than six years after the UK electorate voted to leave the EU.

The EU has been quick to state that the deal on the table is the final one – there will be no renegotiation – and the challenge of concluding the deal now moves to Westminster, where agreement is by no means guaranteed. Many of Prime Minister May’s cabinet and backbenchers, and the DUP, have insisted they cannot support either an indefinite backstop – even the review clause, which would requiremutual consent, may in their view cede too much power to the EU. Given the unstable and shifting tides of the politics around the UK government the agreement of Westminster cannot be guaranteed.

The Future UK-EU relationship

In addition to the Withdrawal Agreement, the negotiators agreed a Political Declaration on the Future Relationship between the EU and UK, setting out a wide-ranging and ambitious relationship – but one which inevitably falls somewhat short of what the UK had hoped for, particularly on services, especially financial services and autonomous trade policy. Of course, with the withdrawal agreement proving so hard to conclude, much less negotiating time was spent on the future UK-EU relationship, and only the broad-strokes are agreed at this point – the real business of negotiating the future relationship can only begin after the UK becomes a third-country.

While the political declaration on the future relationship will not have the legal status the withdrawal agreement will have, it is nonetheless a significant outline of where talks on the UK’s future trade and wider security relationship may go after 29th March 2019. Of course, as the EU is well aware, any early election in the UK – or even one in 2022 when the next general election is due – could change substantially the goals and aims of talks on the future relationship.

While Theresa May initially rejected a Canada-style deal as not deep enough nor reflecting the starting point of full alignment, this does appear to be the initial direction of travel signposted in the political declaration. This would essentially preclude the possibility of deeper UK access to the EU market in services – the Chequers paper proposed an expanded equivalence regime for the UK, but the political declaration makes no such guarantees, appearing to allow the UK only the more limited equivalence access currently afforded to third-countries.

It is also worth noting that both the Withdrawal Agreement and the Political Declaration reference the backstop as potentially forming a basis for the future customs relationship. However, the ‘bare bones’ customs union that would apply to Great Britain in that solution is still inadequate in comparison with the current arrangements (and indeed even compared to Turkey’s customs union with the EU) – while Northern Ireland in this scenario would remain in a somewhat frictionless state of trade with the EU, there would still be a requirement for regulatory checks between Great Britain and the EU.

It is possible that these barriers could ultimately be further softened – the EU and Turkey, for example, engaged in extensive discussions regarding the upgrading of that Customs Union to further eliminate barriers to trade between the two. The key difference in that regard, however, was that the EU-Turkey customs union was designed as an instrument of convergence – the customs relationship with the UK is novel in this regard, being designed in the context of divergence. Furthermore, it is important to consider that both sides still have red lines in this regard – for the EU, the need to protect the integrity of the Single Market, and for the UK, the political need to be able to sign and ratify trade agreements in future.

Deepening the customs relationship on an indefinite basis would mean that the UK could not have the independent trade policy that Brexiters claim as one of their aims. Where talks on a future relationship may go remains, for now, wreathed in uncertainty. And, even with the provision in the withdrawal agreement to extend transition, the prospect of another ‘cliff edge’ will loom given the difficult challenge of agreeing (and certainly not also ratifying) a deal on a new relationship by the end of 2020, or even 2022 in the
extension scenario.

The Withdrawal Agreement and political declaration have created major controversy in the UK with Tory Brexiters, remain-supporting opposition MPs (and some Tories) and MPs who would prefer a ‘soft’ Brexit all opposing the deal. The chances of the deal being voted through at Westminster look slight (as of the start of December). Whether, in the face of a rejection of the deal, there would be support for another referendum, a shift to a ‘soft’ Brexit (through renegotiating the political declaration), a general election, even a revoking of Article 50 or perhaps a second vote on the same deal is unclear. Only a handful of Pro-Brexit MPs would actually want to see the prospect of a ‘no deal’ crashing out of the EU. In any event, the UK would face a major political crisis – and the EU would wait for the UK to come to a decision on its next steps.

Scotland and Brexit

Scotland voted remain in 2016 – by 62% to 38%. Yet Scotland is currently on track to be a full part of whatever Brexit deal the UK negotiates, or of ‘no deal’ if that should transpire. The Scottish government has insisted that its preference is for the whole UK to remain in the EU, that failing that it would support a ‘soft’ Brexit of staying in the EU’s single market and customs union, and that failing that it would argue for a differentiated Brexit whereby Scotland could stay in the EU’s single market while the rest of the UK left. None of
these goals match with the current approach of Theresa May.

Scotland’s First Minister, Nicola Sturgeon, has indicated that in the absence of these goals being met, the SNP’s MPs at Westminster, the third largest group after Labour MPs, would be likely to vote against any deal May brings home. Sturgeon has also called for an extension of Article 50 and at the SNP conference, a week after our event, said SNP MPs would support any vote at Westminster on holding a ‘people’s vote’, if it contained a ‘remain’ option – even if there were no provision for Scotland not being outvoted again (while saying she thought, as in 2016, there should be such a provision).

While the LibDems in Scotland – and across the UK – also support a people’s vote, Labour has continued to fudge its position on that, and Scottish Labour has not diverged from Labour’s UK leadership on that (albeit some individual Scottish Labour politicians have). Meanwhile Scottish Tories have indicated not only their support for Brexit but have expressed their concerns about a Northern Ireland specific backstop as it might encourage not only differentiation in Scotland but support for independence too.

Recent polls have suggested that a ‘no deal’ Brexit would increase support for independence somewhat; whether the fact of Brexit happening, even with a deal, may impact more on support for independence in the coming months is an open question. There have also been many concerns in Scotland at how the devolution settlement has been and will continue to be impacted on by Brexit – with the so-called ‘Sewel Convention’ which states Westminster will not normally over-rule Holyrood, now seen as having no legal effectiveness at all. So alongside Scotland’s pro-remain majority being out of line with the leave majority in England and Wales in 2016, there is a stand-off and political controversy around devolution too.

Irish politics of Brexit

Ireland may not have had a vote in the Brexit referendum, but no issue in peacetime has preoccupied the country to the same extent as the UK’s referendum and impending withdrawal from the European Union. Unlike the debate in the UK, however, there has been almost total consensus on the issue in Ireland: Brexit is unquestionably bad for Ireland, economically and politically.

As John McGrane, Director of the British-Irish Chamber of Commerce put it in his remarks at the event at the IIEA: “In voting to leave the EU, the UK aimed to shoot itself in the foot, but missed and shot us in ours instead.”

It is true that Ireland’s accession to the European Economic Community (EEC) helped it move away from its dependence on the United Kingdom in recent decades, but the two countries to this day maintain exceptionally close relations. The Common Travel Area that Ireland and the UK share has existed for nearly a century and the open borders which came about as a consequence of joint EU membership and the end of the Northern Ireland conflict have contributed to turning these islands into a shared social and economic space.

Ireland can claim a greater understanding than most Member States of the British mentality, including the tendency towards exceptionalism and the at times difficult relationship with the EU, but the referendum result nonetheless came as a shock and threw the country into crisis response mode.

The Government’s immediate response was to publish its Brexit Contingency Framework, the result of months of preparatory work, and by August, a mobilising of existing resources and restructuring of the Irish Government civil service was already underway. The new organisational structure notably included:

  • A strengthening of Irish missions and agencies in key member states, including Germany and France
  • A new Cabinet Committee on EU Affairs
  • A new EU Affairs division in the Department of Foreign Affairs and Trade

These points, somewhat overlooked amid the post-referendum frenzy, were in fact crucially important indicators of the road the Irish Government was now choosing to walk: when the negotiations began, Ireland would be firmly on the other side of the table from the UK. Outreach to other Member States was to be a key part of the Government’s strategy, particularly as a means of highlighting Irish concerns.

The Irish Government’s approach proved to be a major diplomatic success. When the EU negotiating guidelines were published they made agreement of a withdrawal deal contingent upon agreement of the Irish issues.

Notably, while the Brexit process has had a profoundly destabilising effect on UK politics, the opposite has been true in Ireland: the last election produced no clear majority for the ruling Fine Gael, and it entered into a confidence and supply agreement with the largest opposition party, Fianna Fail. Both sides have expressed their view that the Government should not be brought down until the Brexit negotiations are successfully navigated – though this could yet mean an election prior to March 2019, depending whether and how quickly the UK can ratify the withdrawal agreement.

Brexit also engendered a galvanising effect on Irish attitudes towards the EU – far from creating a ‘domino effect’ of Euroscepticism in neighbouring countries, Brexit and the chaos it has induced in the UK, combined with the solidarity shown by the EU to Ireland, has
actually contributed to record levels of pro-European sentiment in the country. Polls now consistently show that over 80% of the Irish public have a positive view of the EU. Nonetheless, as the Brexit endgame begins, many commentators have begun to ask whether a price may be attached to that solidarity – sans a UK that was like-minded across many policy areas, Ireland will find itself more isolated in an EU that is none-too-enamoured with the Irish position on corporate tax, for example.

While the Irish Government continues to work to build new alliances, focusing particularly on Northern European countries and a new, so-called ‘Hanseatic League’, there is little denying that the UK’s economic weight and political influence will be missed in Dublin when the EU becomes a club of 27.

German politics of Brexit

Germany never welcomed the UK decision to leave the EU and its Chancellor, Angela Merkel, has made that clear on many occasions. However, Germany’s continued goal in the process of the Brexit talks has been to preserve the unity of the EU and of its single market. Germany has also been a clear and strong supporter of Ireland and the need to defend the Good Friday Agreement.

While Germany businesses have strong trade and investment links with the UK, the hope espoused by some Brexiters that these links would mean German business encouraged a good deal of some sort for the UK have not been fulfilled. German business, like the German government and opposition parties, recognise how vital it is to defend the integrity of the single market and its four freedoms and have concurred with the Germany government’s strategy.

The UK’s departure from the EU, as one of the biggest member states, will clearly impact on political dynamics across the EU27. While the UK was always in some ways an outsider given the closeness of the Franco-German relationship, it also proved an ally to Germany on some issues including free trade and the eastward enlargement of the EU in 2004. Given its opt-outs, the UK had little influence over the evolution of eurozone policies and the strategies adopted during the euro crisis. But, at the same time, the UK could, to some extent, align with member states not in the euro and help give them voice.

Germany faces many other EU challenges with the other EU member states beyond Brexit. While the UK leaving the EU will be a significant moment, Germany – like France – is now more focused on its other big European challenges.

Business and the economy

Uncertainty is, in general, not helpful to businesses and the economy – and so it has been with the uncertainty around Brexit. With a new British Chambers of Commerce survey showing 62% of firms surveyed had done no risk assessment of Brexit on their activities, and 67% of those surveyed in Scotland, investment and export and import plans all risk being hit. A more recent CBI survey also found that 80% of companies had cancelled or delayed investment decisions due to Brexit uncertainty – even before Brexit has happened. The fall in the pound sterling is also, already, a drag on growth.

Many studies have suggested a range of likely negative impacts on business and the economy, depending on the form Brexit takes. Even staying in the single market would impact negatively on growth to some degree, but a free trade deal or trading on WTO terms would have an even larger impact. Unless the UK stayed in the EU’s single market and customs union, tariff and non-tariff barriers in particular would impact negatively on a range of sectors, cross-border supply chains and just-in-time production.

While there is no definitive future UK migration policy yet Sajid Javid’s, the UK Home Secretary, outline of plans for the future raise several concerns. With the end of free movement, a focus on higher skill migration and on lower migration, will mean many sectors may struggle to get sufficient labour including to find workers for a range of lower wage (not always lower skill) occupations – from tourism to the care sector to agriculture. Some areas of the UK, notably Scotland, also rely on immigration, particularly from the UK, both to contribute to their economy and society, and to contribute to or even ensure, demographic growth or stability.

In Ireland, meanwhile, the potentially negative effects of Brexit on the economy and business are well documented, and while the estimates of the impact on GDP vary widely, agreement on one point is unanimous: other than the UK itself, Ireland is the country that will be most negatively affected by Brexit. The term ‘asymmetric shock’, which was so often heard in policy circles in Dublin during the financial crisis, has re-entered the lexicon.

Having begun the 20th century as a region of the wider UK economy, over the subsequent century there was a gradual reduction in the Irish dependence on the UK. EU membership has seen the development of the two economies in parallel, both benefitting from the access to the wider EU market. However, while the ties between the two economies have been greatly reduced, they have not been broken.

The numbers speak for themselves. Nearly 14% of Irish goods exports go to the UK and 25.7% of goods imported arrive from the UK. Somewhere in the region of 3400 Irish exporters deal exclusively with counterparts in the United Kingdom. In terms of services, 18% of Irish exports go to the UK and the UK accounts for 10% of imports. Eighty-nine billion euro of Irish FDI entered the UK in 2015.

Membership of the EU’s Customs Union and Single Market has been the foundation of this trade for decades, and until the shape of the UK’s future relationship with the EU is determined, it is very difficult to quantify the economic impact of this major change in the relationship.

The backstop, if it were to be part of the model for the future relationship, provides us with some partial guidance, but of course its focus was primarily on maintaining a frictionless border with Northern Ireland. While the volume of trade crossing that border is not insignificant, the backstop’s importance is measured in political and social terms, rather than strictly economic ones.

The East-West economic relationship is larger than the North-South one, and direct trade between Ireland and Great Britain is much greater in both industrial and agricultural products than the trade between the two parts of Ireland. This means that, in economic terms, it is more important to maintain free trade with Britain than with Northern Ireland. The backstop’s bare bones customs union and absence of coverage for trade in services only partially solves this problem.

There will also be, for the foreseeable future, the danger of exchange rate volatility to contend with. Differences between the Euro and Sterling have long been a source of difficulty for business on both sides of the border. North-South trade and cross-border shopping activities have in the past been affected by large fluctuations in the euro-sterling exchange rate. The crash in sterling after the referendum was a visible reminder of this risk. Fluctuations in the euro-sterling rate since the referendum have had serious implications for product sourcing arrangements by producers and retailers – arrangements that are often difficult or impossible to change at short notice.

For Irish business, the uncertainty does not end with the UK’s still hypothetical departure on 29 March 2019 – it can only be eliminated or mitigated by the successful conclusion of the talks on the Future Relationship, which may still be some years away.