Brexit: Now for the hard part

BREXIT: NOW FOR THE HARD PART Edelman

15 December 2017

Pawel Swidlicki Brexit Analyst Pawel.Swidlicki@Edelman.com

EU leaders today formally agreed to move onto the second phase of Brexit talks following the deal agreed by the UK and the European Commission last week, which dealt with the issues of citizens’ rights, the UK’s financial obligations, and the Irish border. This is a positive result which gives Prime Minister Theresa May a much needed boost domestically, although as European Council President Donald Tusk and others have stressed, the first phase of the negotiations was the relatively easy part; agreeing the future UK-EU relationship will be even more difficult.

TRANSITION TALKS CAN BEGIN PROMPTLY… As has previously been stressed, the transition will not be a highly bespoke arrangement – instead the UK will formally leave the EU on 29 March 2019 but it will continue to apply the EU acquis (body of law) in full, including any new laws introduced during this period. During this period – set to last ‘around two years’ – the UK will also have to accept the free movement of people, make EU budget contributions, and adhere to ECJ rulings. This amounts to de facto continued membership of the single market during this period. However, the UK will “no longer participate in or nominate or elect members of the EU institutions, nor participate in the decision-making of the Union bodies, offices and agencies.” It is not clear whether this means the UK will be able to maintain observer status at EU regulatory agencies such as the European Chemicals Agency or the Body of European Regulators for Electronic Communications.

There is also a question mark over trade policy. While the UK will de facto also remain in a customs union with the EU, meaning it will “apply EU customs tariffs and collect EU customs duties and ensure all EU checks are being performed on the border vis-à-vis other third countries”, it is not clear whether the UK will continue to benefit from the EU’s third country FTAs with the likes of South Korea and Canada. Much will depend on whether those countries are willing to roll those agreements over, and indeed whether this would even be legally possible, or whether they will seek to renegotiate them to obtain better terms from the UK than they were able to get from the EU as a whole, including on issues like rules of origin. The above arrangement also means that the UK will not be able to formally negotiate any new FTAs with third countries (such as India or the USA) during this period, although it could undertake informal scoping exercises. The Commission has been tasked with “putting forward appropriate recommendations to this effect” with the member states set to adopt the relevant negotiating directives on the transitional arrangements at some point in January 2018 – this will allow the transition to be negotiated next and separately from the future trading relationship, and ideally agreed quickly in order to give both UK and EU the certainty they desire.

BUT TRADE TALKS WON’T START UNTIL MARCH… While the transition talks can get underway early next year, the talks over the future relationship – encompassing not only trade but also other areas such as security and foreign policy – will not begin until late March when the EU27 will adopt their new negotiating guidelines at the next European Council summit on 22/23 March 2018.

Moreover, contrary to the UK Government’s stated desire to have agreed (if not ratified) the new relationship by the time of the UK’s withdrawal, the EU’s summit conclusions make it clear that the EU will only “engage in preliminary and preparatory discussions with the aim of identifying an overall understanding of the framework for the future relationship.” This makes it absolutely clear – in case there were any lingering doubts - that the final free trade agreement will not be ready by March 2019, only the outline. This will be set out in a political declaration accompanying the exit deal, meaning that much of the detail will have to be thrashed out during the transition period. In addition, in order for the talks to proceed onto Phase Two, the EU has stressed that the terms of the exit deal “are respected in full and translated faithfully into legal terms as quickly as possible”.

RECAP: WHAT WAS IN LAST WEEK’S DEAL? The hard work ahead of the summit was carried out over preceding weeks with Theresa May and her principal Brexit advisor Olly Robbins playing a central role. The agreement was almost scuppered at the last minute after the DUP protested that the provisions on the Irish border opened the way – in their view – for Northern Ireland to become economically and politically isolated from the rest of the UK, but some last-minute shuttle diplomacy resulted in a form of words acceptable to all sides. Below is a summary of the key points. Citizens’ rights •

The deal will preserve the majority of EU/UK citizens’ existing rights to work, reside, access public services and benefits including a more generous regime for family reunification including for future spouses and as yet unborn children than the UK had originally wanted.

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The administrative procedure for applying for settled status will be “transparent, smooth and streamlined”, with a “principle of evidential flexibility”, giving authorities scope to exercise discretion in favour of the applicant where appropriate.

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EU nationals with settled status can now retain this for up to five years of continuous absence from the UK, initially the UK had proposed a two-year period.

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The UK won the right to apply systemic criminal background checks to applicants but the threshold for deportation over previous criminal behaviour will be as set out under EU law, and that is very high.

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The UK Government will bring forward primary legislation specifically to implement the Agreement. When passed into law, this will “prevail over inconsistent or incompatible legislation”.

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The UK has also committed to establishing a new independent national authority to implement and apply this part of the agreement.

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The ECJ is recognised as the “ultimate arbiter” of EU law and UK Courts will have due regard to any rulings it has made up until the point of withdrawal. UK Courts will also be able to refer cases to the ECJ for interpretation for a period of up to 8 years.

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The right of onward movement for UK nationals within the EU27, i.e. beyond the member state they are resident in at the time) has not been guaranteed, which has come as a disappointment to British expats.

AND THEY WILL BE VERY DIFFICULT A frequent complaint on the part of the EU has been that it does not know what exactly the UK wants from the new relationship, and this has again been stressed at today’s summit both in the official conclusions and by individual leaders. This clarity might finally be forthcoming with the UK Cabinet set to meet next week to discuss and agree a position on the ‘end state’ of UK-EU relations, namely whether they believe the UK should aim to be more like Norway – with a high degree of single market access but most of the obligations that come with full membership, or more like Canada, which has a lower level of access via its FTA with the EU but enjoys greater freedom.

Prominent Brexiteers in the Cabinet such as Boris Johnson and Michael Gove have agreed to the status quo transition on the basis the final set-up will be closer to their desired vision in which the UK has the scope to diverge from EU rules rather than having to shadow them, which in turn naturally narrows the scope for market access. The UK has said it wants ‘Canada plus’, or even ‘Canada plus plus plus’ but it is doubtful the EU will go for a very bespoke arrangement. It has stressed that any new FTA will be calibrated so as to “ensure a balance of rights and obligations” (i.e. UK can’t enjoy the benefits without some form of financial and political cost), “preserve a level playing field” (the UK will have to respect EU rules and regulations) and “avoid upsetting existing relations with other third countries” (The deal can’t be too good or else the EU will have to offer the same terms to its other trade partners such as Canada, Japan, Korea etc). For all these reasons, the second phase of negotiations will be very difficult. 15 December 2017

The financial settlement •

The UK will remain covered by the current EU budget period (up until 2020) meaning it will pay in and get money back as though it had remained an EU member during this period.

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In a good win for the UK - the rebate will continue to be deduced at source.

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This means UK farmers, regional authorities, universities etc. will all continue to be eligible for EU funding streams up until 2020.

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The UK will also guarantee its share of the EU’s ‘overdraft’ as it exists on 31 December 2020, i.e. projects that have been agreed in principle but the funds not yet dispersed. If such projects are subsequently not undertaken within the set period, the UK will not be liable, bringing down the overall amount even further.

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Although the deal itself does not specify an amount, reports from Brussels this morning say that the final net figure will be in the region of £35 - £39bn.

The Irish border The UK and the EU have agreed to tackle this issue within the scope of he next phase of talks, but in the event an ambitious FTA cannot be agreed, the UK will maintain “full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support NorthSouth cooperation, the all-island economy and the protection of the 1998 [Good Friday] Agreement.” However, this will be done in such a way that will not create any new regulatory barriers between Northern Ireland and the rest of the UK without the express consent of the Northern Ireland Executive and Assembly – a key demand by the DUP inserted at the last minute. Full alignment is a deliberately ambiguous notion which has already and will continue to be interpreted differently by different people, both in terms of what economic areas it actually covers, and also what it means and practice and how it ought to be monitored and enforced. Broadly speaking, the pro-Brexit side sees it as a loose arrangement meant to ensure similar regulatory outcomes, while the EU and the Irish government see it as more rigid commitment to maintaining a free-flowing border. This will inevitably cause problems further down the line, but for now this conceptual flexibility, or fudge to put it more bluntly, has unblocked the talks. Although “full alignment” is not the same thing as staying within the single market and customs union permanently, it could well become the mechanism via which the UK as a whole ends up more closely bound to the EU’s regulatory model than Brexiteers would like.

15 December 2017

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