8 December 2017

Finally! After knockbacks at the October European Council and a fraught week of intense negotiation between Westminster, Brussels, Dublin and Belfast, the European Commission has recommended to the other 27 EU member states that the UK-EU negotiations have made “sufficient progress” and it is now time to move on to “phase two” negotiations about a transition and the future relationship. This recommendation needs to be officially endorsed by leaders of the EU27 at next week’s summit on the 14-15th December. But this is now largely a formality.

The agreements reached so far under this first phase are today set out in a joint report by UK and EU negotiators.

So, what has been agreed and what happens next?

Money

This had been the biggest political headache for the UK.

The UK will be required to continue contributions to the EU budget up to the end of 2020 “as if it had remained in the Union”, and will be liable for its share of outstanding financial commitments (its share of the Reste à liquider (RAL)) and liabilities up to that date. For those who suggest the government has signed up to an exit “bill”, it is important to note that the UK would also have been tied into these commitments if it had remained a member state. What’s more, this payment will be netted off against other amounts. UK recipients will continue to benefit from payments from the EU budget for the remainder of the budget period and its share of paid in capital at the European Investment Bank will be reimbursed in installments.  After the end of the current budget framework, the UK’s annual contributions to the EU budget will be substantially lower.

There is no figure outlined in today’s document. The fact is that we will not know the precise figure until the various budget programmes, including expenditure and receipts, play out over several years from now. However, a UK official is today quoted as saying that the government expects to pay around £35-39bn as a result of the settlement. This is roughly midway in the band between the £20bn offered in the PM’s Florence Speech and the recent reports that the UK was willing to offer up to £50bn – the latter figure may well have been part of an expectations management exercise. It also much lower than Eurpean Commission President Jean-Claude-Juncker’s on the record estimate of at least 60bn.

The final paragraph of today’s report indicates the UK’s commitment on the money, and other withdrawal issues, are contingent on “an overall agreement under Article 50 on the UK’s withdrawal, taking into account the framework for the future relationship, including an agreement as early as possible in 2018 on transitional arrangements.”

Citizens’ rights

The key sticking point here was over the role of the EU’s Court of Justice in enforcing the citizens’ rights agreement. In May, the EU’s position paper on citizens’ rights argued, “The Court of Justice of the European Union [ECJ] should have full jurisdiction corresponding to the duration of the protection of citizens’ rights in the Withdrawal agreement.”

According to today’s document, the ECJ will have some indirect role in upholding EU citizens’ rights in the UK, but this is weaker than the EU initially demanded. The rights of EU citizens’ who continue to live in the UK will be “enshrined in UK law and upheld by British courts”, as the Prime Minister announced in her statement this morning. In areas relating to the “application or interpretation of those rights, UK courts shall have due regard to the decisions of the ECJ” post-Brexit. In cases where relevant EU case-law doesn’t exist, UK courts will be able to refer questions of interpretation to the ECJ before giving a judgement. However, these procedures will only be available for eight years from the point of the UK’s withdrawal – this sunset clause means that such unique measures do not offer a precedent for dispute resolution mechanisms in upcoming negotiations over the wider future partnership. Arguably, EU citizens’ rights is the least contentious area for the UK to accept some ongoing role for the EU court, since senior figures on the Leave side have long demanded that EU citizens should retain their rights in the UK.

Northern Ireland

The agreement to seek to avoid a hard border on the island of Ireland is an important political and symbolic commitment, for both the UK and Ireland. However, difficult questions remain on how this will be delivered.

Today’s document says that future arrangements between the UK and the EU/Ireland “must be compatible with [the] overarching requirements” to protect North-South cooperation and avoid a hard border. It adds, “The United Kingdom’s intention is to achieve these objectives through the overall EU-UK relationship…In the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all-island economy and the protection of the 1998 Agreement.”

References in earlier drafts to “no regulatory divergence” on the island of Ireland had failed to gain the consent of Northern Ireland’s Democratic Unionist Party [DUP]. Therefore, today’s document also states that the UK will ensure “no new regulatory barriers” are imposed between Northern Ireland and the UK, without the agreement of the Northern Irish executive. The UK will also safeguard “the same unfettered access” for business in Northern Ireland to the whole of the UK market.

There is as yet no agreement about how both these commitments will be delivered, given the UK’s position to withdraw from the single market and the customs union. Much will depend on the final UK-EU agreement – as we have said before, technical solutions to the operation of the Irish border are not possible until both sides begin to talk trade.

Importantly, although today’s commitment is viewed in Dublin as a clear “backstop” to avoiding a hard border, it will be difficult to legally enforce. The commitment is not justiciable and there is no political agreement about what degree of alignment is necessary to support North-South cooperation.

Some have suggested that today’s document rules out the possibility of a trade border in the event of “no deal”. But, this is not the case. Even if the UK and Ireland agree to maintain the same tariffs and regulations, in the absence of a UK-EU trade agreement, these tariffs will need to be collected, and safety standards and regulations will need to be verified.  Ultimately, the issue has been kicked down the road. Ireland will retain its veto over any future deal it feels compromises the soft border with Northern Ireland and the UK. The government (and DUP) will retain a veto over a deal that compromises the integrity of the UK. And “no deal” remains a possible outcome, if these tensions cannot be resolved by agreement.

EU position on transition is likely to be take it or leave it

Presuming the EU27 rubber stamp today’s recommendation from the Commission, European Council President Donald Tusk is expected to table the EU guidelines for the talks on transition and trade next week. Earlier this week, Tusk revealed that these guidelines have already been prepared and are ready to go.

Thrashing out the form of the transition should be pretty straightforward, since the UK and EU largely agree on what this should look like. The UK has accepted that this will substantively mean an extension of the “current terms” of market access – a new temporary arrangement of around “two years” that replicates single market and customs union membership, while the UK formally leaves both institutions.

But there is already some confusion about the form of this transition. Tusk today stated that “the UK has asked for a transition of about two years, while remaining part of the Single Market and Customs Union.” This is primarily semantics, but the UK is clear that it will formally leave the EU single market and EU customs union in 2019, even if de facto trade between the UK and EU is governed by identical arrangements.

Tusk set out the EU’s conditions for the transition: “The UK will respect: the whole of EU law, including new law; it will respect budgetary commitments; it will respect judicial oversight; and of course, all the related obligations.” In addition, “EU decision-making will continue among the 27 member states, without the UK.” None of these demands should come as a particular surprise and Theresa May has already told Parliament that the UK is prepared to accept ECJ oversight during this period. Most Brexiteers would like to avoid this form of transition and some may pressure the UK into trying to negotiate an ‘emergency brake’ over new legislation deemed to contradict UK interests. However, it is difficult to see the EU entertaining this and the UK does not have time on its side if it decides to negotiate bespoke arrangements during the transition. Given the value to business of a transition period diminishes the longer it takes to secure, this will likely be agreed soon, whether or not the UK manages to improve the terms.

Setting the direction for agreement on the “Future Partnership”

Alongside its demands for the transition, the EU27 are expected to lay out their objectives and negotiating points for the future trade relationship between the UK and the EU. The EU side has always been clear that it will not be possible to have negotiated the detailed future trade agreement before March 2019. Privately, UK officials have also suggested they are aiming for a “heads of terms” agreement before March 2019. Although, publicly, Brexit Secretary David Davis continues to suggest it will be possible to secure a full, comprehensive agreement before entering an implementation period.

Lead negotiator Michel Barnier today set out the timetable as he sees it. By October 2018 there should be a treaty agreed on Britain’s withdrawal before “the real negotiation” starts on the future trade relationship. “And then alongside that treaty, I don’t know exactly legally speaking how you would do this, there will be a political statement on the part of the 27 and we will have to work on that next year once the European Council has decided regards the future relationship.” He added, “Once the treaty is signed, then probably the real negotiation will start on the basis of a political declaration – leading up to one, two, three new treaties governing the future relationship.” I.e. the details of the new trade relationship will not be nailed down until during the transition.

However, important decisions will need to be made about what the framework (to use the language of Article 50) for this future partnership is. Today, Barnier again repeated his view that the UK must choose between a spectrum of options for its desired “end state”, from a closely-aligned Norway-style model to a more arms-length treaty modelled on the Canada-EU (CETA) deal. Barnier noted that the government’s position on free movement of people and the ECJ clearly pointed in the direction of the CETA model as the basis for the future relationship, an analysis that Open Europe shares. It is reported that Cabinet will meet before Christmas to address this central big-picture question, a decision that has been put off for too long.

The CETA and Norway models are conceptual and the reality is that, while the UK must choose between these broad overall approaches, there will be shades of grey and some areas where the UK remains more aligned with EU rules than others. In the Florence Speech, May identified three categories of approach:

There will be areas of policy and regulation which are outside the scope of our trade and economic relations…

…There will be areas which do affect our economic relations where we and our European friends may have different goals; or where we share the same goals but want to achieve them through different means.

…And there will be areas where we want to achieve the same goals in the same ways, because it makes sense for our economies.

The detail of the trade negotiations will be for the UK and the EU to agree which issues and which economic sectors fall in to each category. Under a CETA-style approach, more issues will fall under categories 1) and 2).

This is a political success for the Prime Minister

Today’s announcement has been broadly welcomed by Theresa May’s party, Remainers and Brexiteers alike. Michael Gove and Boris Johnson both welcomed the deal as did Andrea Leadsom and Priti Patel, and Anna Soubry. Labour’s Keir Starmer and SNP leader Nicola Sturgeon both welcomed the news the talks would progress, albeit while criticising the government’s general handling of the talks.

More hard line Brexiteers, such as former Environment Secretary Owen Paterson, said there were still problematic areas including on regulatory alignment, the role of the ECJ and money. However, these are subjects – with relation to the UK’s withdrawal rather than the future relationship – which will not be reopened.

More broadly, if there was any doubt, today’s announcement makes it even less likely that Brexit can be stopped or reversed.

There are political chickens yet to come home to roost

As talks enter the even more complicated territory of the future partnership, there are several areas where previous political pronouncements will be challenged.

The Government has emphasised that withdrawal in 2019 will end the UK’s membership of the single market and customs union and that the free movement of people will end. However, bar some minor administrative changes, all of these things will continue de facto during the transition period. It might be better for the government to be upfront about this sooner rather than later.

Similarly, while the political commitment on the Irish border has been important to move onto the next stage of negotiations, concrete solutions are still needed in order to deliver this. As Open Europe suggested in our report, Nothing to Declare, this will likely be achieved using electronic clearance systems, wide use of ‘trusted trader’ accreditation, and significant bilateral cooperation.

Meanwhile, Theresa May continues to insist that a new trade deal can be agreed before the end of Article 50 talks in March 2019. This remains ambitious at best and contrary to the EU’s position outlined above. Behind the scenes, UK officials and politicians have targeted “heads of terms” on the new agreement by March 2019, which seems more realistic.