Overview
Executive Summary
The end of the first round of 'intensified' negotiations following the High Level (virtual) Meeting between British Prime Minister Johnson and his EU counterparts, Ursula von der Leyen and Charles Michel, ended early yesterday with serious divergences remaining on four key issues: the level playing field; fisheries; police and judicial cooperation; and governance (dispute settlement).
This has revived fears of a 'no deal' UK exit from the current transition phase which ends on December 31, 2020. Chancellor Merkel whose country has taken over on July 1 the rotating chairmanship of the EU for six months warned that the EU should prepare for such a scenario.
Both sides issued quite strong press statements highlighting their disagreements (see statements by Chief Negotiators Barnier and Frost).
This contrasts with the slightly more optimistic view which gained ground after the June High Level Meeting. The signalling by both sides then was joint determination to find a compromise in spite of the serious differences. The UK side even talked up prospects of finalising a deal over the summer. The EU side said that the end of October was the final deadline in order for any deal to be approved and ratified but the transition expires.
In the meantime, the option of extending the transition expired on June 30.
It is hard to assess where things stand at present. Both sides are engaged in a game of chicken to see who will move first. It is not unusual in these types of negotiations for both sides to continue to emphasise their red lines. The EU certainly has some room of manoeuvre on the key issues but still has important red lines which will not be altered. For a deal to happen, the UK will have to move the most. It is not clear if the current government fear the negative economic consequences of 'no deal' more than the likely backlash from Brexit hardliners against the compromises any deal will entail. The answer to that question may only emerge well into the autumn.
Economic operators are still strongly advised to prepare for a 'no deal' outcome.
Background
The first phase of negotiations on the future of the EU-UK relations came to an end Friday, June 5 when both sides completed their fourth and final round of negotiations. A High-Level Meeting took place on June 15 and both sides agreed to continue, and intensify, the talks over the summer. There was a slightly more optimistic mood after that meeting. However, it is already clear that tangible results after four months of negotiations are very limited, leaving a huge amount to be done if a deal is still to be struck before the end of the year.
Above and beyond the substantive disagreements which separate the two sides, potentially the biggest obstacle to a deal is the shortage of time. The current transition (which ensures that existing EU rules remain largely unchanged even though the UK has formally left the EU) expires at the end of December and the option to extend it ran out this week. Although talks will continue through the summer and into early autumn, it is far from clear how, absent a clear political push from the highest level, any kind of deal could be struck and ratified in the time remaining.
In this article, we take stock of the Brexit talks and consider three possible scenarios for the months to come.
Where do we stand after over three months of EU-UK negotiations?
The first phase of negotiations on the future of the EU-UK relations took between March and early June, with about a month of interruption due to the COVID-19 crisis. Both sides started negotiations on the basis of their respective mandates and later exchanged draft agreements reflecting very different perspectives on the outcome of the negotiations. While the EU is determined to achieve an overreaching agreement, the UK has proposed a text for an EU-UK Comprehensive Free Trade Agreement (FTA), supplemented by a number of sectoral agreements.
While some modest progress was achieved during the negotiations in areas such as trade in goods, transport, or the UK's participation in EU programmes, the overall result of the first rounds is meagre. The exchange of letters between the EU and the UK Chief Negotiators on the occasion of the publication of the UK draft agreements in May gives a sense of the gap that remains between the two positions.
The EU aims at an ambitious, tailor-made agreement while the UK is requesting an FTA inspired by agreements the EU has concluded with third countries, notably the Canada-EU Comprehensive Economic and Trade Agreement (CETA). The main difficulties lie in: the level of regulatory alignment expected by the EU to grant market access (the so-called "level playing field," which formed part of the commitments in the EU-UK Political Declaration agreed in October 2019 and annexed to the Withdrawal Agreement); the governance of the agreement (the EU wants an overarching text with a single dispute settlement procedure, while the UK wants a series of separate agreements); and settlement on a number of sectoral files, such as services. EU Chief Negotiator Michel Barnier also emphasised that no trade agreement would be agreed without a satisfactory deal on fisheries. More recently, he criticised UK overreach on financial services.
The UK's commitment to implement in full the Protocol on Ireland/Northern Ireland, again part of the Withdrawal Agreement, is another main concern of the EU. Contacts are ongoing but the limited timeframe, the parties' different perspectives and the pandemic crisis, will probably make it difficult to achieve functional implementation of the Protocol before the end of the year, notably as regards the nature and level of checks needed on trade between Northern Ireland and the rest of the UK.
An inability to agree on how to implement the Northern Ireland Protocol could poison the entire negotiations, with potentially very serious implications for the US-UK trade negotiations if the US Congress were, as threatened, to refuse to ratify any trade deal on the grounds that the UK is not living up to its obligations under the Belfast Good Friday Agreement.
On Friday 5 June, following the fourth round of negotiations, EU Chief Negotiator Michel Barnier regretted once again that "no significant progress had been achieved." He called on the UK to respect the commitments made in the Political Declaration. He underlined that, without an extension of the transition period, a final agreement would have to be found before October 31, to allow enough time for ratification by both parties.
What happens next?
A new stage of negotiations has begun and the next six months will be a decisive moment for Brexit. The main questions are to know what is achievable in these remaining six months and what are the landing possibilities for an EU-UK relationship as of January 1, 2021. We now assess three possible scenarios.
- Scenario 1: A full deal is finalised and ratified before the end of the transition period. This scenario cannot be excluded but is becoming less likely every day. As mentioned above, the EU and the UK seem to camp on very different positions. Even if major shifts in position were to occur and important compromises were to emerge in the coming weeks, the prospects for having a deal in place by the end of the year would still remain uncertain. Five months is a very short timeframe to agree on a final text, and sign and ratify it in both the EU and the UK.
- Scenario 2: The transition period expires without an agreement between the EU and the UK. This is the no-deal scenario. Today, this seems to be the path we are taking, even though a lot can still happen in five months. The positions of the EU and the UK may remain as irreconcilable as they appear at present. In such a case, the UK government could choose to leave without a deal, which it would tout as “delivering on its commitment to deliver Brexit.” The UK government appears to be actively preparing for this possibility, as shown by the recent publication of a new most-favoured-nation tariff regime, replacing for the UK the EU’s Common External Tariff. The consequence of this scenario would be far-reaching for many industries both in the UK and in the EU.
- Scenario 3: The EU and the UK decide on a "fudge" at the end of the year, allowing for additional time to agree on a deal and/or for industries to prepare themselves, or agree on a limited deal. Some observers believe that some kind of arrangement might be found before the end of the year which would, in effect, buy additional time for negotiations or at least ratification of what has been agreed. If, as of year-end, negotiations have progressed somewhat, then both sides might agree to allow for additional time to finalise targeted talks, ratify, or implement a potential agreement. Neither side has officially acknowledged such a possibility, which would require an ad-hoc legal arrangement. The legal basis for such a "fudge" could take different forms. It most likely would be agreed only at the last minute and would have a limited duration. While this scenario is possible, it remains unpredictable. Alternatively, the parties could, at the very least, find a limited agreement on tariffs and certain basic issues of mutual interest that are of a technical nature and that might be dealt with in separate administrative agreements, for example: cooperation between customs authorities; exchange of information between tax authorities; and, possibly, recognition and enforcement of court judgments. However, this depends on the willingness of the parties to decide issues piecemeal and flies in the face of the negotiation approach whereby "nothing is agreed until everything is agreed."
Conclusion
By any objective measurement, the prospects for an EU-UK post-transition period deal to be in place by the end of 2020 continue to look very dim.
The outline of a limited agreement is not difficult to imagine. The publication by the European Policy Centre's Andrew Duff covers the likely main elements. It cannot be too comprehensive and will not be the end of the story. But even such a limited deal would require the political will to compromise
A further complication is that clearly political trust between the parties is in short supply. Both sides claim the other is failing to negotiate in good faith. The EU believes that the UK is resiling from explicit commitments undertaken in the (non-binding) Political Declaration annexed to the Withdrawal Agreement. The UK argues that the EU is making greater demands on it than on previous FTA partners. Several commentators suspect that the UK government may already have concluded that a 'no deal' exit is the best way to secure a clean break from the EU regulatory orbit at an early stage in its five-year mandate and that the economic damage of the COVID-19 recession will disguise the economic cost to the UK economy of a cliff-edge departure from the EU. Others think that the UK believes only a clear willingness to walk away will force the necessary concessions from the EU.
What is clear is that business in the UK and in the EU face considerable uncertainty in the next six months on the future of the EU-UK relationship and should be taking appropriate steps to prepare now for a "hard Brexit," with all the attendant disruption that that will entail.