20th October 2017

This week’s meeting of the European Council had not looked likely to unlock Brexit negotiations. EU27 leaders today formally announced that “sufficient progress” on the three main withdrawal issues – citizens’ rights, Northern Ireland and Ireland, and the financial settlement – has not been reached, and discussions on a future long-term UK-EU relationship and any necessary transition arrangements cannot yet begin. However, the EU attempted to strike a positive tone, by green-lighting internal preparations for the next phase of negotiations, and offering assurances that a breakthrough could yet be reached before the end of year. Many leaders also showed appreciation of the progress made since talks opened in June: German Chancellor Angela Merkel noted “encouraging” signs that talks could move to trade in December; and Luxembourg’s Prime Minister Xavier Bettel commended the compromise shown in recent speeches by the UK.

What is blocking “sufficient progress”?

This outcome has long been expected. Following the last round of talks, the EU’s chief Brexit negotiator, Michel Barnier, made clear he would not be recommending a move to open trade talks at this summit. He suggested another assessment would take place at the next European Council meeting on 14-15 December, effectively suspending “sufficient progress” until the end of the year.

The real obstacle to movement appears to be the question of money, with a deal on citizens’ rights “within touching distance”, and discussions on Northern Ireland unable to progress much further without talking trade. From a bargaining standpoint, the EU sees an advantage in extracting as many financial concessions as possible before opening trade discussions – they believe this is their point of maximum leverage. The sequenced structure of talks, with the EU in charge of the political decision on when to move forward, was therefore always likely to result in delays. But exploiting their advantage too far risks backing the UK government into a corner, and damaging future possibilities for compromise.

After Prime Minister Theresa May’s broad offer in Florence that no EU member state should pay more or receive less from the current EU budget, and her commitment to honour obligations taken during the UK’s membership, it is difficult to see how much more the UK government can put on the table during  this first stage. Domestically, it would be politically fraught for the UK to commit to a larger payment without receiving anything in return. As Brexit Secretary David Davis has already noted, questions of money can be more easily unblocked by linking further contributions to participation in particular EU programmes or schemes. It would also be easier for the government to sell domestically if further payments were to signal a joint commitment to securing a ‘deep and special partnership’.

Yet, reports suggest France and Germany are looking for written guarantees from the UK on its financial obligations before beginning talks on trade. French President Emmanuel Macron today said the UK still has to make “a substantial financial effort”, adding, “We are far from having reached the necessary financial commitment.” Dutch Prime Minister Mark Rutte has also said that failure to reach sufficient progress is “primarily” a question of the exit bill, adding, “Theresa May has to come up with more clarity on what she meant [by] other commitments in her Florence speech.” With neither side ready to soften their position on the money to unblock talks, the path to “sufficient progress” by the end of the year will not be easy.

It is sensible for the government to prepare for no deal

Both the UK and the EU are still aiming to secure a comprehensive free trade agreement, with close cooperation on other issues such as defence and security. Walking away without a deal remains neither side’s first preference, and would be economically damaging for both.

But the possibility of no-deal should be taken seriously, given it cannot yet be ruled out. As the Prime Minister rightly said in her press conference today, it would irresponsible for the government not to begin planning for a no-deal scenario, or  to wait “until the very last moment” to begin such preparations (as Chancellor Philip Hammond appeared to suggest last week).

The UK’s preparedness for no-deal can increase the chances of securing a good agreement. The simple truth is many of these measures will be needed even if a final deal is secured. Given the government’s decision to withdraw from the EU’s customs union and single market, work should already be underway to create a new UK customs system, immigration system, regulatory bodies, tariff regime etc. As long as the UK fails to invest in increased infrastructure at ports and borders, or upgrading necessary IT systems, the Prime Minister’s warning that “no deal is better than a bad deal” will understandably ring hollow in Brussels.

There are those that argue that unilateral solutions are “futile” – it is all very well for the UK to implement a streamlined customs system in Dover and Northern Ireland, but goods trade will continue to experience disruption unless the same systems are in place in France and Ireland. As Open Europe discussed in our paper Nothing to Declare, trade friction would indeed be best avoided if the UK and the EU jointly agree comparable measures. But unilateral action would go some way to easing disruption and should be set in motion.

A transition is most useful if agreed quickly

The EU’s decision to open internal preparatory talks on the next stage of negotiations is a welcome development. It would allow discussions for future transitional and trade arrangements to proceed swiftly after “sufficient progress” is declared.

A jointly agreed status-quo transition could provide the necessary breathing space for the UK and EU to negotiate a comprehensive trade deal. At Florence, the Prime Minister put forward the UK’s proposal for a “standstill” transition, where it continues to sign up to EU rules and regulations for around two years. This is a sensible suggestion that would effectively extend the status quo on customs and single market, while formally placing the UK outside the EU. It is also broadly in line with EU requirements for a transition period, avoiding an unnecessarily difficult negotiation over terms – European Council President Donald Tusk today said the EU’s preparatory discussions will take into account the proposals put forward by the UK in Florence. However, questions still remain over the legal basis for such a period. And importantly, the transition is not a panacea. Both sides must still provide greater clarity on what the future bilateral relationship will look like.

The real value of a transition is its ability to provide businesses and individuals with greater certainty and clarity in the medium term. In this sense, the Chancellor was right last week when he described a transition as a “wasting asset” – the longer it takes to agree, the less useful this instrument becomes. Business leaders have already suggested that unless greater clarity on the medium term environment is provided by the new year, they will “press go” on their contingency arrangements. For EU member states still hoping to woo business from London, this is likely a powerful incentive to delay opening the second round of negotiations – yesterday’s tweet by Goldman Sachs CEO Lloyd Blankfein that he plans to spend “a lot more time” in Frankfurt is a timely example.

It is in the interests of both the UK and the EU to arrive at a negotiated comprehensive agreement on their future relationship. While the decision taken at the European Council summit today may be a setback, hopes are clearly still high on all sides that trade and transition talks could open by the end of the year. Achieving this will require the EU to show compromise on the issue of the financial settlement. But, no matter how talks with the EU advance, the government should begin preparing in earnest for a no-deal situation. This is not purely a matter of negotiating leverage – the government has already made clear its decision to leave the EU customs union and single market and will need to be ready in advance for the changes this will require.  As the UK positions itself toward a less integrated relationship with the EU, a lot of the so-called no-deal preparations are simply a necessity.