There has been ample comment on what might happen if the UK leaves the EU without a deal – over the cliff edge, as some have called it, but what might a deal look like if one can be done. To mark Europe day, I’ve decided to write this short memo to outline the parameters for a possible deal and discuss whether it is likely to be advantageous to the UK. My qualification for writing it is my involvement in numerous EU negotiations over many years.
If there is to be a deal, the outcome will likely be determined by the relative bargaining clout of the two sides. Some people have argued that because the EU exports more to the UK than the other way round, the balance of advantage will lie with the UK. Against this it can be said that if hypothetically all trade in both directions were to cease, the loss on the EU side would be shared 27 ways and would be a relatively small proportion of the EU’s total external trade, whereas all the loss for the UK would fall on us alone and would account for about half our external trade.
It has also been argued that the EU will lose the proportion of the UK’s net financial contribution that does not return to the UK. This will undoubtedly do some damage to the EU, but this will be spread unequally, with its main force being felt in poorer countries like Greece and especially Eastern Europe. Since the stability of this region and its ability to resist Russian pressure has in the past been a major British strategic interest, it is hard to understand why the UK now appears to envisage this outcome with such equanimity.
At all events the UK is unlikely to be able to determine the outcome or specify the contents to its entire satisfaction as is currently being assumed. Even if the EU will in the end have the desire to compromise, a deal of the complexity envisaged will require some very fast footwork on both sides.
There is a dispute about the order of business, or phasing of the two agreements that will be needed: one on the departure terms and another on the future relationship. This is partly a tactical issue, as the two sides try to establish their different agendas, but there is also a real legal difference between an agreement reached while the UK is still a member of the EU, which can be adopted using the EU’s normal decision-making procedures, and the treaty that will be required once the UK has left. This will have to be ratified by 27 national Parliaments, creating room for all member states to demand a price for their approval.
This almost certainly means that the deal regulating the future relationship will not be ready in the two years before the UK leaves the EU under the timetable envisaged in Article 50. Either the two year window will have to be prolonged, or there will have to be some kind of transitional arrangement. In either case, most of the high cards will be in the hand of the EU, and it will want to ensure that to the extent the UK’s privileges under the existing arrangement are prolonged, its duties will remain in force as well.
An immediate issue is going to be the so-called divorce bill: the sum of money that the EU wishes the UK to pay in respect of past commitments entered into. There will clearly be a bout of furious horse trading, with the final outcome possibly in doubt until the end. It is not worth taking too seriously the extreme figures that are being leaked by either side at this stage.
Assuming (and it’s a big assumption) that a deal will ultimately be done on the divorce bill, the two biggest issues will then be free movement of people on the one hand and free movement of goods, services and capital on the other. At the moment these are part of a package that guarantees the (relative but not absolute) freedom of circulation of all four. The essence of brexit is that it will break up this package, so that the UK can again exert sovereignty over the movement of people, while – at least in Mrs May’s concept - the free movement of goods, services and capital continues unchanged. This is what the EU calls cherry picking: trying to have all the advantages with none of the costs. The EU will doubtless extract a price for the reduced rights its citizens will enjoy in the UK, and this will most probably fall in the area of access to its own markets for financial services and capital movements, where it will do the UK real damage.
A deal on the movement of people will fall into two linked parts. The first will require agreement on the preservation of rights of what one might call existing “displaced persons”, i.e. those EU and UK citizens already living on the territory of the other; the second will be an agreement about the regime to apply to cross border movements of people, both transitionally and long term, after the UK leaves. The first of these agreements will be, as the Commission has pointed out, extremely complex, because it needs to regulate such matters as long term commitments to pensions and health care. The EU has said that the deal must be enforceable, so it will need legal guarantees, supervision and rights of appeal.
The second will also be tricky. So far attention has focused only on the right to work, where the UK wants to be able to operate quotas, but the UK will presumably also be required to avoid the re-imposition of visas on any EU member state, so it will be unable to exclude people from Eastern Europe as the United States has done. Although the UK is currently glossing over this detail, it is likely to resurface because, largely concealed beneath the cant about Romanian fruit pickers and benefit tourists, there is almost certainly an unstated desire on the part of the Home Office to keep out certain groups of people from this part of the world.
To keep the border open in Ireland and at Dover and to keep trade flowing, there must also be a comprehensive agreement on trade in industrial goods and agricultural produce. This will be a priority for both sides, even though the EU currently refuses to discuss it until the other issues are resolved. A major issue will be rules of origin applying to UK manufactures that contain parts and materials from outside the EU. This problem will arise because the UK wishes to leave the Customs Union, which means it will no longer impose the Common External Tariff (CET) on imports from outside the EU. How this difficulty can be resolved remains so far unexplained. Possible solutions offered by technology are untested on the scale required.
Any deal of this complexity will need an administrative underpinning and a dispute resolution mechanism to ensure its good functioning. At the moment under the existing EU regime, these are provided by the Commission and the European Court of Justice. The UK is part of both bodies, so their decisions are not “imposed by Brussels” (or indeed by Luxemburg) but are a collective responsibility. Because the British Government wishes to abolish the visible attributes of EU sovereignty, while the EU wishes to ensure the primacy of EU law in all areas, the dispute here will probably be tough, and a compromise must be struck. The balance of advantage will determine whether the outcome, if one proves possible, looks more like the status quo or more like some Heath Robinson device designed in Westminster.
Let’s assume for the moment that the EU is forced to concede the essence of what the British are asking. (I believe this is in fact the less likely outcome, but we need to think about how it would work.) It means that for the supervision and enforcement of whatever deal is struck, new machinery will have to set up. The ECJ will have to be substituted by a body that I will call, for now, the EU/UK Court of Arbitration, and the Commission by an EU/UK Joint Commission.
These new bodies will need to have authority to implement and supervise rules, just as the existing ones do, and they will need to be staffed and financed, and probably to have some permanent presence and status, i.e. a building and all the other trappings of administration, which the UK will have to co-finance.
What this means in essence is that even after the UK leaves the EU, it will still be paying into an international body and subject to its administrative laws and rulings. So the UK still won’t be sovereign in certain respects, but nor is any other country that exists in the international framework. If you inhabit the civilised world, you are subject to international laws and to the commitments you have assumed. If you want total sovereignty to do anything you like, you need to become autarchic like North Korea.
Assuming this analysis is correct, one begins to see that the UK will be building a chimera. Mrs May will have traded in much of the financial services sector, a tried and tested administrative and legal framework, the bulk of her influence over the policy making of our nearest neighbours and a huge amount of good will, for what will in the end probably turn out to be a kind of badge engineering to create the illusion that the UK has reasserted sovereignty.
In the interests of brevity I will not review all of the many other problems that could arise, but it is already clear that areas of substantial difficulty will be the regime for Gibraltar, which will be deprived of reliance on EU law to moderate its dealings with Spain; air services, where the EU’s open skies policy may need to be substituted or replaced by a series of bilateral agreement, and various other common policies that will have to be replaced, for example on nuclear energy and the environment.
We have established that leaving the Common External Tariff (CET) will create problems in a system requiring frictionless open borders, so it is worth analysing the reverse side of this argument, which is the much discussed ability of the UK to negotiate its own trade deals with third countries once it has left the EU. My view is that this always was something of a side show. The EU accounts for almost half the UK’s foreign trade, and the only other country that really matters is the US. Between them the EU and the US account for about three quarters of the UK’s foreign trade and the two of them together so dominate international trade that they will between them largely determine what UK/US trade will look like. The odds are that it will remain mostly unchanged. There will be no great US trade bonanza, indeed a member of the Trump administration has described brexit as an opportunity for the United States to grab part of the UK’s markets. The fact that the UK will be free to pursue its own trade deals with China, India, Russia and Brazil, to name but the most important four, will have relatively little future impact, and what impact it does have will be broadly negative for the UK, because we will not have the trading weight that the EU has to kick open doors in the relevant capitals, where the UK is not particularly loved. Indeed there will probably be transitional problems as we move from the cover of the EU’s Common Commercial Policy to a new set of bilateral trade deals that have yet to be negotiated.
One issue nobody is yet talking about is agriculture. Long before Margaret Thatcher got the EEC to agree to complete the single market for goods and services, the six original members had launched the European Communities to regulate trade in coal, steel and food, because these were the strategic goods with which wars were won in the first half of the 20th century. We can forget about coal, and perhaps even about steel, which no longer has the salience it once did, but food still matters to everyone, and here there will be another battle, one whose outlines have so far only been dimly envisaged. When the UK scraps the apparatus of agricultural price setting and support and the European free trade in agricultural produce that it underpins, what will take its place? We want the border to remain open for trade in agricultural products, but this presupposes some agreement on pricing, which implies agreement on support and subsidies, as well as the continuation of common veterinary and phyto-sanitary regulation. The answer may be to re-badge the CAP too, which means an even bigger system of administrative supervision so that, for example, UK turkeys can still be exported to the EU for Christmas.
It seems fairly obvious that even if Mrs May gets everything she wants, it will be worse for the UK than what we have now, except in the narrow sense that the UK will have reasserted a largely superficial sense of its own sovereignty. But the likelihood on current showing is that she will get significantly less than this, and if the UK digs in on important details, including but not limited to the cost of the divorce, the possibility that there will be no deal at all will loom ever larger. Public disquiet over this is likely to grow, particularly among displaced people on either side, for whom the stakes are particularly high. In either event voters are likely eventually to realise that it would have been easier, quicker, and a whole lot less painful for all concerned to stick with what we already have. But by then it may be too late to reverse the damage.