May Speech: Deadlock Unlocked? Edelman Analysis by Edelman

MAY SPEECH: DEADLOCK UNLOCKED? EDELMAN ANALYSIS 22 September 2017

Lucy is a Director at Edelman UK and Head of Brexit Advice. She was a cofounder and Deputy Director of the Remain campaign in the EU referendum. She is a former BBC journalist, covering the EU institutions in Brussels for four years. Lucy Thomas - Head of Brexit Advice Lucy.Thomas@Edelman.com

Pawel is a Brexit Analyst at Edelman. He is a respected expert in EU and UK political analysis from his time at the Open Europe think tank where he produced detailed research papers which informed government policy. Pawel Swidlicki – Brexit Analyst Pawel.Swidlicki@Edelman.com

Key takeaways Two year transition – or longer? The UK will seek a transition of around two years after March 2019. “Brexit delayed” was how one reporter characterised it, but businesses will be breathing a sigh of relief that the certainty they craved has at least in part been provided. EU Chief Negotiator Michel Barnier was quick to respond, praising the “constructive spirit” of the speech. He said a transition was in principle possible, but that all EU rules and mechanisms would apply throughout: from regulations and free movement, to continuing ECJ oversight. This was a tick-box speech which the Government hopes will answer calls from the EU to show “sufficient progress” has been made on the divorce bill, the Irish border and EU citizens’ rights. While no specific figure was given, Theresa May said the UK would honour its obligations and that the EU budget would not be left with any holes – largely taken to mean around €20bn to 2020. The tone was upbeat, with the “bright future” ahead referenced several times. Some will see this as Boris Johnson’s injection of optimism into the prevailing gloom. She called for “creativity and ambition” on both sides: a clear attempt to make the EU responsible for finding a mutually workable solution. The less-than-subtle branding of the speech: shared history; shared challenges; shared future. Some in the EU may not appreciate the attempt to drag them into what they see as the UK’s decision to leave. 22 Sept 2017

May also gave an emotional pitch to EU citizens in the UK that “we want you to stay” and “we value your contribution to our national life.” EU citizens’ rights: May stressed the independence of UK courts and that EU citizens’ rights would be fully incorporated into UK law, so Parliament couldn’t water anything down. She also revealed that the UK would “take into account” judgements of the European Court of Justice, in the hope that this would be enough to quell EU fears that ECJ oversight would be needed to ensure the UK followed the rules. Barnier’s response made no mention of ECJ, but said whatever UK enforcement was in place, had to be the same as across the EU. Future trade terms: there has been increasing discussion of whether the UK should pursue a Norway-style option (European Economic Area) or follow the Canada-EU Free Trade Agreement model. Theresa May said that neither was acceptable: adopting laws with no say over them (EEA) or overly restricting our mutual market access (Canada) would be unacceptable to the British people. No deal better than bad deal: while it didn’t feature in the speech, May confirmed that she still believed no deal would be better than a bad one in response to a question. Security: the offer of a deep and special security partnership made clear that the UK’s involvement in security and defence is no longer the bargaining chip it once was. The Sun’s Tom Newton-Dunn challenged the Prime Minister that some would see this as throwing away one of the UK’s strongest cards.

What May said, what it means A warmer tone but no surprises A year ago, this might have been seen as a bold and generous speech as opposed to what it is today: a belated acceptance of reality. There were no surprises and nothing really new beyond what we learned over the summer and what was pre-briefed over the last couple of days. She stuck closely to the Lancaster House blueprint but used all the wriggle room that she left herself within it. There were lots of warm words about close ties and UK’s interest in the EU being a success. However, while striking the right tone will undoubtedly help, no amount of warm words will convince the EU to give the UK a deal that allows it to retain many of the benefits of EU membership with few of its costs or fix thorny technical issues. While “no deal is better than a bad deal” didn’t feature in the speech, it was the answer to a later question. As time has gone on, this has become far less credible as it is clear the UK is not putting in place the hard and soft infrastructure necessary to prepare for such an outcome - much to the dismay of supporters of a ‘clean’ Brexit.

Progress on rights & cash, not on Irish border Citizens’ rights: May said EU nationals would be able to directly enforce their rights as set out in the withdrawal agreement in UK Courts, and that UK judges would “take into account” relevant ECJ case law. While this still falls short of the EU’s demand that the rights be directly enforceable at the ECJ, that is an absolute red line for the UK. The bill: As expected May did not put a specific figure on how much it would be willing to pay to settle the accounts but the expression that no other member state will have to pay more or receive less up until 2020 will be welcomed. The UK’s commitments to the EU budget are only part of the wider financial settlement question which also covers wider liabilities (e.g. officials’ pensions). May also implied additional payments for the transition period and beyond, although this was again framed in terms of contributions to specific programmes and an intriguing reference to furthering “the development of our continent” which could imply a Swiss-style bilateral assistance programme for poorer member states. These are hard to square with the demand set by Boris Johnson and others about post-March 2019 payments. Irish Border: May reiterated that all sides want to keep it open but, as Barnier noted, gave no new details as to how this could be resolved with the EU’s eventual departure from the single market and customs union. If the EU does decide to open parallel talks about the future trading relationship it might make it easier to also make progress on this point.

Transition: only one change – welcome for business Businesses will only have to make one set of changes, with access during the two-year period continuing on “current terms” – i.e. access to the customs union and single market enabled by accepting all current rules and regulations, ECJ, free movement etc. Clearly this will be politically difficult for many to swallow. May was right to say that people want a smooth and orderly Brexit but there has been a huge failure to manage expectations first by the Leave campaign and then by the government. Technically this was always on the cards but it required a high degree of knowledge about the Brexit process to appreciate this, many ordinary voters do not understand ‘why we can’t just leave and be done with it’. While new immigration system is put in place EU nationals still free to come to work in UK but there will be new registration system. This could be a problem if the EU deems that the registration scheme – by denying new migrants the right to permanent residence – does not constitute full free movement. No new details on whether the customs union transition will preclude the UK from implementing (as opposed to just negotiating) new FTAs (although lack of time might make this largely a moot point). 22 Sept 2017

Where next? The Future Relationship Put in the simplest terms possible, Brexit is a trade-off between access/influence and control. May went further than before in acknowledging this trade-off, accepting the UK will not enjoy the level of access it currently has and it will no longer have a seat at the table when new laws are drawn up. She was right to accept that neither the Norway model with its four freedoms and acceptance of new EU laws or a EU-Canada-style FTA are good fits for the UK. As she said, the Canada FTA, despite being a comprehensive and advanced FTA, would not work for a country that is so much more deeply economically linked to Europe. Therefore, the UK will need a bespoke deal somewhere along that continuum, as May put it “a new framework which holds rights and obligation in a different balance”. The current fault line within government between those who want to lean closer to the Norway end and those who want to lean closer to the Canada end. In very broad terms there is an acceptance that the UK will have to largely accept existing and future UK laws in sectors that are highly transnational such as banking, pharmaceuticals etc. The key question is how to manage divergence, and here May suggested “a strong dispute resolution mechanism”. This would not be the ECJ, whose rulings have direct effect, but something more like the EFTA Court which polices the EEA agreement. May made clear that the UK will not turn itself into a de-regulated, Hong-Kong style economy with “shoddy goods and services, a poor environment and exploitative working practices”. Whether explicitly intended or not, this is a clear warning to some hard Brexit backers that this will not open the door to widespread deregulation. However, it is vital to remember that while May’s priority is getting her Cabinet and the wider country behind her, this is only the first step. The EU 27 have to agree to it all too, and once the strict parameters of the Article 50 mandate have been exceeded, they may also have divergent views. The bottom line It remains the case that, notwithstanding May’s outreach today, there is deep scepticism across Europe and Germany in particular that May’s vision for the new relationship amounts to a model where the UK enjoys many of the benefits of membership with few of its costs. For many in Europe, even a painful Brexit would be preferable to a deal that sets a precedent which in turn could lead to the EU unravelling as other member states seek more beneficial arrangements, thereby upsetting the painstakingly put together balance of benefits and obligations

22 Sept 2017