PAPER: Brexit Negotiations

In his seventh Brexit Challenge Paper, Nick Clegg sets out the challenges facing the UK Government during Brexit Negotiations. Read the paper here:

By Nick Clegg, Mar 16, 2017 6:03

1. Introduction

The triggering of Article 50 marks the beginning of the negotiations to agree the terms on which the UK will depart from the European Union, and the nature of the future relationship.

After four decades of legal, economic and administrative convergence, the scope of this undertaking is truly vast: from labour mobility to customs checks, fishing rights to patents, scientific research to counter-terrorism. It is the most challenging task faced by any British government since the Second World War.

The challenge is all the greater because Article 50 stipulates that (unless the other Member States agree by unanimity to extend the period) the UK will cease to be a member of the EU within 2 years - deal or no deal.  

This paper will examine the starting positions of the UK and the EU, and analyse the impact of decisions already taken on the prospects for a successful negotiation.

2. Some major constraints on the negotiation

The negotiations will be constrained by the time available for their conclusion, the scope of the talks, and differing views about sequencing.

i) Time

The two-year timescale for the talks will, in practice, be considerably shorter, for two reasons. First, because negotiations cannot start immediately: the Commission has first to receive its negotiating mandate from the European Council, which is not expected to meet until 3-4 weeks after the UK issues the withdrawal notice. More significantly, time has to be allowed at the end of the process for the draft agreement to be formally adopted.

The process of adoption itself depends on the eventual scope of the agreement. If it is limited to the arrangements for the UK’s withdrawal from the EU, then the process is as set out in Article 50(2), which states that “[the agreement] shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament”. The UK government has added to this by undertaking to hold a vote in both Houses of Parliament before the matter is considered by the European Parliament. In other words, once a draft text is agreed among Member State governments it will be presented first to MPs at Westminster for approval or rejection, then to MEPs in Brussels, before finally coming to a special meeting of the European Council for formal adoption. This process will take several weeks at a minimum, and could run into months.

If, as the government intends, the outcome takes the form of a 'strategic partnership', including a Free Trade Agreement and a new customs agreement, then this will be treated as a, 'mixed agreement', requiring not only the agreement of the EU institutions but also the approval of all Member State parliaments, including some regional parliaments. Such an agreement could be rolled into the Article 50 agreement (which would render all the ‘divorce’ matters subject to ratification by national and regional parliaments as well as the trade issues), or it could be incorporated into a separate treaty. This would nonetheless need to be concluded within the two-year timeframe in order to avoid a hiatus during which preferential trading arrangements would fall away.

The process of ratifying a mixed agreement can be very time-consuming. Our analysis of 10 ‘mixed’ trade agreements signed since 2009 shows:

  • the fastest ratification took just over 2 years to complete (the Moldova and Georgia Association Agreements)

  • it took more than 5 years to ratify the EU/South Korea Free Trade Agreement

  • seven others remain unratified and have been awaiting ratification from between four months (in the case of EU/Canada) to 7.5 years (in the case of EU/South Africa).

It would be wrong to draw an exact parallel between a typical FTA and one with a departing Member State. But it is worth noting that there are no recent examples of a mixed agreement being ratified in the time envisaged for the Brexit deal.

The EU’s chief Brexit negotiator, Michel Barnier, has for these reasons argued that an agreement must be reached in 15-18 months, rather than 24.

ii) Scope

The first task for the negotiations will be to determine their scope.

This is relatively straightforward in relation to the ‘divorce’ elements of the settlement. Both sides anticipate that this will include:

  • The UK’s disengagement from the EU budget, including the the issue of existing financial commitments (estimated at up to €60 billion), and the division of shared assets and liabilities.

  • The rights of British nationals resident in other EU Member States, and of EEA citizens living in the UK.

  • The UK’s future involvement in international treaties signed by the EU, including more than 50 Free Trade Agreements (for the latter, substantive decisions will depend on the outcome of bilateral negotiations between the UK and the relevant countries).

  • The future of British civil servants working in the EU institutions.

  • Arrangements for British members from the European Parliament, the European Court of Justice, the Committee of the Regions, the Economic and Social Committee, etc.

  • The relocation of EU agencies which are currently based in the UK – notably the European Banking Authority and European Medicines Agency which are the subject of intense competition from other EU Member States.

  • UK military involvement in common security and defence policy missions, and the future of UK police staff and secondees to Europol.

  • The transfer of regulatory and enforcement responsibilities currently exercised at European level. There will need to be agreement, for example, about the transfer of current cases and the handling of sensitive information.

  • Future arrangements at the UK’s land borders with the EU in Northern Ireland and Gibraltar.

Beyond the practicalities of the separation lie much larger questions around the future relationship between the UK and the EU, and here there are likely to be disagreements about what is legally required and what is practically possible in the time available.

Much hinges on the interpretation of the requirement in the text of Article 50 for the parties to negotiate a deal “taking account of the framework for [the UK’s] future relationship with the Union”. Article 50 has never been triggered before, so the meaning of these words has never been tested.  

The UK government wants a maximalist interpretation. It has already made clear in its White Paper that it seeks “a new strategic partnership with the EU, including an ambitious and comprehensive Free Trade Agreement and a new customs agreement.” It is likely to argue that Article 50 not only permits but requires a comprehensive agreement encompassing every aspect of future trade, regulation and security cooperation.

According to the orthodoxy in the Commission, this aspiration goes well beyond the “framework for the future relationship” anticipated in Article 50. The expectation on the EU side appears to be that the two parties will only sketch a pen portrait of the future relationship at this stage, in order to provide context for the phasing out of the UK’s rights and responsibilities as a member of the Union, including perhaps transitional arrangements covering the period until the future relationship could be fully negotiated and applied.

iii) Sequencing

Michel Barnier has already said that the withdrawal agreement (in particular the question of money and citizens’ rights) must be resolved before any substantive trade talks can take place. Trade Commissioner Cecilia Malmström has gone further still, arguing that the UK cannot legally enter into trade talks until it has ceased to be a member of the EU.

Even if the European Council mandates the Commission to run both sets of talks in parallel, it may insist on material progress on money and citizen rights before the Commission is permitted to broaden the scope of the negotiations. Ideally, no doubt, it would like a ring-fenced financial settlement from the UK without having to ‘trade’ the money which the EU argues it is owed (see below) for privileged UK access to the Single Market or other UK desiderata. In the same way, the UK will no doubt wish to make the financial settlement conditional upon a favourable trade deal.

3. The starting positions

We now turn to the issues of substance in the talks.

Unlike most international negotiations, the Brexit talks are about picking apart a set of established arrangements rather than constructing something new. The goal of both parties is therefore to minimise the damage from the break-up. The UK is in the weaker position as the smaller party and the demandeur, seeking to extract concessions from the EU. On trade, those concessions are going to be worth more to the UK than to the EU, as bilateral UK/EU trade in goods is more valuable to the UK economy (12% of GDP) than it is to the EU (3% of GDP).

The tight timescale puts a premium on both sides having realistic aims, enough flexibility to overcome impasses quickly, and an openness to interim solutions in order to minimise the possibility of breakdown and of a chaotic Brexit.

While no direct talks have yet taken place, both sides have made public statements that provide a reasonable idea of their respective starting positions and potential room for manoeuvre.

The EU
  • For the EU institutions and for many Member States, the priority is protecting the integrity of the Union and the “four freedoms’; stopping the UK from “cherry picking” the bits of the EU that it likes; and avoiding ‘contagion’, with other Member States encouraged by the example set by Britain into contemplating leaving the EU.

  • Brussels and European capitals have presented a largely united front since last June, and are likely to take final decisions by unanimity, despite the Article 50 stipulation that decisions should be taken by qualified majority. As a recent German government memo (leaked to Bloomberg) stated: “Our top priority is the cohesion and unity of the EU-27 and to safeguard what has been achieved in the common legal and political framework for the future of the EU at 27. European integration has brought peace and prosperity for the past 70 years after centuries of repeated wars in Europe.”

  • While EU spokespeople and national politicians have emphasised that they will approach the talks constructively, most have therefore been clear that the deal on offer will be materially inferior to membership.

  • Both EU institutions and Member States want to settle the budget issues in a way that will minimise the financial impact of Brexit. As the House of Lords EU Committee has noted, the UK provides approximately 12% of the resources available to the EU, and is a major net contributor. The UK’s departure will create a large hole in the Union’s finances, affecting the EU’s €241bn unpaid budget appropriations (essentially the EU’s ‘credit card’); as-yet unspent funds allocated for cohesion and rural development; and ongoing pension costs for EU officials. Some current net recipients from the EU Budget will become net contributors. The EU will wish to avoid a punishing row over the next round of EU budget negotiations, which begins in the middle of the Brexit process in 2018.

  • The rights of EU citizens living in the UK will be a particular priority for countries with large numbers of nationals resident in the UK (Poland, Romania), and is an issue likely to be championed by the European Parliament.

The UK

The UK’s broad negotiating position was set out in the government’s White Paper of 2 February.

  • The government confirmed its intention to send the Article 50 notification before the end of March. This timing has consequences for the negotiations because it will be hard for the EU to engage fully until it knows the outcome of the French elections in May and the German elections in September. The arbitrary timing reflects the government’s need to be seen to be “getting on with the job”. But it piles on even more time pressure. The chances of a successful negotiation might have been improved by delaying the withdrawal notification until the autumn.  

  • The government says it will be seeking a comprehensive agreement covering both the terms of withdrawal and the future relationship. In our judgement, as discussed in previous Brexit Challenge papers, it will not be possible to unpick and re-stitch every aspect of EU law as it applies to the UK, and then to ratify the outcome in more than 30 national and regional parliaments, in the space of 24 months. Yet the UK government has claimed not only that this is possible but that it is, according to the Foreign Secretary, “by far and away the highest probability”.

  • At the least, there will surely need to be transitional arrangements to allow more time for detailed negotiations on trade and other matters. The government’s White Paper acknowledges the need for transitional arrangements, but only in the guise of a “phased process of implementation”, putting into practice decisions that have already been taken. The paper rules out the possibility of extending the UK’s existing terms of membership while further talks take place.

  • Disputes between Brussels and Westminster over the UK’s contribution to the EU budget have always been bitterly fought, and tend to elicit outrage from the British press, as in 2014 when faster than expected economic growth led to a £1.7 billion ‘surcharge’ on top of the UK’s annual payments. A visceral reaction can be expected to a demand from the EU that the UK settles a ‘bar bill’ of up to €60 billion at the point of departure. Backbenchers will remind Mrs May of her pledge to walk away from a ‘bad deal’, citing legal advice provided to the House of Lords committee that suggested that it would be difficult for the EU to enforce non-payment in the courts (though many other options for retaliation would be available). Senior Ministers have made no attempt to prepare parliament or public opinion for large payments – or, indeed for any payment beyond limited contributions tied to future access to specific EU programmes. The Secretary of State for International Trade has dismissed the idea of a charge as “absurd” and the Foreign Secretary has invoked the 1984 Fontainebleau summit (as which Margaret Thatcher secured the British rebate under threat of non-payment of UK dues) an “illustrious precedent”.

  • The decision, announced at Conservative party conference in October 2016, to end the involvement of the European Court of Justice (ECJ) in any post-Brexit arrangements creates severe constraints. It would mean that any transitional agreement that included continued access to the Single Market or Customs Union would require its own bespoke enforcement and dispute resolution body as an alternative to the ECJ. This is unlikely to be acceptable to other Member States, who must themselves submit to ECJ rulings and would be reluctant to create a new body with different rules for the sole benefit of the UK. Bespoke arrangements would also have to be put in place for future access to (non-controversial) programmes like Horizon 2020, and for crime and security measures like the European Arrest Warrant and the exchange of criminal records. The UK’s position would create additional complexity to no obvious end: indeed, the fact that the UK government is aiming for regulatory equivalence means that ECJ jurisprudence will continue to apply to the UK, even if its formal jurisdiction does not.

  • The government has refused to countenance "off the peg" models, and notably the EFTA/EEA option which was explored in our last paper. EFTA is not without its complexities (and it is less desirable than full EU membership). But an application for EFTA membership might emerge as the only way to avoid damaging the UK’s economic interests in the event that talks break down. Excluding this option from the outset, even as a transitional one, surely increases the chances of a chaotic Brexit.

  • The Prime Minister suggested in her Lancaster House speech of 17 January that the government would like to become “an associate member of the Customs Union in some way”, without being subject to the Common External Tariff, in order that trade with Europe can be both “tariff-free” and “frictionless”, while the UK is simultaneously free to sign its own FTAs with “old friends and new allies from outside Europe”. This position is internally contradictory. Mrs May wishes at once to leave the largest free trade area in the world, and to maintain free trade with it. She seems to be hinting at a sector-by-sector approach, with car manufacturers, for example, at the front of the queue for a deal that would seek to preserve the pan-European supply chains on which the UK industry relies. There is no precedent for such an arrangement, and it will be very hard to fulfil the expectations that have been raised. The closest analogy is perhaps Turkish participation in the EU Customs Union. But that is far from frictionless. Delays and red tape are estimated to cost €3bn a year in lost trade. Unless a novel solution can be found - one which requires both goodwill and legal ingenuity - the UK’s exit from the Customs Union will result in significant bureaucratic burdens on UK exporters.

  • The Prime Minister has declined to seek a new EU-wide deal on Freedom of Movement, which would have built on the trigger agreed in David Cameron's renegotiation package to permit discrimination on the grounds of nationality for the purposes of welfare benefits in the event of exceptionally high migration flows. Instead, the government’s White Paper sets out an intention to design a system to impose unilateral controls on the numbers of EEA citizens coming to the UK. As a result, immigration has become the pivot around which everything else in the Brexit negotiation revolves, including UK economic interests. A genuine attempt to work with Germany and others to achieve an EU-wide “emergency brake” in exceptional circumstances might have avoided a rupture between the UK and its largest export market.

  • Securing a reciprocal deal on citizens’ rights is important both for humanitarian reasons and for those sectors of the economy that rely on EEA migrant workers (notably the food industry, academia and financial services). The government’s approach has been inconsistent. On the one hand, it has encouraged expectations that that those already here will be able to stay. On the other hand the Home Office is still requiring EEA citizens to complete an onerous bureaucratic process in order to achieve permanent status, and rejected 28% of applications in the second half of 2016. The government has so far refused to make a unilateral offer to regularise EEA citizens in the UK. As we explored in our paper on freedom of movement, a deal on citizen rights is likely given the symmetry in both sides’ interests (including the need to secure the status of more than a million British citizens in the EU). A unilateral move by the UK would therefore have saved time and created much-needed goodwill at the start of the talks.

  • The government is committed to avoiding the creation of a hard border between Northern Ireland and the Republic, and the maintenance of the Common Travel Area. Both the Irish government and the European Commission have made public statements to the same effect, conscious of the impact that border checkpoints would have on the Belfast/Good Friday Agreement and on cross-border trade. Suggested solutions range from moving UK immigration controls to Irish ports and airports, to introducing ‘virtual checks’ on goods moving across the land border. As the House of Lords has observed in a recent report, the experience at other EU borders shows that “while the burden and visibility of customs checks can be minimised, they cannot be eliminated entirely”. A solution to this set of problems will require an unprecedented agreement between the UK, Ireland and the EU. This will be legally, politically and technologically complex, and extremely challenging to deliver in the time available.

  • The Prime Minister made it clear in her Lancaster House speech that she sees the UK’s strong record of leadership in EU on crime, policing, counter-terrorism and defence as once of her strongest cards. At a time when security is a major concern across the EU-27, the government’s hope appears to be that it can make future cooperation conditional on securing a favourable trade deal. It is not obvious that this tactic will work. While it may well be the case that the UK can buy goodwill in the negotiations by offering to increase its commitment to collective security, a cruder transactional approach is likely to backfire, as RUSI have warned. Any suggestion that the UK will act to weaken European security in order to get its way on trade is likely to severely weaken trust between the parties.

  • The Prime Minister indicated in her speech that the government would “change the basis of Britain’s economic model” in the event that the the EU takes a “punitive” approach to the talks, shutting the UK out of the Single Market from which it is choosing to withdraw. This was widely interpreted as a threat to turn the UK into a low-tax, low-regulation haven on the model of Singapore, designed to undercut European markets. It was received extremely badly in European capitals and could well backfire, as other Member State may now use the talks to attempt to constrain the UK’s ability to dramatically reduce business taxation or to subsidise key industries by applying state aid rules, anti-dumping measures, and constraints on deregulation in exchange for a trade deal. The credibility of the threat is also undermined by the lack of political consensus in the UK for such a move.

4. The first hurdle: UK financial contributions

The first weeks and months of the process are likely to be overshadowed by an argument about money. The domestic UK political context will make a deal harder. Negotiating documents will inevitably be leaked and find their way onto the front pages of the newspapers. The Prime Minister will come under intense pressure from the press and from Conservative backbenchers to reject any significant payment to the EU, and to walk away from the talks if the EU takes a hardline view.

The more time that is taken up resolving the money dispute, the less time there will be for discussions about trade and other matters. So an early pragmatic compromise is needed. A potential deal appears to be taking shape in which the EU could break the deadlock by offering to establish (at the June meeting of the European Council) that the trade and Article 50 talks can run concurrently, in return for which the UK will need to show willingness to settle its outstanding bills. This could be achieved by agreeing to a set of principles that will govern the final settlement, thereby allowing both sides to proceed with talks on trade and other topics without finalising the sums of money involved until later in the process.

This approach requires flexibility from the UK. The Prime Minister will have to to explain to the public that a financial settlement running into the billions is in the national interest. She will have to counter criticism from the eurosceptic right. This requires a sharp change of direction from the government, which to date has tended to seek to placate hardline eurosceptic sentiment and to raise expectations that the Article 50 process will be relatively painless.

5. Insufficient resources

The challenges set out in this paper will require the full focus of the civil service over the next two years. Whether the institutional capacity exists to meet this task is not yet clear. As a result of the decisions taken to reduce the deficit, the civil service is operating with fewer staff than at any time since the Second World War. It must, among other things, rapidly re-learn how to strike a trade deal, 45 years on from the last one, while simultaneously renegotiating dozens of existing EU trade deals with third countries and carving out agreements with a newly-protectionist United States and other potential partners. This is the job of the Department for International Trade - an entirely new department, which is still recruiting and training staff, overseen by another new department - the Department for Exiting the European Union. The civil service’s extraordinary resilience and adaptability notwithstanding, it is a Herculean and expensive task, creating extraordinary new quantities of red tape and armies of consultants.

There is a long tail of other complex issues that will require deft footwork from departments. These include the Single Skies agreement that governs landing and overflight rights across the EU, major projects like Galileo (a global navigation satellite system), cross-border energy agreements, reciprocal healthcare arrangements, including the EHIC card, arrangements for animal and plant health certification, and many others. All will need to be resolved by the time of Brexit. In many cases, there will also be a requirement both for new expensive regulatory systems to replace the European ones from which the UK is withdrawing, and for some form of dispute resolution mechanism to replace the role of the ECJ. 

6. Conclusions

The UK positions set out above were designed to placate domestic constituencies. The sum total of these choices points to a high-risk strategy: delivering - under very challenging time constraints - not only a ‘fair’ separation agreement, but also an ambitious trade deal that secures “the exact same benefits” (in David Davis’s words) as membership of the Single Market. Expectations have been set very high.

Success now appears to hang on the questionable assumption that the EU-27 will be compelled by economic self-interest to cooperate with the UK’s demands. Here, the UK should not forgot that size matters. While a failure to agree would undoubtedly damage both sides, the UK is smaller so the damage would be proportionately greater.  

The most important missing ingredient is an atmosphere of goodwill. There has been little attempt to date to set a positive tone. Some of the government’s pronouncements have been interpreted on the continent as thinly-veiled threats. In a large, complex negotiation with many parties involved, threats from a smaller demandeur are unlikely to work.

Given the range and complexity of the issues and the poor choices made by the UK government to date, there appear to be two likely outcomes at the end of the process: either the UK negotiates transitional arrangements which prolong some or all of the terms of the UK’s membership to allow time for trade talks to reach a conclusion, or there is a disorderly exit with a reversion to WTO rules, implying tariff and non-tariff barriers on our exports to the EU, and serious economic disruption.

In order to secure a transitional deal, and avoid the talks ending in failure, the UK will need to take a series of politically difficult steps:

  • agree to a fair settlement on liabilities;

  • reverse the White Paper position that ‘transition’ can only be about implementation rather than an extension to the time available for talks;

  • accept that key elements of the UK’s membership of the EU will need to continue on a temporary basis for several years while talks are concluded; and

  • reverse the position on ECJ jurisdiction, at least for the duration of the transition.

The EU will also need to show flexibility in order to maximise the likelihood of a successful outcome:

  • Rigid adherence to the Commission’s preferred sequencing risks an early stalemate, and is not necessarily consistent with the letter of Article 50.

  • A degree of flexibility in the application of the 4 freedoms would facilitate progress.

  • Insistence on a maximalist interpretation of the UK’s financial obligations raises the chances of a breakdown in talks.     

Summary of key UK positions and impact on the negotiations

Summary of key UK positions and impact on the negotiations

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