Brexit Briefing No.51: A softer EU27 stance emerges?

We have entered the final few months of the Brexit negotiations. Many issues remain outstanding and with no formal meetings between EU & UK negotiators this week, the U.K. government released detailed papers on what would happen in the event of a no deal, while the European Reform Group (ERG) of MPs opposed to the Chequers proposal released their plans on how to avoid a hard border in Ireland in order to remove the obstacle to a Canada style free trade deal between the EU & UK 

From the EU side the focus was on the annual “State of the Union” speech by Jean-Claude Juncker, the president of the European Commission, to the European Parliament in Strasbourg.

The State of the Union, inspired by the U.S. presidential address of the same name, is normally big news in the EU bubble but rarely arouses much interest outside Brussels. It is however an opportunity for the Commission chief to sketch out his vision for the EU over the following 12 months.

Brexit was, of course, a topic in the speech, but not a main one and the European Commission seems still not to have recognised that the EU will shrink over the next year. It will lose broadly 12% of its territory, 15% of its population and 18% of its economy with Brexit. The economic equivalent of its 18 smallest member states all leaving at the same time. Yet this is reduction in the EU economy and global influence is rarely acknowledged in Brussels and was again not addressed in this speech. 

However Jean-Claude Juncker did repeat that the UK could not have all the benefits of being in the EU after it has left. This highlights a big and continuing misunderstanding between the two sides. 

The UK has never asked for all the benefits, instead trying to create a new system of cooperation in the areas of mutual interest to both the UK & EU. However the EU has never seen it that way. It is still very worried that a good deal for the UK will make leaving more attractive to other countries that are cooling on the EU. 

Juncker did appear to pour cold water on some of the Chequers proposals though, by saying that the UK couldn’t pick and choose which parts of the single market to stay in. However, he immediately contradicted that by saying he wanted the UK & EU to agree a free trade area (as opposed to a free trade agreement) which might allow close relationships in some areas but not others. 

Downing Street wants frictionless trade in goods, but it is not seeking any special treatment for services. Services make up some eighty percent of the UK economy. The agreement would give Britain freedom to diverge from EU rules.

salzburg

EU leaders will meet in the Austrian city of Salzburg, next week to discuss the Chequers paper. There is also speculation that they will issue new (and possibly more flexible) guidelines to chief negotiator Michel Barnier in an attempt to seal a deal in November. 

Customs remains a seemingly intractable problem as Barnier rejected the possibility of the EU accepting a British offer to collect duties before the summer, arguing that Brussels won´t delegate its customs policy and rules to a non-EU member. The British government has ruled out a customs union and Barnier says the EU is “obliged” to control goods at its external borders.

The Irish question - as I wrote last week - will likely be a classic EU fudge to get the withdrawal agreement over the line, with the finer details still to be resolved. However eventually the fudging will have to end and it will have to be addressed. It is very difficult however to see any arrangement that meets all the red lines which can avoid a hard border. 

The ERG proposals this week on the Irish border also tried to address the customs issues, offering a range of options focusing on technological solutions, trusted trader schemes and checks away from the border.

northern ireland border

Crucially it also proposed 100% tariff free access for goods, access to the EU VAT system and equivalence on agricultural regulations. Their proposal is to try to pave the ground for a Canada style free trade agreement with the EU, which is their (and according to polls the public’s) preferred option for post-Brexit trade. The Irish border is the main obstacle to such an agreement being found. 

However, in an example of just how complex these negotiations are, these proposals appear to break some of the ERG’s own red lines. The VAT proposals would probably need some ECJ oversight and the tariff free option would need an agreement on state aid rules (as tariffs are often a defence against a partner heavily subsidising exports to gain an advantage). The agricultural equivalence would need the UK to take the EU’s rules on animal welfare, food and pesticides. Without that the EU would definitely check and block imports as they do on these grounds from every other country. 

A key part of the paper is the proposal for an agreement on a system of mutual recognition of product standards. This is the holy grail for trade negotiators, something which has never successfully been fully negotiated in any trade deal. Ironically the EU single market is the only example of this being achieved because such a system needs to be based on a common rule set, institutions and ultimately a court. 

Otherwise, neither side will trust the other one to keep up their side of the bargain, especially when one side starts becoming more competitive in one area or another and when regulations change over time on both sides. Trust alone isn’t enough to keep such a system going. 

A system of mutual recognition between the UK & EU could work though, especially as it is what currently governs trade relations under the single market. The key is how to address the trust issues caused by a lack of institutions to deal with disputes. Focusing on mutual recognition of the bodies creating the standards, and not the standards themselves, could address the issue and if a success, could stand as a template for future trade deals across the world. 

The ERG proposals highlight the reality of the last phase of the negotiations. Everyone will have to negotiate and back down from their red lines in order to get a deal. On the UK side that process is evident, even from the harder Brexiteers, but it has still not yet happened on the EU side. So far, they have rejected all the options put forward by the UK.

However, softer, more pragmatic voices are starting to emerge in some quarters. One influential MEP, not from the UK, was overheard in the corridors of the European Parliament this week making the case to chief Brexit negotiator Michel Barnier for the 27 to maintain close cooperation with British universities.

Indeed, the government is trying to seek "full association" membership of the EU's post-2020 research funding programme, known as Horizon Europe. Many British universities, such as Cambridge, LSE and Oxford, are world leaders in this field. 

So all eyes now turn to the Salzburg meeting next week, and the possibility that the EU position may shift away from the less rigid, legalistic stance of recent months. 

If that happens, negotiations are likely to move quickly.