British business needs Brexit certainty
LONDON — Brexit is finally showing signs of progress: The European Union has green-lighted moving on to the second phase of negotiations, and offered a ray of hope in the process. But this is, at most, the end of the beginning. The U.K. and EU27 now face two new challenges: negotiating a post-Brexit transition period and agreeing the framework of the trade deal that will follow.
In addition, the U.K. has its own challenge to ensure there is enough certainty over the latter to give value to the former.
Both sides agree on the need for a transition period to ensure EU-U.K. economic continuity until a new trade deal can take effect, which — given its complexity — could take anywhere between a further two to five years.
The most sensible form of such a transition, as May has conceded, would see the U.K. remain in the single market and customs union. This means Britain will be subject to existing and, potentially, new EU policies and regulations, including on the movement of people, and to their supervision by the European Court of Justice for at least two years.
The transition won’t begin until March 30, 2019, the day after the U.K. officially is no longer a member of the EU. But if business does not know well before then how such a transition may — or more likely, may not — differ from the status quo, it will prepare for the worst and take drastic measures in the first and second quarters of 2018. This would cover everything from restricting the routes available for future U.K.-EU airline bookings to moving large parts of EU-focused wholesale banking from the City of London to financial centers in the EU27.
Prime Minister Theresa May has called this phase of Brexit an “implementation period.” The term implies that its sole purpose is to buy the U.K. time to implement the terms of its withdrawal. But the “transition” is, in fact, a means to an end.
U.K.-based businesses, regulators and others need clarity on what the country is transitioning to, not just what it’s transitioning from.
The next step is for the two sides to agree on a framework of the future trade deal by next fall, which would still leave time for review and ratification if necessary by the British and European parliaments.
Judging by the heated debate over the Irish border, the issue of regulatory alignment, coordination and divergence will be enormously complex to resolve. But in light of the progress made this week and the mutual interests on both sides, it’s possible they can agree on a framework for a sensible EU-U.K. economic relationship after Brexit.
This would include the broad terms of the future trade relationship; areas of planned regulatory divergence and alignment; dispute settlement procedures; rights to work; future U.K. funding for and participation in EU programs; and a new treaty to manage continued close security cooperation.
Even then, the question for Britain will be how to make the framework sufficiently binding legally after the scheduled end of the Article 50 process on March 29, 2019 for it to lend certainty to businesses on both sides of the Channel during the ensuing transition.
Otherwise the transition period will be meaningless. It will simply turn over the proverbial hourglass and restart the countdown on the next stage of the Brexit process, perpetuating the very economic uncertainty that the U.K. is now hoping to escape. The destination needs to be known when the transition journey begins, not decided along the way.
How can this be done? One way would be for the heads of government of the EU27 to sign a EU-U.K. framework agreement with May, immediately after the completion of the Article 50 process, that commits them legally to implement the parameters of the future U.K.–EU deal.
In other words, the framework for the future trade deal would have legal meaning before all of the complex detail is finalized and the formal trade agreement is ratified by EU member countries some years after Brexit.
This was the mechanism used with then Prime Minister David Cameron on his pre-referendum set of proposed EU reforms.
Implementing Cameron’s EU reforms was contingent on him winning the referendum and on the European Parliament approving one of the items: changes to the rights of EU citizens in the U.K. to in-work benefits. Losing the referendum meant that little attention was paid to the innovative legal approach the EU27 had taken beforehand.
Similarly, the future formal U.K.–EU trade agreement would be contingent on ratification by Britain and the EU27.
But agreeing to a legally binding framework in advance would mean that the structure would, at least, be unlikely to alter over the course of the detailed negotiations following Brexit. This would give citizens, businesses and investors on both sides of the Channel far more certainty than they have today. And make a successful Brexit more likely.
Robin Niblett is director of Chatham House.