Brexit Briefing No.6

Although there were no official negotiations this week, it has arguably been the most significant week in the Article 50 process since the two sides first met in June. The Prime Minister's speech in Florence today offers the first concrete proposals for a potential transition period before the final UK/EU relationship is settled.

Before today's big speech Theresa May started the week in Canada where she agreed with the Canadian PM Justin Trudeau that the UK and Canada would grandfather in the new EU-Canada trade agreement, which came into force this week, ensuring the tariff reductions agreed in that trade deal would stay in force post Brexit.

May Trudeau Meeting

In addition, the UK government also made it clear this week that they will seek a specific security treaty with the EU to ensure that current security cooperation can continue post Brexit.

This is a tricky area because at the moment the UK is a key member of many EU instruments including Europol, Eurojust, the European Arrest Warrant, and criminal database systems. These instruments are generally valued by the police, intelligence and counter terrorism officers as they allow data and information on security and criminal threats to be passed quickly between European countries.

The UK generally puts the most information into these databases and has often the strongest intelligence services which allow far more information to feed into the European system than would exist without the UK. As the threat of crime and terrorism is increasingly cross-border it is in no one's interests for UK information to be lost post-Brexit.

Some non-EU states can access these databases (although the information comes through slower that for EU countries) and crucially they have no say in how those instruments are organised or data managed. This is a key problem for the UK even if continued access is negotiated. The UK will certainly want a continued say on how these systems are run, yet at present, EU rules do not allow for third countries to have such a role. So there is still a lot to negotiate on the security side. So even without the Prime Minister's speech it was a busy week for Brexit matters.

Florence skyline

In her speech the Prime Minister set out a plan for a transition period of up to two years where the UK will continue to pay a contribution to the EU budget in exchange for clear and uninhibited access to the single market and a customs union relationship that allows the UK to negotiate future trade agreements with third countries whilst maintaining current customs procedures with the EU.

The hope is that this proposal will provide a fillip to the article 50 talks, currently at an impasse due partly to the EU's insistence on sorting out the divorce agreement before looking at future trading relations but also because the UK has, up to this point, not narrowed down the options of what it would like from the Brexit process. Beneath this lies two big problems, one for the UK and one for the EU. For the UK it is imperative to be able to negotiate trade deals independently on day 1 after Brexit, yet this can't work if the UK stays in the customs union, hence the proposal today from the PM to devise a new customs arrangement with the EU which an allows independent UK trading policy from Day 1.

For the EU, the major problem is that it needs to fill the budget hole that will be left after the UK leaves in March 2019 which will mean very difficult discussions in Brussels. This is something the European Commission is keen to delay for as long as possible.

So in one sense today’s speech does solve Brussels short term headache yet in another sense it doesn't, because the UK is only recommitting to pay what it has already agreed to pay. In 2013 when the financial perspectives were agreed to cover the 2014-2020 period, the UK agreed to pay around £10 billion a year to the EU. The Prime Minister today reaffirmed that commitment for 2019 and 2020, after the UK has left the EU.

However the outstanding budget disagreements, namely ongoing projects which the UK has agreed to fund post 2020, pension obligations and EU assets which the UK owns a part of, such as a share of the capital in the European Investment Bank, are not covered by this and will need to be addressed at a later date.

And crucially, this is just a negotiating position from the UK government, we do not yet know how the EU will react. By moving the focus to the transition agreement rather than just the divorce arrangements, the UK is straying out of the territory that the EU wants talks to concentrate on, namely the divorce settlement.

However, it is crystal clear to everyone that there will need to be some sort of transitional arrangement agreed before the final future trading relationship can be negotiated. The time frame offered by Article 50 is just too short to allow anything else. Michel Barnier himself said this week that there was only 12 months left to get an agreement that can be ratified and implemented by the end of March 2019. The UK leaving without any agreement would be just as destabilising for the EU as it would be for the UK.

It is therefore vital for everyone that the negotiations for the transitional phase get underway as soon as possible and the UK has now made an offer to get those negotiations started. The ball is now in the European Commission's court, but there is a good chance that this week has signalled the start of proper negotiations.