Reading the Tea Leaves

19 Jun 2017

Policy area: Brexit

BPF Head of Insights and EU Engagement Patrick Brown sets out an overview of key items for negotiation as Brexit talks begin.

Introduction

Today began the first round of negotiations on the UK’s exit from the EU. 

The FT has conducted an excellent roundup of who’s who in the negotiations.  While the figureheads are important, experience dictates that the officials that carry out the preparatory work, and determine what issues get elevated to ministerial/permanent representative level, have as much of a role to play.

Model for Negotiations

The proposed method is that negotiations will proceed on a monthly cycle.   Two weeks of preparation will be followed by a week of negotiation between the Commission and the UK negotiators.  This will be followed by a week during which conclusions will be drawn.  This explains why the next date of talks after this one is July 17th.

It is highly likely that many EU leaders will wish to have something to report by early Autumn, since September marks the German Federal Elections and the Conservative Party Conference takes place in October.  At very latest, the basics will need to be agreed by close of the year, since the final deal (or at least those elements governed by Article 50 – there may be scope for discussions on the finer points of a trade deal post-Article 50) will need to be inked by October 2018 to allow a good few months for ratification by EU27 Govs, EU institutions and 35 or so national and regional parliaments.

Below we set out some headings that frame some of the major points of discussion in negotiations.  However, it is important to recognise that each of these issues is inter-related – this should come as no surprise given the build-up of 60 years of constitutional order and public policy. This means that negotiators may find themselves unable to move forward unless they remain focused and in problem-solving mode.

As for what to expect in terms of public pronouncements, Simon Usherwood at the University of Surrey has observed there is a cultural difference in the way that the UK and the EU tend to prefer to negotiate. In the former case, it is behind closed doors, allowing compromises to be reached more quickly and based on leverage.  In the latter case, it is based on openness and ensuring that there are no behind-closed-doors manoeuverings.  EU negotiating tactics tend to be based on strength of argument, meaning that throughout the build-up to negotiations we have been sorely in need of common heads of terms, including a common framing of what it is that Brexit means in practice. It is likely that we will look back and acknowledge the process would have been more efficient had such documentation been drawn up.

First Items of Business

There are two main items of business on which all parties agree must be settled before proceeding to discuss further matters.  These are:

Citizen Rights of Residence

The UK wants to secure the rights of EU nationals resident in the UK at an early stage.  On April 26th, David Davis said that he wanted to secure ‘very early agreement’ that ‘effectively freezes’ their existing rights.  Since countries such as Germany depend upon working age immigrants for their workforce, this is also likely to be a high priority item for negotiation on the EU side too.  The EU is keen to secure a once-and-for-all deal to include equal treatment on healthcare, pensions and benefits, taxation and education/professional development and attainment.

Financial Loose Ends

A second high priority item for negotiations.  The Prime Minister has made it clear that the UK no longer intends to make substantial contributions to the EU’s Budget post-Brexit.  However, this  has always been modified by virtue of Mrs Thatcher’s Cheque (the rebate) since 1985.  The PM has also left the door open to potential participation in some EU programs on a selective basis. However, which of these are open to the UK is likely to depend on the model of coordination/collaboration enjoyed with the EU post-Brexit. 

For its part, the EU believes that the UK should continue to pay into the budget for a transitional period and that the UK cannot pick and choose which elements of the EU it chooses to participate in.  A further dynamic is that, should the UK leave the EU and then seek to strike a new association agreement that requires payment into the EU’s resources, it would almost certainly lose the rebate, meaning that all other things being equal, the relevant financial liabilities might increase.

Also within this bucket are the costs associated with leaving the EU.  Membership of the European Investment Bank, and liabilities arising from the EU’s security and defence operations.  These one-off costs are what the media has been referring to when it speaks of the ‘Divorce Bill’.  The EU negotiators maintain that the UK must settle its contribution too to the EU’s seven year budget program that finishes at the end of 2020 (although clearly the two year default time horizon for Article 50 may conclude before then), so that there is no curtailment of existing programs.

Further Items of Business

Future Trade

Expect that the EU institutions will stick to the rubric that there can be no negotiation of a future relationship on trade between the UK and the EU pending conclusion of the withdrawal treaty (the output from the Article 50 process that sets out the terms on which the UK leaves the EU).  While reversion to WTO rules may cushion some impact from the lack of a trade agreement (at least providing some fallback rules) the tariffs for the matters they cover and their only partial coverage of matters of import to the UK would leave the UK in a problematic position.  For example, flows of data would not be covered by WTO, but they are fast becoming a valued commodity in their own right.

Recent rulings suggest that while the withdrawal treaty would need to be agreed by the EU institutions and EU27 as well as national and regional parliaments, a Free Trade Agreement might not according to recent rulings. However, this does not include investment matters, which would likely be treated separately in any case in that scenario.

As for what the UK is seeking as a target, the UK has said that it wishes to leave the Single Market and the Customs Union, and to obtain a ‘bold and ambitious’ free trade agreement.  The UK wants the trade deal to include financial services.  For its part, the EU is insisting that any rights of financial services access will be accompanied by obligations to preserve the integrity of the EU’s economy and financial markets via observance of pertinent EU Directives and Regulations.

Immigration

The UK Government’s stance on immigration has softened over time, but essentially it is seeking to set restrictions.  The EU’s position is that the UK must accept freedom of movement if it is to maintain access to the Single Market on a privileged basis.  This issue is linked to that of the rights of residence for existing EU nationals in the UK and reciprocal rights of UK nationals in other EU countries.

EU Courts and Arbitration

The EU Courts of Justice have provided case law that has developed and clarified the legal and constitutional order of the EU.  Earlier in the year, the Prime Minister indicated that the UK would conclude the ECJ’s influence over UK public policy and jurisprudence. However, that position softened with the advent of the Great Repeal Bill associated documentation that said that case law derived from the ECJ would be accorded the same status as UK law.  The Government has also made vague suggestions that international trade arbitration may be possible to replace the role of the ECJ with respect to trade disputes, but there is not a great deal of detail on what the UK proposes here.

During the period of negotiations, the ECJ’s jurisprudence (including over non-transposition and non-implementation of EU law) will continue to apply.  If there are terms to the deal struck between the UK and EU, we might expect it to be a natural home for policing outcomes.

Gibraltar and Ireland

No agreement between the EU and UK will apply to Gibraltar without agreement Spain and the UK on that matter.  Similarly, the avoidance of a hard border between Northern Ireland and the Republic of Ireland, may be challenging.  The politics of the UK Government, with a prospective deal between the Conservatives and the DUP, make the prospect of a hard border (and by extension ‘no deal’) seem a more distant prospect.

Transitional Arrangements

Both the UK and the EU see the merit in extending the implementation period for any deal struck beyond the time horizon set out in Article 50, and so transitional arrangements are likely. However, the EU is clear that the transitional arrangements need to be well-defined, and require their own enforcement mechanisms.  The Commission negotiators maintain that we should not be talking about transitional arrangements until the shape of the deal is clear.  The German Government has gone on record saying that generic transitional arrangements are preferable over deals for individual sectors.

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