The authoritative source for independent research on UK-EU relations

29 May 2018

Relationship with the EU

Remember the “row of the summer”? Last May David Davis said that it was “illogical” to discuss the UK’s financial obligations and the Irish border before moving on to talks about the future trading relationship between the UK and the EU.

How, he argued, could you resolve the Irish border question, unless you knew “what the customs agreement is, what the free trade agreement is”?

Of course, there wasn’t a row at all, just a humiliating climbdown as the UK gave in to the inevitable. Inevitable for three reasons: first, the disproportionate bargaining power of the two sides meant that it was always the EU27 that would set the agenda; second, the text of Article 50 and the legalities of EU trade deals with third countries meant that making any sort of binding commitment to a future deal is very hard for the EU; and third, and perhaps most importantly, the fact that the UK cabinet had absolutely no idea what it wanted the future relationship to look like.

Had Michel Barnier turned up to the negotiations and said “OK then, you win, let’s talk about the future trade deal. Let’s see your proposal”, the UK would have been hugely embarrassed, when it transpired that Mr Davis had nothing more than a blank sheet of paper.

However, Mr Davis may have the last laugh. Because it looks increasingly likely that the negotiations over the next few weeks and months, between now and October, over the text of the withdrawal agreement, will indeed determine the shape of the future UK-EU relationship – despite the protestations of both sides.

Of course, Mr Davis’s victory is pyrrhic at best, since not only is the cabinet as disunited and incoherent as ever, the UK’s negotiating position has never been weaker.

It was the belated recognition of that weakness that forced the cabinet last week to agree that, to fulfil the UK’s December commitment that there will be no hard border on the island of Ireland, the UK will offer to, if necessary, remain part of the EU’s customs area and apply the EU’s common external tariff – the so-called backstop.

Expect to hear that word a lot from the prime minister. The government will emphasise that the “backstop” will only be relevant if a subsequent deal on the future relationship doesn’t make it irrelevant and that in any case technology will in due course make it unnecessary. But don’t be fooled.

Just as the government’s “implementation period” is nothing of the sort (there’s nothing to be implemented) and really should be called a “standstill period”, the backstop will in fact be the default option.

There is no prospect of the technology needed to render it redundant being ready by 2021, and no trade deal that comes close to meeting the government’s supposed red lines would do so either.

And at the moment, there is no prospect of Ireland, and hence the EU, accepting the government’s proposal that it should be time-limited. So the backstop will immediately become the most likely option for our future trading arrangements with the EU after the end of the standstill period in December 2020 – for the indefinite future.

Moreover, no one should be fooled that the backstop will just be about customs. Averting a hard border – as the UK also accepted in December – will also mean a high degree of alignment with single market rules across a range of issues. And it is here the real difficulties will emerge.

Will this alignment, as the EU proposed in March, just apply in Northern Ireland, in which case there will need to be at least some checks between Northern Ireland and the rest of the UK? Or will it apply to the UK as a whole? The former seems unlikely to be acceptable to the DUP or large parts of the Conservative Party.

But if it’s the latter, both sides will need to soften their red lines, if not abandon them entirely. The UK will have to accept that, de facto and very probably de jure, the European Court of Justice is still the ultimate arbiter of the rules for large parts of the UK economy.

Meanwhile the EU will have to soften its objection to “cherry-picking” parts of the single market. And, at least until now, the Commission has made very clear its view that the backstop can only apply to Northern Ireland.

Will this line hold if it becomes clear that the alternative is the collapse of Theresa May’s government and quite possibly a chaotic, no-deal Brexit, along with the imposition of a hard border in Ireland?

Expect the Commission to stick to the principle – but that doesn’t mean that, if the political will was there, a fudge couldn’t be found, with the UK somehow committing to unilaterally accepting and implementing all the relevant rules.

It is worth noting that this all-UK backstop would, in fact, not be that different in economic terms from the proposals Mrs May set out in her Mansion House speech. As Anand Menon and I noted at the time, the prime minister was unable to identify a single area of regulation where there would be significant benefits from divergence.

Given that she – like most economists – clearly regards Brexit as, from the economic perspective, a damage-limitation exercise, there could be worse outcomes. True, the UK’s ability to do independent trade deals would be, at best, severely constrained, and we’d become a rule-taker in large areas of regulation. But UK business would, by and large, breathe a huge sigh of relief. And free movement, at least in its present form, would end.

Similarly, the EU – which already finds its web of bilateral agreements with Switzerland complex and unwieldy — would be saddled with another complicated and messy third-country relationship.

But the supply chains of pan-European manufacturers would remain largely intact, as would the unimpeded access of EU business to the lucrative UK market; while, since this arrangement would presumably not cover financial services, the EU would be free to use its regulatory powers to continue to gradually improve the competitive position of continental centres vis-à-vis the City.

Of course, while economically this doesn’t look that different from the Mansion House speech, the politics will be very different, as the asymmetric nature of any deal becomes clear.

In due course, the other shoe(s) will drop in London, as Brexiteers realise that while the UK won’t exactly be a “vassal state”, our future will bear no resemblance at all to their vision of a “Global Britain”, free of EU regulation, making deals with countries on the other side of the globe.

Nor will it be an easy sell in Brussels, Paris or Berlin, where politicians might prefer either a clean break from the UK or the reversal of Brexit.

So it’s by no means a done deal. But what’s the alternative? The cabinet has grasped, belatedly but unequivocally, that the UK has no choice but to come up with a serious, detailed proposal that meets its December commitment on the Irish border; magical thinking and promises of technological unicorns won’t cut it.

And there is no majority in the House of Commons for “no deal” — although accidents can happen. So it looks likely that if the government can’t build a consensus behind the backstop – and, even more difficult, persuade the EU27 to acquiesce – then everyone will need to go back to the drawing board.

What does that mean? A greatly extended standstill period? Requesting an extension of the Article 50 timeline? Or withdrawing it altogether? Any of these would mean that, de facto, we will remain, economically at least, part of the EU for all intents and purposes for the foreseeable future.

So, over the next few months, the UK will have to confront finally the real choices: a messy, imperfect solution that mostly contains the damage but leaves us still inextricably tied economically to the EU and with a structurally weaker bargaining position.

Or Brexit in name only. Or, less likely but still possible, the polar opposites of a chaotic no deal or no Brexit at all. Anybody who tells you they know what’s going to happen doesn’t know what they’re talking about.

By Professor Jonathan Portes, senior fellow at The UK in a Changing Europe. This piece originally featured in Times Red Box.


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