At an extraordinary summit last Sunday, 25 November, the United Kingdom and the European Union (EU) approved the draft withdrawal agreement, as well as the political declaration on the framework for the future relationship. The two documents will be put before the UK and European Parliaments in December for ratification.
The political declaration – which, unlike the withdrawal agreement, is not legally binding – sets out the goals of the EU27 and the UK in terms of a future partnership that is intended to be “ambitious, broad, deep and flexible” through not only trade and economic cooperation, but also foreign policy, security, defence and other areas of cooperation. Both parties acknowledge that this relationship would have to evolve over time. The economic partnership will be “comprehensive” and, in the spirit of Theresa May’s Chequers plan, would include an EU/UK free trade area and cooperation in sectors of mutual interest, strengthened by rules ensuring a level playing field. The declaration endorses the UK’s desire for independence in terms of trade policy.
On the prickly issue of the Irish border, both parties agree to find, during the transition period, alternative agreements to the backstop to permanently obviate the need for a hard border between Northern Ireland and the Republic of Ireland. These agreements could be based on “facilitated arrangements” and available technologies.
As regards trade in goods, the economic partnership will need to put in place “ambitious customs arrangements” to ensure that there are no tariff barriers between the EU and the UK, and no rules of origin checks. The declaration calls for regulatory alignment in the relevant areas.
As regards services, the stated aim is to achieve a degree of integration higher than that allowed for under World Trade Organization rules and at least as extensive as that allowed for under free trade agreements recently entered into between the EU with third countries. In financial services, the two parties commit to assess equivalences by the end of 2020 with a view to determining terms of access to their respective markets.
The biggest challenge ahead, and a source of major uncertainty, is the UK Parliament’s meaningful vote on the withdrawal agreement and the framework for the future relationship. The vote will take place on 11 December 2018 and is highly likely to be a failure for Theresa May. Given her very slender parliamentary majority, for each vote she loses from her own camp, the Prime Minister must garner a vote from the opposition. Due to the terms of the Irish border backstop, which provides for stricter regulatory alignment between Northern Ireland and the EU, the ten members of the DUP (Northern Ireland’s Democratic Unionist Party) are likely to vote against the withdrawal agreement.. Europhobe conservatives are also likely to vote against – at least the 26 Members of Parliament who last week submitted letters of no confidence in Theresa May. The opposition has also reacted strongly to May’s deal, with key Labour figures saying it does not pass the Party’s six Brexit tests. Since Labour’s aim is to trigger fresh elections or, failing that, a second referendum, it is hard to see May’s deal winning opposition support. The only thing that might prompt opposition MPs to approve the deal is fear of a no-deal scenario. That seems to us to be unlikely in the first instance. The “meaningful vote” could give rise to requests for amendments to the withdrawal agreement and/or the political declaration. For example, the opposition could push for a permanent customs union or a membership to the single market to be included in the political declaration. According to Politico, an amended version could be discussed at the European Council meeting on 13 December, followed by a second vote by the UK Parliament before it breaks up on 20 December. However, the EU is unlikely to agree to amend the deal within such a short time frame. It is also likely that fear of a no-deal scenario or a political crisis giving rise to a snap election will, in the end, force eurosceptic conservatives to support Theresa May’s deal.
Our baseline scenario is that the Brexit deal, or a version of it, will be ratified by early January at the latest. This would enable the UK to avoid a disorderly Brexit on 30 March 2019* and enter the transition period, which could be extended if need be. The prospect of a smooth Brexit should thence trigger an improvement in the business climate and cause UK growth to pick up again in the short term, after what looks set to be a gloomy fourth quarter of 2018. This reprieve will, however, be short-lived. It will not be long before businesses are plunged back into a period of uncertainty over the outcome of future negotiations on the details of the long-term relationship and ratification of associated agreements. The political declaration may be full of good intentions, but translating it into legal reality and delivering it on the ground will be a long process, and definitely not an easy one.
*The transition period is currently set to begin at 23:00 UK time on 29 March 2019.
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