What the General Election Means for Brexit

Winston Churchill once said about the American government, that they could be trusted to implement the right policies once they had exhausted every other possibility. The next months will show whether the aphorism also applies to the British government. It is only a matter of days until the negotiating teams of the EU and the UK are scheduled to meet for the first time on June 19 to begin the formal talks. The clock for Brexit is remorselessly ticking in the background and time is precious. In the meantime, increased uncertainty implies a further depreciation of the Pound, inflation is starting to increase and investment into the UK is down.

But it doesn’t look like the British side is in a position to take on these negotiations in a stride. Theresa May’s authority has been substantially weakened by the election result. It is unclear whether she will be able to hold on to the red lines she defined on Brexit. Most importantly, it is not clear how a majority that would approve any EU-UK deal could be formed. So what lies ahead for the Brexit process? Is Britain doomed to end up with a no deal?

Short-Term Priorities

It is vital to make a distinction between short-term and long-term priorities here. Short-term priorities mostly derive from avoiding a no deal-scenario. If no other agreement is struck between the EU and UK, all treaties related to Britain’s EU membership cease on March 29, 2019. In that case, trade between the EU and the UK would take place under WTO rules, implying the introduction of tariffs which would seriously damage the UK’s structural growth potential. A no deal-scenario would also imply serious disruptions of the UK’s energy supply, air traffic and many other areas related to other EU treaties. In short: any politician in his right mind would avoid a no deal-scenario.

Since it is not realistic to expect a long-term deal to be negotiated until March 2019 (see more below), avoiding a no deal-scenario mostly means ensuring that there will be a transitional agreement. This could consist of continuing the present rights and obligations of the UK despite ending its EU membership until a long-term arrangement is found. Any such transitional agreement would have to be passed by all EU27 parliaments, the Council and the British Parliament – the latter being the most significant challenge, given the lack of a majority.

So, what has to happen to secure a transitional agreement with the EU and pass it through parliament? The EU will only agree to a transitional agreement if it is satisfied with the terms of the divorce settlement. Three issues are the most contentious here: The status of EU citizens in the UK and UK citizens in the EU27, Britain’s financial contributions and finding adequate solutions for the soft borders between the Republic of Ireland and North Ireland as well as between Gibraltar and Spain. The British government will have to make concessions on these issues which will not be liked by some Tory MPs – especially believing that it is possible to get away with paying no financial contributions at all is not a realistic prospect. This implies that a waver thin Tory-DUP majority – as controversial as it might be – is too risky a gamble for such an important policy issue. Therefore, the Prime Minister will have to do something that is rarely done in British politics: seek consensus on the terms of divorce and on the nature of a transitional arrangement in order to be able to secure a large majority.

Long-Term Possibilities

Once a transitional arrangement is obtained, negotiations on a long-term trade deal between the UK and the EU can begin. Since trade talks typically take a long-term to negotiate, given their complexity, it is likely that another General Election will be held before the outcome of the trade negotiations is known. Thus, theoretically, anything is possible.

The economically most sensible solution would be to leave the EU but to remain a member of the Single Market and the Customs Union. Often nicknamed the “Norway Solution”, this would have permit the UK the leave the EU without too substantial economic consequences. From the point of view of a Brexiteer, this solution has however an important disadvantage: Britain would still have to accept EU regulations and allow labour mobility – difficult to swallow after a referendum decisively influenced by concerns about migration. These concerns about migration are not only present within the Conservative Party but are also shared by Labour’s leader Jeremy Corbyn.

As mentioned above, it would not in the interest of the UK or the EU to fall back on WTO rules. Such a scenario would disrupt production chains and have disastrous consequences for some sectors of the British economy, such as agriculture for example. Prime Minister Theresa May has said she wants “the freest and most frictionless trade deal possible” – a goal shared in principle by the EU. But for the EU, it is also clear that Britain cannot enjoy an arrangement akin to the Single Market while being restrictive on issues such as immigration. The situation of a non-member of the EU has to be less attractive than membership.

How can the two positions be reconciled? How can an arrangement be found that avoids ‘crashing into the iceberg’ when the two-year period for negotiating an orderly exit of the UK ends in March 2019? How can the EU avoid that the relations with the UK deteriorate substantially? After all, both sides want the other to be a good and friendly neighbour. The EU has already developed a model how good neighbourhood can be propelled by a good economic relationship: The Deep and Comprehensive Free Trade Areas (DCFTAs) with Eastern European Countries. This model might serve as a basis to develop a new long-term economic relationship with the UK because they allow the UK to maintain some degree of sovereignty in crucial areas while facilitating a relatively open trade regime – which is however still inferior to membership of the Single Market.

How does this work? In the DCFTAs the partner countries agree to transpose the acquis communautaire of the EU into national legislation. The technical barriers to trade are thus reduced to a minimum. In addition, the EU and the partner country agree to abolish most – if not all – tariffs. This allows in most cases a free trade of goods and services while maintaining important restrictions. DCFTAs do not entail full labour mobility – additional legal settlements aim at establishing some degree of mobility of workers but it is inferior to the full labour mobility of the Single Market. Thus, it might be an acceptable compromise for the British side. In addition, it would not be necessary that such a trade deal is under the jurisdiction of the European Court of Justice (ECJ), thus again accommodating a key demand of many British eurosceptics. But also the European side might make use of some restrictions if it intends so, for example in order to maintain control over financial regulation.

Negotiating a trade deal between the UK and the EU would be an unprecedented undertaking: Normally, trade negotiations begin with a status quo of diverse regulation. Finding an agreement on mutual recognition or even harmonisation of regulations in order to eliminate non-tariff barriers to trade is normally the hardest part in trade negotiations. Much harder than agreeing on a schedule for tariff reduction. But in the case of an EU-UK trade deal, most regulations would be identical, since the UK has of course transposed the acquis communautaire. The Great Repeal Bill will enshrine these regulations in UK law, so even after leaving the EU, the same regulations will be binding on both sides of the Channel. The crucial bit in the negotiation will be to come up with a mechanism that minimises legal divergence after the divorce. In the DCFTA model, the UK would just pass analogue national legislation to any new EU regulation either in all policy areas or only in selected few. If most EU legislation would be transposed into national law, the economic consequences would be small. Basically, this is the closest thing to Single Market membership with immigration control. Whether such a model is acceptable to a hardline Brexiteer is however another question. It does however come with the advantages of feasibility, discretion in some policy areas and a large degree of regulatory cooperation, helping to facilitate trade.

This can however be only a long-term solution. The EU’s DCFTA with Georgia – the least complicated agreement among the different DCFTAs – is a little over 700 pages long and took four years to negotiate. It would be almost impossible for the EU and UK to conclude similar negotiations in a shorter time period. It is certainly unlikely that they could be completed within the two years of the divorce negotiations, especially given the multitude of other EU-UK issues that need to be discussed in addition to trade policy. The iceberg can hence only be avoided, if a transitional agreement is found.