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So, where are we now?

Posted on 1 August 2017

So, where are we now?

So 13 months after the Referendum and four months after the triggering of Article 50, we have just under 20 months left until Exit Day. We have seen two rounds of talks take place in Brussels, in which the EU has largely dictated the timing and agenda to the UK for the upcoming negotiations. Namely that only after sufficient progress has been made on the Withdrawal Agreement can the future relationship and any transitional arrangements be discussed.

This followed a General Election in the UK that surprised just about everybody. The “strong and stable” UK government has not thus far materialised.  There is disagreement within the Cabinet about what Brexit should look like, and both major parties are internally divided over how closely tied the country should be to the Single Market, at least during a transitional or implementation phase. Yet the UK is under immense pressure to present a clearer vision that provides more clarity than was presented in the Prime Minister's Lancaster House speech in January. The devil, as they say, is in the detail, and the devil is getting closer and much larger as the clock ticks away.

There are two primary sets of objective for the UK in designing its future relationship with the EU. An economic and commercial objective and a political objective. The UK will have trouble achieving both of these in equal measure in delivering Brexit.

The Economic/Commercial Objective

Theresa May and Jeremy Corbyn are both stating that it is their ambition to negotiate as close as possible a trading relationship to the EU, without actually participating in the Single Market (SM). But UK businesses are calling more and more vociferously for tightest possible integration with the SM and until a long-term deal is established, they would like a transitional period that ideally should secure two things:

  • Participation in the SM along the lines enjoyed by the European Economic Area (EEA)
  • Continued participation in the Customs Union

As pointed out to the European Economic and Social Committee (EESC) by European Commission (EC) Brexit Negotiator Michel Barnier, it is these two things in combination that deliver frictionless trade and participation in the Single Market. However it is precisely these two things that are most difficult to pitch to the most determined advocates of Brexit, because they involve continued control by and involvement with EU institutions.

As a movement, Brexit promised to deliver the following:

  • to end free movement of persons
  • to liberate the UK from the strictures of EU regulation and red tape
  • to end the supremacy of European courts
  • to repatriate large sums of UK taxpayers money from EU to the UK
  • to realise a Global Britain that independently can forge free trade relations with the rest of the world, emancipated from limitations associated with participation in a customs union with the EU.

The dilemma as to whether to favour the economic or the political objective is beginning to stretch UK policymakers, who realise that having a cake and eating it is not feasible.

Economic Realities

At a time of relative wealth for the United Kingdom, Brexiteers promised nothing less than to put Britain first and to make the country great again. As the economic realities of leaving the EU and the Single Market take hold now, parties supporting a Hard Brexit agenda are getting cold feet, or rather advocates of a softer sort of Brexit, such as Keir Starmer in the Labour Party, are becoming bolder in their proclamations.  

Chancellor of the Exchequer Phillip Hammond is also now openly calling for transitional arrangements that go far beyond what other Cabinet colleagues are espousing, as evidenced most recently in his speech to CDU’s Economic Council annual meeting on 27 July.

In recent weeks we have seen reports revealing signs of economic weakening for some economic indicators in the UK economy.

  • Office of Budget Responsibility (OBR): Public Finances are in worse shape than before 2008. In its most recent Fiscal Risks Report, issued on 13 July, OBR expresses concerns that
    • Net debt is more than double its pre-crisis share of GDP and not yet falling, increasing sensitivity to inflation and interest rate surprises.  
    • Pressures on public spending are growing, with an ageing population putting pressure on health services, an expensive Confidence and Supply agreement with the DUP to finance, and increased UK investments required to replace EU structures after Brexit, not to mention a Brexit bill of as-yet-unknown dimension.  
    • Furthermore, an unexpected recession, or slowing of economic growth due to Brexit could have dramatic long-term consequences: “If GDP and receipts grew just 0.1 percentage points more slowly than projected over the next 50 years, but spending growth was unchanged, the debt-to-GDP would end up around 50 percentage points higher.”  
  • According to Eurostat Britain is now at the bottom of 28 nation EU growth league.
  • Office of National Statistics puts inflation for June 2017 at 2.6%, down from 2.9% the previous month. However in May 2016 inflation was at 0.3%.
  • Royal Institute of Chartered Surveyors announced in its July survey, titled “Uncertainty Stifles Market Sentiment” that residential housing price growth has lost momentum and that activity indicators point to flat sales in coming months. The housing market is often viewed as an early indicator for declining consumer confidence and an economic slowdown.
  • According to SMMT (The Society of Motor Manufacturers and Traders) investment in UK car industry industry has dropped amid Brexit concerns.

The good news for now, according to official ONS Statistics, is that the UK unemployment rate at 4.5% is at its lowest level since 1975, and this is certainly helping to stave off some insecurities. Rising unemployment is yet to rear its ugly head. If it does however, the mood in the UK could change rapidly.

Whitehall and Westminster

Senior civil servants, current and former, are beginning to express serious concern about the Government’s approach to Brexit negotiations. The Head of the National Accounting Office, Amyas Morse, warned that Brexit plans could “fall apart like a chocolate orange.” He was referring specifically to the eventual capacity and readiness, or not, of a new customs declaration service in time for Brexit.

Gus O’Donnell, former head of the UK Civil Service cautioned “that squabbles, unrealistic expectations and an overburdened administration means that the UK is in for a rough ride”.  He and others have decried the apparent lack of a ministerial plan to guide departments through structural and legal challenges related to Brexit and are calling for an urgent need to build new regulatory agencies and customs clearance infrastructure. On the other hand, the EU already has the structures, the negotiating team and the positions required to move through Brexit. It has already issued 9 position papers, versus the 3 put out by the UK.

The voice of business

The Confederation of British Industry is increasingly vocal in calling for the UK to stay in the Single Market and the Customs Union until a final deal can be achieved. It has not hidden its belief that waiting until March 2019 to agree a transitional agreement will be too late. Other business organizations, such as TheCityUK are also pressing strongly for robust transitional arrangements, in the hope of stopping large scale migration of financial services to the EU 27 across the Channel in the Single Market.

Looking Ahead

The first two rounds of negotiations have focused on the three key pillars of the withdrawal agreement:

  • citizen rights
  • financial settlement
  • Northern Ireland

The most progress has been made on citizens' rights where talks have progressed to such an extent that the Commission deemed it appropriate on 20 July to issue a joint technical note outlining areas of convergence and divergence between the two sides. Key sticking points remain on the range of individuals and their family members to be covered by a post-Brexit agreement guaranteeing their rights; and also how such rights should be enforced, i.e. UK institutions and courts versus European ones.

Negotiators have agreed to aim to resolve the above three issues by the end of October, with Member States (on the recommendation of Barnier) hopefully agreeing that sufficient progress has been made on the Withdrawal Agreement so that negotiations on the future relationship can begin soon after. However, with so much more work to be done on the financial settlement (the UK has still not declared a detailed position on this), and on Northern Ireland, there is real concern that Phase 2 talks might not start until the end of 2017 or even the beginning of 2018.   

For so many businesses, the outcome of Phase 2 negotiations will determine their ability to trade with and be competitive in their closest and most important export markets. They can hardly wait to see what the negotiators have in store.

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