This week attention has turned to the future relationship between the UK and EU as the government gave the first indication that the Brexit process may take longer than indicated.
Under Article 50 of the Lisbon Treaty, the EU and UK must agree on how the UK will exit the Union. Given Michel Barnier’s expectation that actual negotiations will need to be completed within eighteen months, it does not leave much room to discuss what comes next. It appears that government rhetoric is softening to Philip Hammond’s position that a transition agreement is needed.
The logic of a transitional deal is to give both economies certainty and support as the UK and EU negotiate a new relationship. Rather than the so called ‘hard Brexit’, which would see the UK trade with the EU on World Trade Organisation terms, a transitional agreement would see the UK trade with the EU on similar terms as it currently does.
The most likely arrangement would see the UK join the European Economic Area while it negotiates a new trade deal with the EU.
This situation would see the UK retain single market membership in exchange for an acceptance of free movement, continued contributions to the EU budget and the continued jurisdiction of the European Court of Justice. This would come into effect following the end of the two year period for negotiating Article 50.
The focus has been placed on this issue because of comments made most recently by the Chancellor Philip Hammond about the possibility of a transitional arrangement. Hammond said that there is an emerging view among business people and ‘thoughtful politicians’ that a transitional deal which would extend the status quo to allow for trade agreement discussions.
This was supported by David Davis at a hearing at the House of Commons’ Exiting the European Union Committee. He said that he would support a transitional agreement if it facilitated a ‘smooth and orderly Brexit’. In his press conference last week, Michel Barnier said that a transitional agreement could ‘clear the path’ to a future relationship.
Economically, any proposed transitional arrangement makes sense. It will give businesses and investors the security to know that there will be no ‘hard’ exit onto a system of tariffs and barriers associated with WTO membership. It will also give the UK and EU time to negotiate their future relationship without the pressures of economic turmoil.
Domestic political demands in both Britain and across the continent may make a transition agreement difficult.
In Britain, if the transitional arrangement is announced soon into Article 50 negotiations, Theresa May could be accused of stalling Britain’s exit from the EU by the more hard-line members of her cabinet and party. With a slim majority, which has already been reduced, this is something she will want to avoid. If the transition agreement is announced later in the process, she faces going into a general election having failed to deliver on Brexit.
In Europe, populist parties are polling strongly ahead of elections next year in the Netherlands, France and Italy. To counter euro-sceptic views among these parties, the EU will want to avoid any deal or arrangement that makes things comfortable for Britain.
Any potential transitional deal therefore faces political pressure from both sides of the negotiation. However, with the Government’s comments on transitional agreements this week, the “soft Brexit” side may be winning some arguments.
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