Since the confirmation of the vote to leave the EU in June 2016, the Brexit process has turned into a nail-biting drama with more plot twists than your average South American soap opera. There’s been conflict, duplicity, suspense and - largely offstage - mundane procedure. What lies in store? The next couple of seasons promise to be even more gripping than the last. At the end of this season, on the 29th March 2019, the most likely scenario is that the UK leaves the EU with an agreed plan for the broad future relationship - if the process follows the pre-ordained series of steps. But as with all dramatic sagas, more twists, cancellation (that is, of Brexit) or a prolonged process could always be an option.
The story so far:
With less than a year to go, about 75% of a draft 129-page Withdrawal Agreement has been agreed between the UK and the EU27, including:
- Broad provisional consensus on the three "divorce" issues: how much the UK owes the EU, what happens to the Northern Ireland border (currently a vague compromise with the backstop option of “single regulatory area” in the Irish Sea) and the rights of citizens.
- A 21-month transition period, during which it is business as usual, with EU laws continuing to apply. The UK can negotiate, but not activate, new trade deals during that period.
Theresa May has laid out aims for a future trade relationship based on “managed divergence” incorporating an ambitious trade deal including financial services and mutual recognition of standards. The EU has rejected those ideas and instead adopted guidelines seeking a close future relationship based on a free trade agreement. Its vision is of a similar deal to that which exists with Canada or Korea – but no more.
Now until Brexit day:
April 2018- October 2019
- 1. Agreement on the remainder of the draft Withdrawal Agreement. While making up a relatively short part of the paper, this includes the most controversial areas:
a. The trickiest remains the issue of the Northern Ireland border and Gibraltar. The UK hopes to have these settled by the time of the EU summit in June. Specifically, it needs to find a way of upholding the Good Friday peace agreement and avoiding a hard border with the Republic of Ireland. The much touted use of technology to ensure a frictionless crossing is unrealistic. Instead, this may come down to clarity over the role of a customs union and the extent to which regulatory alignment is maintained. So in turn this issue – which could still derail the process - sets a precedent for the wider future relationship.
b. Consensus on the dispute resolution mechanism that will be needed for future trade relations.
- 2. A non-binding “political declaration” – so in other words, a set of aspirations - on the framework of the future relationship between the EU and UK. The crucial question here is if it can be forged to suit the UK’s demands and those of its politicians (see below) without it agreeing to remaining in the customs union – or formulating a new one which looks very similar. At present, the EU’s support for a Canada type deal is based on the indications from the UK that it intends to forego a customs union. A deal of that type may only be secured if the UK is willing to submit to largely being a rule taker; more a Norway than a Canada due to its proximity. If the UK were to soften that stance, the EU has indicated it might be more amenable to the UK’s demands, or “red lines”. The accord will likely be less than 40 pages, with the full detail of the relationship to be hammered out once the UK leaves, leaving business still in the dark about what the UK’s trading relationship with the destination for half their exports will look like.
- 3. The drafting of the Withdrawal Bill and its movement through both chambers in Parliament. Amendments are being tabled by the Labour opposition party which demand Parliament gets a say in what happens next if it rejects the withdrawal agreement, and seeks commitment that no type of hard border is installed between Northern Ireland and the Republic.
- 4. The passing of eight other bills to prepare for Brexit – focussing on the likes of trade, customs, immigration, agriculture and fisheries - along with a great deal of secondary legislation. A small cross-party group has tabled amendments to the taxation bill that would force Britain to be part of a customs union with the EU. The government has attempted to delay a vote on this.
Overall, therefore, the issue of whether the government is willing to commit to a customs union that closely reflects the existing one is likely to dictate progress both in Brussels and Westminster over the coming months.
Before 29 March 2019 (“Brexit Day”)
- 1. The government is aiming for the withdrawal agreement and the broad accord on the future relationship to be agreed by October, in good time for the UK Parliament to vote on the contents. If no deal is struck by 29 March 2019, the UK exits without a deal – unless there’s consensus from other member nations to extend the talks.
- 2. If passed, the deal will need approval by 72% of the remaining 27 member states, representing 65% of the population.
- 3. The European Parliament will also then have to give its consent to the bill. This is in no way guaranteed, in particular if the Parliament is not satisfied with the provisions in the agreement about the rights of EU citizens in the UK post-Brexit.
- 4. Both sides ask the rest of the world to continue to act as though the UK remains part of the EU for the period of the transition period. This will allow the UK to remain part of the 750 international agreements set up by the EU. Almost half of these agreements cover trade, the rest deal with everything from regulations and transports to agriculture. Some are crucial – for example, governing the rights of aircraft to travel to the US, others, such as the one concerning swordfish conservation in Chile, less so. Any one of the 160 nations who form part of these deals could object to the UK’s continued participation in these treaties.
Potential obstacles: could Parliament halt Brexit?
What are the chances of Parliament rejecting a deal? Bookmakers in the UK are currently saying there’s more than a 30% chance of this happening. In theory both major parties have signed up to “Brexit meaning Brexit”. But about three-quarters of the UK's 650 MPs voted to remain. This includes over half of the Conservative’s 316 MPs, all but about a dozen of Labour’s 259 members, and over 50 of those belonging to smaller parties (largely the SNP, Lib Dems and Plaid Cymru). The Labour party has said any deal must satisfy Labour’s “six tests” for a deal, which include one for the "exact same benefits" as the current union provides, and indeed now has officially backed membership of a customs union.So a “soft” Brexit would garner wide support from most parties (save the Conservative Brexiteers) and should be easily passed. However, such a deal could reignite fears of a leadership challenge from May’s backbench colleagues. A vaguer deal (a “blah blah” as one senior politician referred to it) is likely to be a closer call, uncertain of passing Labour’s tests, although even the support of even just the Labour Brexiteers would ensure a narrow victory for the government – as long as none of its own party rebelled. As seen with the amendment governing the vote itself, that’s by no means certain – although many Conservatives, whatever their Brexit leanings, might be reluctant to vote against their government and risk precipitating its collapse.
What happens if Parliament rejects a deal? An amendment introduced by one of May’s own party (and passed after 11 of her MP’s voted against the government) requires any Brexit deal to be approved by a separate Act of Parliament before it can be implemented. This gives MPs the powers to send the deal back to Brussels for renegotiation (as long as it's before March 29th 2019, or if Brussels aggrees to extend negotiations) And a former Prime Minister John Major has said Parliament should be given a “meaningful” free vote on whether to accept or reject the outcome of the negotiations, including the ability to seek another referendum – in other words, provide the opportunity for Brexit to be cancelled. The government might resist such a move, highlighting that while the Withdrawal Agreement is enshrined in law, the accord on the future relationship is non-binding and indicates only a set of aspirations. But bookmakers are saying there is as much as a 1 in 5 chance of a second referendum before next April, and recent polls suggest public opinion may be shifting in favour of holding one.
There is also a risk that politicians from the European Parliament will seek to challenge the legality of Brexit in the European courts, which could delay the process, although the Brussels negotiating team have put the emphasis on forging ahead with plans for Brexit.
Assuming that these twists can be successfully navigated, the majority of work for those negotiating teams lies after March 29th when the crucial detail of the UK’s future relationship - with the EU and beyond - will be determined. That’s to be discussed another time. The current season of this saga promises enough gripping drama - complete with improvisation, shock developments and misbehaviour - for now.
Source: Daiwa Capital Markets Europe Ltd.