The Brexit Negotiations move to Phase 2

In December last year the UK’s negotiations with the EU-27 over its withdrawal from the Union reached an important milestone, with the EU determining that enough progress has been made on the terms of the separation to allow discussions to start on the future relationship between the UK and the EU post Brexit.

This was greeted in some sections of the British media as a significant achievement, complete with the inevitable Churchillian quote (“not the end, nor even the beginning of the end, but perhaps the end of the beginning”), without which nothing concerning Brexit seems to be complete.  And it is true that it is clearly better for the UK to have reached this point, and for discussions to be turning to the future, than the alternative.  But as Phase 2 of the negotiations start, we would suggest that a reality check is in order.

Firstly, the main reason that we have reached this point is because, to all intents and purposes, the UK has retreated from just about every one of its earlier positions.  Over the 18 months since the UK’s referendum, those seeking a clean break have had to concede a large payment to the EU on exit, a compromise on Ireland where some sort of cross-border co-operation now looks inevitable, continuing rights for EU citizens in the UK, negotiations on continuing access (of some sort, and for some industries) to EU markets, and a transition period during which the full rules of the EU will be applied to the UK as the implementation of the first four are worked out.  Not one of these was in the Leavers’ plans;  all of them were said to be unthinkable during and immediately after the referendum campaign.

It is not difficult to conclude negotiations if you agree to all of the other side’s demands.  It is only surprising that it took the UK government so long to realise that, given both the relative strengths of the two sides and the EU’s known positions and principles, this was always going to be the likely outcome.  It would have saved months of negotiating time if the UK government had accepted this in say April 2017 not December.

Secondly, and despite the agreement in principle on the three phase 1 issues, all three require more work before they can be drafted into a legal agreement.   In every case, the devil will be in the details and all three issues have complexities that are far from simple to solve.

On none of them is this more true than the question of Ireland, where the impossible triangle of “no border between Northern Ireland and the Republic, no border between Northern Ireland and the rest of the UK, but a border between the UK and the EU, which necessarily includes Ireland” remains unresolved.  Indeed a senior Irish diplomat has commented that the conflicting promises that the UK has made on the issue will be “hard to reconcile” – diplomatic speak for “we don’t think the proposed solutions can be made to work”.

Nevertheless, the phase 2 negotiations, on the future relationship between the UK and the EU, will now start.  The EU – again moving with considerable speed and complete unity among the 27 member states – has set out the guidelines for the next round of negotiations, the chapters of which will be:

1.  A settlement of the details of the agreements reached on the phase 1 issues and their translation into a legal form.

2.  Agreement on the arrangements for the transitional period, which will last for 21 months from the end of March 2019 to the end of December 2020, and during which period the UK will continue to have membership of the single market, will continue to abide by the four freedoms, but will not have membership of any EU institutions.

3.  Agreement on the framework for the future relationship.

This is a very large agenda, and to fit with the timetable for the UK’s scheduled departure in March 2019, the first two parts of it will probably have to be concluded by October this year to allow the various ratifications in the EU.  That is ambitious, and the UK may yet come to regret the time wasted on phase 1.

And even if parts 1 and 2 can be resolved in the next 9 months or so, the third heading will remain.  On this, even the most optimistic of analysts do not expect the two sides to achieve more than agreement in principle on the politics of the future relationship:  the technical and economic details will take years to agree after that (the EU-Canada trade deal took more than 7 years to put together) [1].

Complicating matters will be a probable change in the stance of individual countries in the EU-27.  In phase 1 the 27 member states showed impressive unity;  this was partly political, and partly due to a genuine alignment of their interests.  This alignment of interests will not however be as strong in phase 2, as different patterns of trade and contact with the UK emerge – to give just one obvious example, countries with fishing fleets will be interested in fishing rights in UK waters, whereas landlocked countries will find this less crucial to their national interest.

Broadly speaking, we might expect the EU member states to develop into three groups.  They will be overlapping, and no member state will be completely in one or other group, but there is likely to be a group who tend to prioritise economic links with the UK (the Irish certainly, and probably also the Dutch, Belgians and Danish), there will be those who prioritise security links (mostly the East Europeans), and there will be those who prioritise due process and the coherence of the EU (the Commission and the Parliament will be in this group, probably supported by France and Germany).

On the surface this sounds like the Brexiteers’ dream of “divide and conquer” – ie splitting the EU into separate camps and playing them off against each other.  We would caution that this is most unlikely to happen;  indeed if anything it is more likely to be to the UK’s disadvantage as individual countries feel more empowered to pursue their own particular interests and hold agreement up for their own ends.  It was after all to the UK’s advantage in phase 1 that the 27 member states all agreed to delegate the negotiations to Michel Barnier and his team and abide by the results.

A second complication in phase 2 is a somewhat unusual and unexpected role reversal between the EU and the UK.   Traditionally (and without oversimplifying very much), the EU has had a clear idea where it wants to be in the long run – the “grands projets” – but has been less certain about the administrative details of how to get there, while the UK has been characterised by an impressive attention to mechanical details but usually a lack of any overarching vision of its long term goals.

But now the positions seem to be almost completely reversed.  The UK has the grand vision, of a close and special relationship, but without any consensus in the government or elsewhere either on what exactly this entails or on how to achieve it; while the EU has no specific vision for the future relationship while knowing exactly the legal details of what can and cannot be contemplated.

It is because of this that Barnier repeats that “there can be no agreement on free trade in services without membership of the single market”.   What he means by this is that there is no precedent for a country having the right to free trade in services without being a member of the single market (not even Switzerland has free trade with the EU in financial services, and it is specifically excluded from the EU-Canada trade agreement) – and the EU isn’t prepared to contemplate creating one [2].

In effect, the EU is in a position of a shopkeeper with a number of items for sale, ranging from “membership” to “full access to the internal market” all the way down to “no deal and WTO terms”.  Like the shopkeeper, the EU is content for the UK to choose whichever of these they wish, provided only that they pay the stated price.

This has been elegantly displayed in a chart that Barnier uses to illustrate the point (click here, chart courtesy of the European Commission).  The chart outlines the various types of access third countries have to the EU’s markets, and what the conditions for each are.  The message is simple:  the EU would be content with any of the outcomes and has no a priori preferences;  the UK can have whichever set of trade terms and accesses it wants provided it accepts the associated rules.

One final point remains in the background behind all the phase 2 negotiations:  the fact (widely recognised but seldom stated too openly) that it is not in the EU’s interest for the UK to be too successful, to come out of the negotiations with too good a deal.  The EU-27 cannot afford a flourishing and obviously successful UK, sitting just across the Channel as a beacon for any other malcontents.  Publicly the EU’s comments are limited to the statement that “no non-member state can enjoy greater advantages than member states”;  behind the scenes it is no secret that powerful elements in the EU want, need and will try to ensure that the UK is seen to suffer for having left the Union.

The UK faces a complex set of discussions with a timescale which is very compressed, against a negotiating partner for whom a resolution of the issues is not a major priority [3] and whose main interest in the talks will be to preserve its own rules and processes while conceding as little as possible, and without the usual assumption that if a win-win solution can be found then both sides will embrace it.

The negotiations in Phase 2 are likely to make those in Phase 1 look simple by comparison.


[1]              This does raise the interesting question of what the status of the UK’s trade rights are during the transition period and until the eventual trade deal with the EU is agreed.  Consider for example the EU’s trade deal with Korea.  Because of this Korea can export to the single market, and because the UK will remain in the single market during the transition period, Korean exports to the UK can continue.  But the UK will not be in the EU, and so will not be able to take advantage of EU countries’ reciprocal rights to export to Korea.  On the other hand, because the UK will still be in the EU customs union, it will not be able to negotiate its own trade deal with Korea.

Most probably, the EU and UK will together be able to obtain WTO acceptance that for the transition period some degree of finessing the issue (diplomatic speak for ignoring it) will be the only practical solution.  But that does rely on the transition period being both finite and short – a long transition period would make this difficult, and an indefinite one would we think make it impossible.

[2]               The EU’s relationships with third countries are complex and varied.  The EEA countries have one set of access rights, Switzerland, Ukraine and Turkey each have bespoke agreements, all slightly different, Korea and Canada have hugely complex trade agreements and so on.  But behind this complexity is a simple and coherent principle:  the more a third country accepts the EU’s rules, the more access they can have.

[3]              It is important to realise that while Brexit is an all-consuming issue at Westminster, it simply isn’t in most other EU capitals.  At the recent EU Council meeting, which lasted over 12 hours, Brexit was discussed for just under one hour – and that was considered a long discussion compared to other Councils.