What to expect in the year before Brexit

Theresa May has enjoyed a remarkable resurgence as British Prime Minister in recent weeks. She has secured an agreement with the other 27 European Union members on a Brexit transition period, her EU and NATO partners followed her lead in punishing Russia over a nerve agent attack, and she appears to have headed off Conservative Party rivals for her job – at least for the moment. She is on a roll and is at last getting the credit she is due, Downing Street tells us.

But Mrs May’s time as Prime Minister will ultimately be defined by how Brexit plays out. Thursday, March 29 marks one year since she formally triggered the Article 50 process for taking the UK out of the EU. That means there are 12 months left before the official departure date to wrap up the exit talks. Will it be plain sailing, or could Brexit still hit the rocks?

Two key stages have been completed so far. The UK and EU27 have provisionally agreed on the three divorce issues of how much the UK owes the EU, what happens to the Northern Ireland border and what happens to UK citizens living elsewhere in the EU and EU citizens living in the UK. And on March 23, the two sides agreed a 21-month transition period until the end of 2020 to smooth the way to post-Brexit relations.

Talks are now moving on to future relations. But there are several reasons to believe that navigating the final year will be anything but easy. Let’s look at some of the hazards that lie ahead.

The Irish question. Both the EU27 and the UK have repeatedly said they want to prioritise the Irish peace process in their talks by avoiding a hard Irish border. The issue was essentially parked in last December’s divorce deal: although Mrs May agreed that Northern Ireland and the Republic of Ireland would remain in complete regulatory alignment if no solution is agreed, she has since said that this is something no British Prime Minister could ever agree to. The negotiators began anew to resolve the issue. First up are issues around customs, food safety, and animal health. Negotiations will continue over the two months with EU leaders due to assess progress at their next summit in June. The two sides currently seem at a loss on how to keep the border open, and Ireland has made clear that it will wield its veto on any EU-UK deal that does not address the issue satisfactorily.

The new deal. It may take years and years before the EU27 and the UK complete a deal on their new relationship. However, they are committed to securing a broad political agreement on the shape of a new deal by October. That is just six months to outline future relations on issues ranging from trade and customs to banking and travel. Mrs May says that the UK must leave the single market and customs union and instead strike a bespoke deal and comprehensive partnership, covering not only free trade, but also regulatory co-ordination, and co-operation on external and domestic security. If it all goes to plan, by March 29, 2019, there will be clarity on the broad direction for a future EU-UK trading relationship and work will be able to begin in earnest on the details during the 21-month transition period. If not, then the UK will leave the EU without a clear idea of its relations with its biggest trading partner. And although the proposed new deal is supposed to be a separate issue to the transition agreement, failure in one could doom the other. As EU Brexit negotiator Michel Barnier says, “nothing is agreed until everything is agreed.”

EU ratification. In the Council of Ministers, the Withdrawal Agreement needs a qualified majority of 27 EU governments, meaning at least 72 percent of the EU27 representing at least 65 percent of their population will need to agree. However, it is inconceivable that European Council President Donald Tusk will force a vote on the issue if any one member state opposes it, especially given the safeguards given to Ireland and Spain. It also needs to be ratified by the European Parliament, by a simple majority vote, including the UK MEPs. Although both MEPs and the Council have broadly supported the process so far, their consent cannot be guaranteed. If they don’t agree, the UK will automatically leave without a deal on March 30, 2019.

Westminster. Mrs May has reluctantly conceded a “meaningful” vote for MPs on the Withdrawal Agreement at the end of the procedure (one initial suggestion was for a parliamentary vote after the UK leaves). Ministers say they want MPs to vote for either the agreement on the table – covering both the Withdrawal Agreement and the broad shape of UK’s future relationship with the EU – or to walk away with no agreement at all. Some MPs say that a no vote could send the government back to the negotiating table in Brussels, or even stop Brexit from happening altogether. But it could only happen if the vote is early and the EU is willing to reopen talks. There may also be scope for delaying the March 2019 exit date, at least according to former UK Attorney General Dominic Grieve, who said that the EU would allow more time for a last-minute agreement to be approved by MPs. But such an extension would be brief and unlikely to go beyond the May 2019 European Parliament elections. The mood in the Commons will become clearer after key votes on the government’s upcoming Trade Bill, likely to take place in October, for example, on the customs union, access to the single market and Ireland: these may show the existence or otherwise of a cross-party majority of MPs that could place the government in difficulty. However, residual Remainers admit that any reversal of Brexit would probably need, in addition to a parliamentary no vote, another referendum, or a fresh general election – a tall order, though not impossible.

Business pressure. A strong majority of British businesses backed Remain in the 2016 referendum, and there were many dire warnings about the economic hit from leaving the EU. In the initial months after the referendum, the impact was hard to see: while the pound fell by about 15%, the UK economy defied predictions that it would fall into recession, helped in part by a swift and robust response by the Bank of England. Now, however, the economy appears increasingly affected by Brexit. Investment is slowing as businesses wait for more clarity on the future relationship. There are fears that even with an additional 21 months of transition, there is not enough time to adapt. Many banks are relocating, with most choosing Frankfurt for their EU trading hub. Unilever this month said it would move its headquarters from London to Rotterdam. If the economy continues to dip – and if the slide can be clearly linked to Brexit – then the government may face pressure to change course.

Events. When asked what is most likely to blow governments off course, former British Prime Minister Harold Macmillan responded, “Events, my dear boy, events.” In this febrile political climate, it is harder than ever to forecast the future. Less than three weeks after triggering Article 50 last year, Mrs May called a general election. Pundits almost universally predicted that she would win by a landslide, with some saying she would secure a majority of more than 175 seats. In fact, she lost her majority, and now governs in a fragile coalition with Northern Ireland’s DUP. Her government could fall for a number of reasons, from scandal and party fracture, to terrorism and war. If the opposition Labour Party wins the subsequent election, it may seek to reverse Brexit, or more realistically, significantly soften Brexit.

All these are big challenges that have to be overcome before the UK leaves. That is on top of the other preparations that the government and businesses must make, from setting up new customs procedures, to agreeing standards and conformity arrangements. Can the two sides do it? That remains to be seen. But businesses should already be planning for every eventuality, including the worst-case scenario of no deal. The EU and the UK are at the halfway point in the Article 50 process, but there is a mountain of work still to be done.

By David Harley, Roland Moore & Leo Cendrowicz

 

Leave a Reply