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They have spoken!

Posted on 13 October 2017

They have spoken!

Juncker, May, Macron, Merkel, May again. They have all said a lot about Europe in recent days. Juncker delivered his State of the EU speech, May held her big Brexit speech in Florence. Macron launched his vision for France and for Europe, and May was on the podium again at the Conservative Party Conference in Manchester, and the dispatch box in parliament. Amidst all this, Chancellor Merkel was re-elected as Chancellor of Germany, although with a reduced mandate and an anti-Euro/anti-immigration party entering and moving straight into third place in the Bundestag.  And then there was an unofficial referendum in Catalonia that threatens to break Spain apart, and the King spoke and expressed his dismay.

Does all of this change much regarding Brexit?  Fundamentally it does not alter the fact that even now nobody really knows what Brexit will look like in two years, in four years or in ten or twenty years. The only thing we can know is that “it is likely that something unlikely will happen”, as Aristotle said.

Let’s look at the two year extension that Mrs May spoke about in Florence. She said “during the implementation period access to one another’s markets should continue on current terms.” This is significant, because it was not explicitly expressed as Government policy up until that point. Our contacts tell us that the realisation in the Department for Exiting the EU has grown, that there is no way the UK can put in place the structures in time that are needed for a United Kingdom that is outside of the Single Market and Customs Union. That piece of news seems to have filtered up to the Prime Minister and it became the defining point of her Florentine message. It is notable that the former Irish Prime Minister, John Bruton, is advocating the extension of the negotiating period to six years after the triggering of Article 50 in order to have sufficient time to get the job done properly.

EU 27 and the European institutions assume that “current terms” means continued participation in the Single Market and Customs Union, and immediately expressed an interest in seeing a proposal from the UK that would enable that to happen. However, such a prospect will be a great disappointment to ultra-hard Brexit advocates in the Prime Minister’s own Conservative Party who are rooting for a clean break, and some would like to see that as soon as possible. To many others, not least in the business community, it may provide some relief, but it raises as many questions as it answers.

One question is: what will the legal structure be for such an extension? The UK will be outside of the EU, without access to the institutions, but it will continue to have the facilities of EU membership, including free movement of persons, capital, goods and services. In order for that to work, the EU will likely insist that the UK adopt, or at least replicate new EU rules and legislation as they come into force, as well as to adhere to rulings of the Court of Justice of the EU. The UK Government simply instructing UK courts to follow precedents set by European courts may not provide sufficient comfort for the EU. It will be keen to ensure that the UK does not become a channel for trade of contraband, non-taxed and non-compliant goods and services into the EU.

A two year extension offers the prospect of continued frictionless commerce between the UK and the EU, without the imposition of any of the barriers and controls that normally exist between the EU and non-Member States. But even such a prolongation agreement between the EU and UK would have to be codified in the form of an international treaty. This would then most likely require parliamentary ratification. MPs who are ardent supporters of Brexit may be reluctant to approve an additional two years of regulatory control by the EU, sizeable payments, and the removal of the UK from the EU’s decision making institutions. And for the EU’s part, it might be less conciliatory towards British special pleading as a third country than it was when the UK was a full Member State.

However, without such an agreement, whether transitional or long term, the four freedoms of the single market end abruptly the day after Brexit, on 30 March 2019. The application of tariffs, control of agricultural and other regulated products transported to and from the UK, much more extensive scanning of trucks and containers, and filing and checking of thousands of customs declarations forms every day will make importing and exporting much more complicated and expensive.

In Dover Port, around 10,000 trucks are cleared every 24 hours. For intra-EU trade, clearance of each truck takes only two minutes, on average. For non-EU freight, that time jumps to between 20 minutes and 90 minutes. Every two minute delay creates 25 kilometres of queues into the Kent Downs. There are more than 20 agencies that can intervene to inspect products entering the EU.   If there is no good agreement between the UK and the EU in place before 30 March 2019, Operation Stack will look like a picnic. This pertains to the movement of goods through one port, but there are plenty of other ports and airports, as well as land-crossings in Northern Ireland that must be ready to adapt substantially and expand their operations. In a recent leaked document the Irish counterparties to the UK’s HMRC have openly stated what many of us know already – frictionless trade with the UK outside the customs union is not possible and as such, some form of physical border will be necessary.

This is why the Prime Minister, and more and more people who wish to see the fulfilment of Brexit, realise that a prolongation is necessary. But there are also those who believe that an additional two years does not buy nearly enough time. Most of the work to prepare for Brexit has not yet begun, because it is very difficult to build something before you have the blueprint of the final structure.

The Fifth Round was the final one before EU Member States are due to take a position on whether there has been sufficient progress to start Phase 2 of the negotiations. The mood is sombre in Brussels. The Commission is frustrated by high turnover in DexEU and political divisions on the UK side over what their ultimate vision for Brexit is. Consequently, as time runs out, we hear that Commission officials are instructed to spend more time planning for a hard and chaotic Brexit. Businesses and ports, such as Calais and Zeebrugge that rely heavily on trade with the UK are doing the same. And financial institutions are hiring more and more office space in Frankfurt, Dublin, Brussels, Amsterdam, Luxembourg and Paris.

With the EU and the UK stating firmly to each other “the ball is in your court”, there is a risk that progress will be too slow. A stand-off when time is short is in nobody’s interest, and businesses can no longer hope for the best. They are now planning for the worst.

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