Brexit Briefing No.44 - Brexit Becalmed?

As the drift in the Brexit negotiations continues, Europe’s focus has shifted to other matters.

The upcoming June European Council Summit was supposed to be a decisive moment in the Brexit process when many key decisions would be taken and the path to October’s agreement on the final Brexit terms would be smoothed. No longer. Brexit is slipping further and further down the Summit’s agenda, partly because the EU has many other existential crises to deal with right now, but also because it appears to be a deliberate strategy. 

The European Commission has no interest in making things easy for the UK and appears to be of the opinion that the longer it leaves things the more likely the UK is to concede to its demands on Northern Ireland, staying in the customs union and single market, continuing to accept free movement and remaining largely under EU rules. The strict timeline imposed by Article 50 (with the UK leaving on the 29th March next year) makes this easier for Brussels. It knows time is on its side as the political pressure will ramp up on the British government to get a deal as we get closer to that deadline. We are already seeing this in the UK, whereas in Brussels the Commission is not under anywhere near as much pressure to secure a quick deal and so can take its time before offering the UK a take it or leave it deal at the last moment. 

The UK government has been aware of this danger for some time, which is why the “no deal is better than a bad deal” headline has been frequently employed. However, the reality is that no deal is almost certainly not viable at this point, as there is simply not enough time for the UK to prepare adequately for it and because the fractured domestic political situation doesn’t give the government the political freedom to pursue such a radical change. The Hungarian government also reminded everyone this week that no deal would be disastrous for the EU as well, with very little contingency planning having been done on that side of the channel either. 

So this week’s summit is unlikely to bring about significant progress. In another sign of those low expectations, only 12 countries sent ministers to the EU27 pre-summit Brexit preparation meeting, the other 15 were represented by officials. The protracted discussions on Northern Ireland show no sign of reaching agreement, and the UK Government White Paper on the Future Relationship, originally promised in the spring now has a new date of July 9th. 

Goals for the future relationship annex of a promised October withdrawal agreement diminish with the shrinking days post spring equinox. The real negotiations on that relationship will take place after the UK has left the EU and when it will be treated like a third country in any trade negotiations with Brussels. 

However this poses problems for both sides and is actually the primary reason why negotiations have stalled. Brussels initially insisted that the Article 50 negotiations cover only the withdrawal issues and not the future trade arrangements. Yet only when those trade arrangements are finalised will the EU be sure that there will be no hard border in Ireland, which is their minimum demand for agreeing to the withdrawal deal in the first place. 

It is this, more than anything else, which is causing the blockage in talks. I believe this has been a miscalculation from the European Commission because they assumed, rightly, that it would be harder for the UK to negotiate access from outside the EU. As Japan and Canada have found, the EU remains a protectionist trade power in many sectors, most notably in agriculture, fisheries and services and a trade deal takes years to finalise and then ratify, with any EU member state and regional parliaments in some countries able to block the entire deal. The commission believed this put them in a very strong position but they overlooked that this also meant that they would be unable to exert any leverage over the Irish border once the UK was out of the EU. Their leverage only really works with the threat of no deal and a disorderly exit from the EU. Once the UK is a third country the Commission can’t leverage that threat any more. As a result a UK commitment to stay the customs union and single market (the only way the EU believes a hard border can be avoided) can only be extracted from the UK now. 

There are only two perceived primary ways out of the impasse. Either the UK accepts the EU demands and stays in the single market and customs union in perpetuity, (with a commitment to bind any future government into the same relationship) in order to get the withdrawal deal done and at least leave the EU in name, or the talks need to be reset and the future trade arrangements need to fully part of the withdrawal negotiations. 

The first option greatly benefits the EU, the second the UK, but would probably involve an extension to Article 50. Given the nature of these negotiations neither are very likely in the short term. 

visa

There is a further disconnect between the UK and the EU. The UK believes that as one of the foremost powers in Europe it should have a special partnership with the EU. For the EU side the only thing that is unique in the EU-UK relationship is that the UK is leaving the EU, once it has left, it will be treated like any other third country. Of course there is some inconsistency to this approach, the UK has just signed up to a major new defence and security pact in Europe, and in seeking to undermine economic relations with the UK the EU is also putting at risk the strength of the UK’s contribution to European security, which is inevitably dependent on the wider economic success of the country and more important than ever to Europe given the ongoing withdrawal of American commitments to European defence. 

However, the EU faces many internal threats to its future survival and so the key interest is to ensure that the UK is seen to lose from departing the Union. Most European leaders share this view even if they know there will be some damage to their economies (which they will ask the EU for financial support to alleviate). Business leaders around Europe fall into line because they also recognise that keeping the single market together will ultimately benefit them more than keeping all of their current business in the UK. 

So in the likely certainty that the UK will leave the single market companies are making contingency plans to separate their production sites. BMW appear to have taken this view when it announced this week that its future investment in Britain is uncertain, mainly because British factories will be producing cars just for the British market in future, not for the whole of Europe. However the flip side is that companies who produce for the whole of Europe (including the UK) from production plants outside the UK, are looking at moving their production for the British market back to the UK to avoid any barriers to trade that may come up. 

So the reality of Brexit is that it will likely see some jobs move to the continent and others created in the UK. In this regard the UK benefits from being a large enough market that it can support major unique market investments to serve the domestic market. 

Another sign of the European Commission’s intentions with regards future UK-EU relationship came in briefings to the media that it was looking at the option of requiring British citizens to apply for a visa for travel to the EU, placing the UK in the same category as visitors from countries such as Uganda and Uzbekistan. 

Visa requirements are designed to make it harder to visit the EU and include a prior interview at an EU embassy (in London) significant cost, and a high likelihood of the visa being denied. 

If the EU ever imposed this on the UK it would be a huge inconvenience for British visitors to the EU, many of whom could not meet the requirements at all and many of those who could simply would not bother to go through the hassle. 

However it would be disastrous for the European tourist industry, particularly in places such as the Algarve, Malta, and Cyprus who rely nearly exclusively on British tourists. There are more British tourists to Europe than from any other single country. Many European airlines operate on fine margins that depend on British tourists to survive. The Eurostar and Eurotunnel also rely on high numbers of British travellers. 

Very few British citizens would go through the inconvenience of applying for visas and would simply holiday outside the EU in countries such as Turkey, the Balkans or the US. 

The EU has the power to control visa access as it took it over from member states in the Schengen area many years ago (which is a key difference from the pre-EU days). However with that power comes responsibility. Such a threat is not credible or viable given the fact that the EU has visa free agreements with many countries including Turkey, Ukraine, Malaysia, Brazil, Morocco, Venezuela, Argentina, the US, Canada and Australia. However the fact the idea was even mooted by the Commission is a signal of their bullish intentions vis a vis Westminster. 

macedonia

Right now the reality is that Brexit is not top of the current EU agenda, as the EU is focusing its energy on other issues, most notably the accession talks with new potential EU members. Macedonia is top of the list after the country agreed a provisional deal with Greece on the forty year name dispute which in theory at least, will open the door to them joining the EU. It appeared this week that talks are also about to open with Albania. 

Migration still has the greatest potential to rip the EU apart though after an ugly weekend mini-summit on the issue descended into name calling and vicious briefing and counter-briefing.

The main June summit is expected to touch on migration, and particularly the demands from frontline states such as Italy and Greece for a mandatory relocation mechanism by which all EU members are obliged to take migrants who arrive from the Mediterranean. There is little likelihood of an agreement though despite the German Chancellor’s desire for one to help resolve her own internal difficulties. The weaker Merkel is proving a headache for Brussels and the EU not just on migration, but on eurozone reform where the Franco-German plans launched last week now face stiff resistance from at least a dozen EU countries when they come up on the summit agenda.

So we can expect many fractious headlines to emerge from Brussels in the weekend papers, but despite the shortening timeframe to conclude a Brexit deal do not expect a big breakthrough on the Article 50 talks. For now at least the talks remain in a state of stasis awaiting a gust of fresh wind.