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31 March 2017

The EU Responds

Brexit, Government Affairs

The EU’s opening gambit was comprehensive and clear. Any earlier sadness of Donald Tusk dissipated to make way for an undivided focus on the EU’s “interests, those of its member states, its citizens and its businesses.”

While still a draft, to be signed off by EU leaders when they meet at the end of April, the letter was in keeping with wider European reaction earlier in the week.

It contained the odd surprise, such as the suggestion that when it comes to Gibraltar’s future, Spain will have a special say.

The EU position on the sequencing of talks was more flexible than it has been – choosing an ambiguous phrase to describe when the talks could move on from the divorce to the future trade deal. They said the second phase could be started “as soon as sufficient progress has been made in the first phase towards reaching a satisfactory agreement” on divorce, which is far from the insistence on one and then the other.

Away from the letter, retaliation continued on the UK’s overt use of security as a bargaining chip. EU foreign policy chief Federica Mogherini made clear that the EU can “continue perfectly well” without Britain’s involvement: “The UK contributes today only for 3% of our civilian capabilities in our EU operations and missions, and 5% to the military ones.”

Other key points in the letter included:

UK can’t enjoy same benefits as a full EU member…  

  • This has been reiterated many times now – and indeed accepted by the UK – but it is worth stressing as this will be one of the overarching principles of the talks. The challenge will be to find a deal that allows both parties to continue to enjoy free trade to the fullest possible extent while adhering to each other’s red lines on sovereignty (including over immigration) and maintaining the integrity of the single market.

…but neither can it fully escape all of the costs and obligations

  • The EU will insist that the regulatory frameworks of the UK and EU cannot diverge too much post-Brexit in order for a new comprehensive trade deal to be viable – “It must ensure a level playing field in terms of competition and state aid, and must encompass safeguards against unfair competitive advantages through, inter alia, fiscal, social and environmental dumping.”
  • This will provoke opposition on both sides of the UK political spectrum – many on the right see Brexit as an opportunity to rip up burdensome regulations across a swathe of policy areas ranging from employment through to environmental law while on the left (and indeed to some extent among Theresa May’s supporters) there is an appetite to pursue more interventionist and protectionist policies in areas like public procurement.

Sequencing

  • The guidelines confirm that discussions over the future UK-EU relationship – including a post-Brexit FTA – could get underway “as soon as sufficient progress has been made in the first phase towards reaching a satisfactory agreement on the arrangements for an orderly withdrawal.”
  • Tusk subsequently suggested that these negotiations could begin in the autumn, some 6 months after the triggering of Article 50.
  • Needless to say there will be some very tough issues to navigate during this first round of talks, most notably concerning the UK’s outstanding obligations, and it remains to be seen what the EU’s benchmark for “sufficient progress” will be. That said, it is not the complete rejection of any overlap that many had been anticipating.

Status and rights of UK/EU nationals

  • The EU has reiterated that resolving this issue will be a priority, although the guidelines state that “in accordance with the principle that nothing is agreed until everything is agreed, individual items cannot be settled separately.”
  • This leaves open the possibility that even if a quick agreement can be reached on this point it may not be formally implemented until all other outstanding issues – including the contentious ‘Brexit bill’ – are settled. This means that over 4 million people may have to wait a while longer for clarity and certainty over their futures.

Transitional arrangements

  • The EU is insisting that any transitional period between full membership and the new trading arrangement – which now appears highly likely – should be “clearly defined, limited in time, and subject to effective enforcement mechanisms.” It would also “require existing Union regulatory, budgetary, supervisory, and enforcement instruments and structures to apply.”
  • However, maintaining the overwhelming framework of EU membership – and its attendant costs and obligations – beyond March 2019 will be a very tough sell politically in the UK.
  • For this reason, the UK prefers a ‘phasing-in’ period – which involves gradual steps towards a new relationship with the EU. This divergence of views will need to be ironed out.

Third party FTAs

  • Via its EU membership the UK is party to around 30 FTAs with over 60 third countries (including Mexico, South Africa and South Korea). In total these cover somewhere in the region of between 15% and 20% of total UK trade.
  • The fate of these has long been debated – Leave supporters argue they can easily be adapted and grandfathered over post-Brexit. However, from the EU’s perspective this is not the case – the guidelines state the UK “will no longer be covered by agreements concluded by the Union.”

Gibraltar

  • Possibly the biggest surprise in the guidelines was the point that “no agreement between the EU and the UK may apply to the territory of Gibraltar without the agreement between the Kingdom of Spain and the United Kingdom” – this effectively grants Spain a veto over any agreement applying to Gibraltar – which voted Remain by 96% to 4%.

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