With Phase One ‘complete’ – including agreement on the Irish border, citizens’ rights and a ‘divorce bill’ – the Brexit negotiations are now entering Phase Two, which will include decisions on the future trading relationship between the EU and UK. Progress has, undoubtedly been made. But ambiguities in Government plans and the ever-present notion of ‘nothing is agreed until everything is agreed’ makes for uncertain times for the finance sector – and the wider economy.
The original uptick in optimism, both economically and politically, that followed the conclusion of Phase One of the Brexit negotiations has quickly been tapered by a return to reality brought about by ambiguities in the UK Government’s plan, the failure to recognise or realign some of the hypocrisies within it and by the EU’s hardening stance on the obligations of the UK during any transition period.
For financial institutions this means uncertainty. The Government has repeatedly (and quite purposefully) maintained ambiguities in their negotiating position. Both Lancaster House and Florence speeches outlined an ambitious vision: tariff free access to the Single Market without being a member of it, or any customs union. The deal would necessitate more detail in various areas including Euratom, ECJ jurisdiction, Europol and so on, but the basic vision existed.
Politically it is impossible for the EU to allow a key-member to leave, maintain its access to the Single Market and its economic benefits while also opting-out of the ‘sacrifices’ ie the ‘open-door’ policy of immigration, a judiciary operating under the ECJ system and financial contributions to a central budget.
According to the EU, Theresa May and her government wanted to ‘have their cake and eat it’.
Therefore, negotiations have been protracted, even during relatively easy topics. The Irish border and citizens’ rights, where the EU and UK have agreement on the ‘end’ (though not always the means) and the divorce bill, which was a certainty to (at least) meet the UK’s current budget commitments.
An agreement in Phase One is by no means a finalised, codified, signed deal however. Instead it exists as a pre-cursor for the next step, an agreement that will be finalised, should the rest of the negotiations be sufficiently and acceptably completed. The concept that ‘nothing is agreed until everything agreed’ means the phases of negotiation will overlap to iron-out inconsistencies, in an approach that aims to mitigate the necessity of such overlaps.
Corbyn’s Labour Party is moving towards the idea of negotiation under the umbrella of a need for ‘a’ (if not ‘the’) customs union, while the Government has rejected the idea of a customs union, instead arguing for a ‘customs agreement’. These comments came after Barnier’s statement that “without a customs union… barriers to trade in goods and services [between the UK and EU] are unavoidable”.
The semantics are critical and the EU – if this statement is taken as gospel – is showing a level of flexibility and the opportunity to frame Brexit negotiations under a conceptual umbrella, providing a clearer sense of direction and end goal. Critically this would allow UK to leave the customs union and instead negotiate the terms of a customs union between it and the EU.
The red-line for the Government is their requirement that the UK would need to be free to sign trade deals with other nations across the world.
Exploration of a customs union would significantly change the Brexit-environment in several areas; the development of short-term certainty for financial services as a result of political transparency, a political solution for the Irish border question and critically, the creation of an institutional framework for the future relationship between the UK and the EU.
As time passes and the deadline draws near will the government’s red-lines disappear? Or will the EU break the deadlock and offer a politically palatable deal?