Rethinking Europe

EU Summit: Too Early for a Brexit Deal

UK politicians should not overrate the current attempt by the EU27 to be nice to Theresa May.

Credit: Prachatai www.flickr.com

Takeaways


  • UK politicians should not overrate the current attempt by the EU27 to be nice to Theresa May.
  • EU leaders might grant Theresa May a little extra time by scheduling a special Brexit EU summit for mid-November. On substance, however, the EU has reportedly little to offer beyond the position it had presented before.
  • There is a 60% probability for a semi-soft Brexit under which the UK de facto stays in the EU customs union for goods (or very closely aligned with it), thus avoiding the need for a hard border in Ireland.
  • There is a significant 40% risk for potentially more unsettling outcomes than a semi-soft Brexit, including a 20% risk of a hard Brexit.

Aware that the UK prime minister faces an uphill battle at the Conservative party congress starting on 30 September, EU leaders are trying to be polite to Theresa May during the EU summit discussions that continue today in Salzburg.

After May’s dinner presentation yesterday, EU leaders might ask her to amend rather than ditch her “Chequers“ plan. They are also likely to grant her a little extra time by scheduling a special Brexit EU summit for mid-November, instead of insisting on wrapping up the talks at the EU’s regular October summit, as originally planned.

On substance, however, the EU has reportedly little to offer beyond the position which EU chief negotiator Michel Barnier had presented with full EU27 backing before.

This is that the UK has to make up its mind whether it wants a mere Canadian-style free trade agreement or a customs union with the EU (or perhaps a Norway-style single market deal) after the post-Brexit transition period ends in late 2020. The Irish border remains the big sticking point.

The hot phase of negotiation

The hot phase of negotiating the envisaged umbrella agreement for future EU-UK relations will start after the Conservative Party congress.

From an EU perspective, the talks could potentially be heading towards a fudge combined with a backstop.

First, to make it easier for May to get the envisaged umbrella agreement on future EU-UK economic relations through the UK parliament, the deal could be less detailed than the EU would have liked, leaving more issues to be settled in future negotiations during the post-Brexit transition period.

A lack of details could allow May to claim that the final result could still be close to her Chequers plan while allowing other Conservatives to hope that it would be rather different.

Second, the more details are left open in the umbrella Brexit agreement now, the more will the EU insist on an ironclad “backstop“ guarantee that there will be no hard border on the Irish isle whatever the outcome of the detailed negotiations during the transition period later on. If the UK mainland leaves the customs union with the EU after the transition period, Northern Ireland would have to stay inside the customs union.

This “backstop“ would be very difficult to swallow for the UK government which relies on the Northern Irish DUP for its majority in parliament. Upon hopefully concluding the pre-Brexit agreement in November, both the EU and May could thus emphasize that neither side expects the backstop to be activated as future talks on details of a post-Brexit trade arrangement would most likely find a better solution.

Conclusion

As things currently stand, there is a 60% probability for a semi-soft Brexit under which the UK de facto stays in the EU customs union for goods (or very closely aligned with it), thus avoiding the need for a hard border in Ireland.

That, however, leaves a significant 40% risk for potentially more unsettling outcomes including a 20% risk of a hard Brexit.

But one must assume that, faced with the choice between such a deal and the chaos of a no-deal hard Brexit (or even new elections that could sweep Labour‘s Jeremy Corbyn to power and/or result in a new Brexit referendum), many reluctant Conservatives would probably vote for the deal. While some Conservatives will almost certainly defect, a few opposition MPs may help the deal over the line.

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About Holger Schmieding

Holger Schmieding is chief economist at Berenberg Bank in London. [United Kingdom] Follow him @Berenberg_Econ

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