Brexit Has Just Been Triggered – What Happens Next?

Today, on March 29, Prime Minister Theresa May will formally notify the European Council of the United Kingdom’s decision to withdraw from the European Union. With this notification begins the two year period, which is foreseen by Article 50 of the Lisbon Treaty for the withdrawal from the EU. This is also the reason why Article 50 was not triggered sooner after the referendum: given the momentous consequences of these negotiations, it was sensible to prepare them as good as possible before setting the timer. This ticking clock is important: If no deal is reached within this time and if no extension or transition is agreed, the UK will automatically cease to be a member of the EU. But how will the negotiations unfold? What would it entail if they failed? And how likely is such a scenario? In this blogpost, we will approach these questions and outline what lies ahead for the Brexit negotiations between the UK and the EU.

How are the negotiations going to unfold?

Last week, the Financial Times published a very insightful timeline, drawn up by Lord John Kerr – who is none less but the very diplomat who once drafted Article 50 in the negotiations around the Lisbon Treaty. His timeline is presented in Table 1.

So, what is going to happen, and why? The notification of withdrawal is delivered to the European Council. Subsequently, the Council will have to work out guidelines for the ensuing negotiations – these are likely to be high-level aims and ambitions regarding the outcome of the negotiations but not very technical in nature. The technical mandate for the European Commission to conduct the negotiations from the EU-27’s side will be worked out ones the more general guidelines have been approved at a Council meeting scheduled by the Council’s president, Donald Tusk, for April 29. Working out the detailed mandate containing more technical aspects will require more time, according to Lord Kerr’s timeline. It can be expected to be finalised towards the end of May or early June. Unlike in previous international treaty negotiations, for example the Transatlantic Trade and Investment Partnership (TTIP), the technical mandate will be made available to the public at the beginning of the negotiations. The EU’s chief negotiator, Michel Barnier, has already announced that he intends to conduct the negotiations in a transparent way and to keep the public informed about any progress that has been agreed – a sign that the Commission has learned lessons from TTIP and realised that transparency is an effective way to influence the public debate.

Actual face-to-face negotiations are likely to start in late May or early June. This is the point where the two sides have diverging ideas about how to structure the negotiations. For Michel Barnier, the priority is to lead “divorce” talks first. This means discussing the terms under which the UK’s membership of the EU will end before beginning to discuss what a future relationship could look like. Barnier mentioned especially the issues of the outstanding British contributions to the EU budget, the status of the EU citizens in the UK and the British citizens in other EU countries and border arrangements between Northern Ireland and the Republic of Ireland as priorities (more detailed discussion of these issues below). Barnier said: “If these uncertainties cannot be resolved at an early stage, there is a risk of failure. Putting things in the right order maximises the chances of reaching an agreement. This means agreeing on an orderly withdrawal of the UK before negotiating any future trade deal. The sooner we agree on these principles, the more time we will have to discuss our future partnership.”

The British side, however, has different ideas about the structure of negotiations. The foreign secretary, Boris Johnson, said that there would be no reason not to negotiate the withdrawal and a trade deal “in parallel”. The truth is that the two year time period gives the EU a strong negotiating position. As will be outlined below, the UK will want to avoid ending up with no deal, even if Prime Minister Theresa May has said that “no deal would be better than a bad deal”. It is therefore likely that the EU negotiating team will be able to impose their intended structure.

However, most experts agree that it will be almost impossible to resolve the many technical aspects of the divorce within two years – let alone negotiate a free trade agreement (for example, CETA took seven years to negotiate). Also Whitehall is daunting the technical difficulties to set up a multitude – some have proposed the number of 37 – of  new regulatory agencies to replace EU agencies within two years. Setting up the organisations and acquiring the necessary technical expertise is likely to take longer. The upcoming elections for the European Parliament in May 2019 make it practically impossible to extend the negotiation period. But what is conceivable is a transitional agreement that would allow the UK to remain a member of certain EU agencies and apply some EU regulations even after its formal withdrawal for some transition period. Such a transition deal would have to be agreed before March 2018. The reason for this is that if there is no transition deal by that time, many businesses will take necessary precautions – move activities to the Eurozone, stop investments, etc. – because they fear a no-deal situation. If a transitional agreement is agreed too late, it won’t be able to mitigate the effects of this precautionary behaviour which by that time may already have started.

Since any Brexit deal will have to be approved by the Council of the remaining EU-27, the European parliament and also national parliaments (including the UK parliament) the negotiations need to be completed by October 2018. This would allow sufficient time for the ratification process to be complete in March 2019 when the two year period will expire.

Which will be the most controversial points in the negotiations?

There are several stumbling blocks in the negotiations. While both sides have affirmed their goodwill to achieve an ambitious deal for a close future relationship, especially the British government is under pressure on the one side from hard-line pro-Brexit conservative MPs who might reject any compromises in the final parliamentary vote and on the other from the Scottish regional government who might win another independence referendum, should the break from the EU be too hard.

Britain’s Contribution to the Budget

Not very surprisingly, the most difficult point in the negotiations is money. On both sides, extreme propositions have been made. The frequently circulated number of EUR 60bn is based on the current EU budget, covering the time from 2014-2020, as well as pension contributions for British citizens working in EU institutions. While the British government approved this budget and hence is technically liable to pay up to 2020, the other side argues that it would be unreasonable to expect the British to contribute even after they have left the EU and no longer benefit from EU policies. Should there be a transitional agreement, extending the application of some EU policies even after the withdrawal in early 2019, the EU will not be willing to provide these for free. It is therefore not impossible, that the UK might have to pay even more than EUR 60bn – something that will be hard to accept for hard-line Brexiteers.

Immigration Policy

The subject of immigration can be divided into two parts. One part falls under the header of divorce negotiations: The future status of EU citizens living in the UK and of UK citizens living in other EU countries. This presently concerns 4.5m people. The other part is already linked to defining a future relationship: What amount of EU immigration to Britain would be permitted – and vice versa. Since immigration was among the most important points for Leave campaign and Theresa May has so far not been willing to guarantee the right of residence of the EU citizens in Britain, this might be a tricky issue. David Davis, who leads the department overseeing the Brexit negotiations, has recently struck a milder tone, saying that levels of EU immigration would depend on the needs of the British economy. It is likely that there will be a quid-pro-quo between immigration and the depth of a potential trade deal. A deep trade deal would have to be met with a more accommodating policy on EU immigrants, or – if the UK government is not willing to make this concession – a trade deal will be more shallow and extending to less areas.

Trade & Financial Services

In her landmark Lancaster House speech, Theresa May said that she wishes the “the freest and most frictionless trade possible in goods and services between the UK and the EU”. Also Michel Barnier has pronounced himself in favour of an ambitious free trade agreement between the UK and the EU. This would make sense, since economic losses on both sides can be minimised by a wide-ranging free trade agreement.

However, the “freest and most frictionless trade possible” would have been a continued membership of the Single Market, which Theresa May has ruled out. The EU negotiators have made it clear that there will have to be a difference between being a member of the Single Market and being outside.

One notable difference is likely to be financial services. While the UK would like the City to continue to provide financial services to continental EU countries in an uncomplicated fashion, under present rules the so-called “passporting rights” apply only to EU member states. Hence many financial institutions have already made plans to move parts of their businesses to the Eurozone. However, the City is also an important hub for many continental European firms and some people have argued that it might raise the cost of access to financial services if the City loses its passporting rights. Therefore, the EU might be willing to make some concessions in this area, if the UK is accommodating on the Brexit bill and the immigration regime.

European Court of Justice

The European Court of Justice (ECJ), which oversees the respect of European treaties, is strongly rejected by many Brexiteers. In her Lancaster House speech, Theresa May said that a post-Brexit Britain would no longer be subject to the ECJ. This promise might however clash with a transitional deal. If Britain continues to use the services of some EU agencies or continues to apply EU regulations as part of such a transitional agreement, this would have to be overseen by the ECJ. Again, this is a point that might be hard to accept for some Brexit hardliners.

What is at stake?

What would be the worst case scenario? What would happen if indeed the negotiations ended without a deal? Since a complete description  of such a scenario would require a book rather than a section in a blogpost, this can only be a superficial overview:

• Trade: The UK would fall back on WTO rules, meaning that it would face the same a tariffs with the EU as any third country with which the EU does not have a free trade agreement or a customs union. Also, all EU free trade agreements and customs unions would no longer apply to the UK. This would immediately raise the costs of both imports and exports in the UK and severely disrupt value chains. Many companies producing for the EU market in the UK or having their headquarters there, might consider to move to the EU-27.
• Euratom: Euratom is the agency which inter alia oversees the market for nuclear fuel in Europe. An extreme scenario would be that Britain’s nuclear power stations would have to shut down because of a lack of fuel. Since Euratom also sells nuclear fuel to non-EU members a more realistic scenario would be that costs for nuclear power in Britain increase.
• Air Traffic: If no new or transitional deal is negotiated, on March 29 2019, aircraft could remain grounded in the UK. Since the UK’s membership in the European Common Aviation Area (ECAA) would cease with its EU membership, air traffic between the UK and the remaining countries as well as all countries with which the ECAA has bilateral agreements would come to a halt.

These are just the most extreme effects of an unorderly withdrawal of the UK from the EU, various others, including probably some unforeseen ones, would ensue. A transitional deal could however mitigate these effects.

How likely is a no-deal?

Prime Minister May has already threatened to walk away from the negotiation table if the EU did not make any concessions to Britain. Also Michel Barnier believes that a no-deal scenario is a “distinct possibility”. But experts disagree on the likelihood of a no-deal scenario. Janan Ganesh of the Financial Times estimates it as high as about 30 percent, while admitting that we presently witness typical pre-negotiation posturing on both sides.

The likelihood of a no-deal scenario depends how well the initial divorce negotiations go. If both sides come to terms quickly and then can spend most of their time working out a transitional deal or even a complete framework for future relations, the likelihood of a no-deal is small. If, however, the divorce negotiations either prove unexpectedly cumbersome or hard-line conservative MPs conspire to derail an agreement because they object to parts of the divorce deal (finance or ECJ could be such topics), then a no-deal scenario becomes much more likely.

Therefore, it remains important to continue to watch the negotiations closely and to bear in mind the stages that the negotiations need to have accomplished at a certain time. Once the negotiations begin missing the milestones, the risk that the whole enterprise ends up in disaster increases.

Further Reading: If you are interested in more Brexit expert opinion, you can click here to read an Interview with Bertelsmann Stiftung CEO Aart De Geus, in which he discusses Brexit, Trump and the future of the European Union.