August 9, 2017    5 minute read

What You Need to Know About the Brexit Transitional Deal

Not Easy    August 9, 2017    5 minute read

What You Need to Know About the Brexit Transitional Deal

The increasing confusion and chaos, evident in the recent Brussels negotiations, are thought to be partially a consequence of the division within the British political class. Since the Brexit vote, cabinet members have taken different positions regarding the EU exit strategy, which should tackle a multitude of areas.

Changing Positions and Opinions

As the economic situation in the UK evolves, so do political positions among the major decision makers. Public opinion is evolving and changing as well, as recorded by the results of the most recent monthly Brexit tracker, surveying 2000 people.

The British public confidence in the ability of Prime Minister Theresa May to successfully negotiate a Brexit deal is declining every month. Currently, 61% of the respondents disapprove of the way the government is handling the negotiations, a 5pp increase from July, while 35% are confident that the PM will get the right deal for Britain. Among the respondents, 40% agree that Britain will be better off after Brexit, while 37% believe the opposite.

Growing Momentum and Support for Soft Brexit

The deteriorating economic situation has already led businesses, the BoE and government to lend support to the more rational economic deal that would prevent a “hard landing” after Britain leaves the EU.

The Institute of Directors recently published a report outlining a range of options for the UK to choose from, in order to minimise the disruption to businesses. Governor Mark Carney reinforced the case for a smooth exit, by stating that a Brexit transition deal that reduces access to the customs union and the single market will harm the British economy. The government also announced its plan for publishing a “position paper” that will outline a transitional customs agreement and will be presented to the European Council in the October summit.

The proposal would be aligned with the positions of the PM, Brexit Secretary David Davis and Chancellor Philip Hammond, who have all stated that they would leave the single market, but would have a customs agreement.

In addition, even the opposing Brexiteers, like Trade Secretary Liam Fox, softened their stance for a “hard Brexit” and became more inclined towards a soft transitional deal, which would have less severe consequences for the economy and the British people.

IoD Options

The  IoD published the report to make the government aware of the urgent need to prevent disruption to businesses after Brexit. According to the IoD, there are numerous options to mitigate the risks emerging from Brexit:

  • The UK and EU could agree to extend the Article 50 negotiating window in the next 6-12 months
  • The UK could enter into the EEA (agreement) as an independent contracting party
  • The application of the EU acquis could be prolonged
  • The alignment with the EU’s Common External Tariff could be maintained
  • Brexit-related legislative bills could be used to incorporate ongoing alignment to EU rules, after responsibility for these functions have been transferred to the UK
  • A Common Transit Convention sign up
  • A joint EU-UK customs cooperation committee and Trade Contact Group could be established, to expedite discussion of trade facilitation issues between customs authorities and related bodies
  • A “parallel sources” agreement before the UK leaves the EU could be undertaken, to bind a transitional deal into both parties’ respective legal systems

EEA – Norway Model

All recent actions and statements in the UK regarding the transitional deal point to a smooth Brexit. However, the EU is leaning towards a different solution. The latest debate surrounding the smooth transitional deal is around a Norway model, whereby UK would rejoin the European Economic Area from outside the EU.

Contrary to a customs agreement, it will enable a smooth exit, but by maintaining access to the single market, preventing disruption and giving negotiators time to develop a trading agreement. Currently, in the UK, the opposition Labour party is in favor of remaining in the single market. The EEA approach is also EU negotiator Michel Barnier’s favorite option for a transitional arrangement, who believes that a customs agreement is impossible.

The EEA option is unfavorable to the British, as some Brexiteers believe it has a potentially disastrous effect on the UK. According to MEP David Campbell Bannerman, the deal would imply that the UK will have to sign EU laws without having its MEPs, UK Council or Commission members to amend them. The UK will also have to contribute billions that could be better used to reduce debt, boost UK infrastructure and assist the NHS. Lastly, EU immigration will not be controlled during the EEA transitional period.

Compromise Needed

Nonetheless, the British government will have to make a compromise, in order to avoid economic suicide, as previously suggested by the former head of the European Commission, Romano Prodi. According to Hammond, there is still some time before full migration control is imposed. In addition, Article 112 of the EEA Agreement allows a party to the agreement to unilaterally take “safeguard measures” to limit freedom of movement in particular regions or sectors.

The EEA transitional deal, which would be in favor of Labour’s position on Brexit, including the EU exit, access to the single market and reformed freedom of movement, will meet legal resistance only from Liechtenstein. Moreover, a transitional deal, regardless of its form, would not be concluded before the Brexit bill is settled, which is currently a speculative issue.

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