Brexit – The State Of The Art

On the 14th of March 2018, the debate “Brexit – What’s next?“ took a glance at the current state of affairs around the opaque Brexit topic. For the economics expertise, Professor Paul Seabright from the TSE and IAST, and Professor Louise Curran from the TBS were present. For the policy and legal perspective Pieter Cleppe, head of the British Think Tank Open Europe, and Professor Lukas Rass-Masson from the ESL, attended the high-level debate.

Due to a high level of uncertainty still surrounding the negotiations in Brussels, it became clear in advance of the debate that it is not an easy topic to discuss right now. For this reason it was truly interesting to talk about the current negotiations and shed some light on the current issues being discussed in Brussels and Westminster.  

A Short Wrap Up – Where do we stand in the negotiations?

“Painful, unpleasant, and costly. That’s where we are.” – Michel Barnier, European Chief Negotiator for the United Kingdom Exiting the European Union, September 2017

On the 23rd of June 2016, the British people decided to leave the European Union with a vote to leave by 51.9%. While the vote could have been clearer, it was unambiguous that there was a majority opinion in the British society for leaving the EU.

In light of the deadline of the 29th of March 2019 for an agreement on the withdrawal terms, a transition deal for the implementation phase until 2021, and guidelines for a future relationship agreement, which will be specified during the implementation phase, time is running out. The withdrawal deal has to be voted by a qualified majority in the European Council and by consent from the European Parliament. The final deal will also be subjected to a vote in the British parliament; due to a diminishing majority behind Theresa May’s Brexit course, it will be a Herculean task for her to get an adequate majority for the withdrawal deal.

On December 15th 2017, a first settlement between the divorcing partners was reached on the subjects of citizens’ rights, the financial obligations, and the Irish border. One can find the underlying law respectively in part two, “Citizens’ Rights”, part five, “Financial Provisions”, and in the “Protocol on Ireland and Northern Ireland” part of the draft agreement, which was released by the European Commission and by the British Government.

There are three crucial matters. The first one is about the rights of EU citizen in the UK: they will be reserved for incoming citizens during the transition period and the jurisdiction of the European Court of Justice will be respected for them. This can be found in part two of the joint withdrawal agreement of the UK and the EU. The UK government has agreed that EU citizens and their families arriving during the implementation period will be able to stay on the same terms as EU citizens living in the UK right now. Both of them have to apply for a so-called settled status, with an online application for which the procedure can only begin after five years of living in the UK. As a settled status cannot be denied for arbitrary reasons, it is arguably certain that EU citizens arriving before the deadline in 2021 will obtain the status. It is, however, important to note that for EU citizens arriving after the transition period has ended, the migration and status of EU nationals will be subject to the United Kingdom’s law and immigration regime.

The second critical concern is financial: Both sides have agreed on a withdrawal invoice of around 35 to 39 billion pounds for the UK to pay. In his spring statement, the British Chancellor of the Exchequer, Philip Hammond, announced that Britain will pay £37.1 billion to the EU over the next 45 years, a figure also present in part five of the joint withdrawal bill of the UK and the EU. Chancellor Philip Hammond laid out that the UK would pay almost half of its outstanding commitments to Brussels by the end of 2020; the sum of £16.4 billion will be paid until 2020, when the EUs’ seven-year budget runs out. In the coming EU budget, the UK will obviously not have any further financial commitments. Nevertheless, between 2021 and the end of 2028, the UK will pay a further £18.2 billion towards projects that have been signed off by the UK but have not yet been paid for. On top of this, the UK has to pay a further £2.5 billion over the next 45 years to cover ongoing expenses such as the pensions of British EU officials and British MEPs. These figures are estimated by the British Office of Budget Responsibility and agreed on by the UK government.

The third hurdle is the Irish border, which might be the most difficult point to agree on. While both sides are committed to having a frictionless Irish border after Brexit, and to the Belfast Agreement of 1998 – the so-called ‘Good Friday Agreement’ – common ground has not yet been found on the issue of a common regulatory area on the island of Ireland.  Both parties agree on the outcome of a frictionless Irish border for people and goods, but disagree on the means to achieve it, with the EU reserving the option to keep Ireland in the EU customs union as a last resort.

Phase 2 of the Brexit negotiations is currently on, with talks concerning the framework of a future trade deal and other future relationship issues. The UK negotiations team would love to keep all resources and emphasis on the future trade deal, but EU officials have reiterated that concrete talks about a future trade deal would only commence during the transition period. Several officials have made it clear that a final deal on the withdrawal agreement and the transition period should be ready by October, so that the European Parliament and the European Council have time to vote on it. Whether this ambitious time frame will be feasible is another question.

Economic Consequences

“There will be no downside to Brexit, only a considerable upside.” – David Davis, British Secretary of State for Exiting the European Union, October 2016

When discussing the economic consequences of Brexit, it becomes apparent that there is still a lot of uncertainty surrounding what Brexit really means for the economy. When just looking at the numbers, the forecasts are predicting that Brexit will cost the British economy between 2% and 8% of GDP growth in the long run. To understand these costs, which are engendered by trade reduction, business dissolution, and less foreign direct investment in Britain, three important factors were outlined by Professor Paul Seabright from the TSE.

Firstly, it is important to note that trade policy conflicts are less often conflicts between two countries but rather principally between different interest groups within the same country. Thus, Trump’s steel tariffs pit steel exporters against other manufacturers who use imported steel. The latter will lose many more jobs than gained by the former. In the case of Brexit, the issue is not principally between the UK and the EU, but rather a deep division within the UK itself. There will be collateral damage to Ireland and other countries as a result of an internal conflict inside the UK.

The second point is that it makes no sense to talk about national economies in today’s production models. Germany doesn’t make cars: German firms make cars. While they used to produce cars in partnership with German workers, they now do it mainly in partnership with Polish and Chinese workers. Supply chains are thoroughly international in a way that Trump and the Brexiteers do not understand. If Germany stopped importing parts, it would be unable to produce a single car.

The last point is that trade is still determined to a great extent by proximity. The components of an Apple computer may be assembled in China but the principal sources of valued added – intellectual property, legal services, and so on – are still traded within a short radius of Apple’s headquarters in California. It is a fantasy to think that for the UK, trade with Australia, New Zealand or other Commonwealth countries can easily replace trade with the EU.

From all of this, it becomes clear that Brexit will have consequences for all kinds of businesses and industries. For example, British Airlines, the airline company, will no longer be entitled to operate in the European Union unless there is a new agreement on take-off and landing permits.  There is also uncertainty surrounding the Open Skies agreement that the EU has with the United States: the UK would also formally leave this agreement, which would make it impossible for British and American airlines to operate in each other’s airspace. Furthermore, companies like Airbus or BMW, who have big plant sites in the United Kingdom, make products that have to cross the channel several times before the final product is made. European supply and value chains that include the UK might become unprofitable in the future.

But don’t panic: negotiations in all kinds of areas are currently ongoing. The goal for the UK must be to find solutions in many areas to all kinds of regulatory voids they will be facing, thereby ensuring a smooth operation of business in the UK and reducing the business clear out after Brexit. The UK will need to negotiate with the EU while simultaneously finding substitutes to all of the regulatory agreements currently covered by the EU regime. There is a lot of work for the British government right now, in this challenging two-sided negotiation.

It is important to point out that leaving the EU on the 29th of March 2019 without a future trade deal would be disastrous, since this would mean a fall back on the WTO terms in trade relations, which is in neither side’s interest. Since the British government reiterated that they want to leave the single market and the customs union, only a deal like the CETA free trade agreement, which the EU negotiated successfully with Canada, is feasible. It will depend on how much the EU is willing to give into a similar deal with the UK.

Recent Developments

An important part to play in the negotiations may be the leadership change in the two major state economies in the European Union: Germany and France.

On the one hand, French president Macron is unlikely to give any favourable deal to Britain since he wants to strengthen and reform the EU, and is a politician with clear federalist ideas. For him, it would be unfavourable to give Britain a too good of a deal, since this would make the case for leaving the union.

On the other hand, Germany’s political change – or non-change – might be more favourable for Britain. The new finance minister, Olaf Scholz, a new strong voice in the government as the vice-chancellor, could play a crucial part. There is a good chance that he will advocate for a more lenient Brexit, with strong economic ties to the UK kept open in the future. He apparently has a good relationship with Philip Hammond, his British counterpart, and he is the former mayor of Hamburg, a city that is sometimes dubbed as the most British city of Germany. Furthermore, the trade pendency of Hamburg is important, with a great bulk of container cargo coming from British ports into the harbour of Hamburg. It is unlikely that he wants to actively harm the region where he comes from by advocating for a punishable Brexit.

Finally, it is important to note that after the chemical attack in Salisbury, there was a clear united response, with the United Kingdom, Germany and France standing side by side. It is interesting that despite difficulties in trade talks, there remains European support for Britain, especially in crucial issues like defence.

 by Niels Kirst




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