UK government’s two year Brexit transitional period: poisoned chalice or a step in the right direction?

December 2017 | EXPERT BRIEFING | ECONOMIC TRENDS

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On 4 October 2017, the Conservative Party’s annual conference drew to a close. The conference, and Theresa May’s speech in Florence before it, had been closely watched for indications of where the UK’s Brexit negotiating strategy was heading.

The seminal moment came during the Florence speech when Ms May confirmed the much speculated position that the UK was not seeking an immediate and full withdrawal from the EU in March 2019, but wished to have a two year transitional period, starting from that date. During this time the UK would continue to make contributions to the EU budget.

The business community received the prime minister’s speech with relief. Businesses want certainty and so anything that helps to reduce or resolve current ambiguity will be welcomed. In seeking a two year transitional period, in return for continuing the UK budget contributions, she was aiming to reassure UK market players that there will be no cliff edge to Brexit and that a trade deal will be negotiated in an orderly manner during those four years. This will allow the business community sufficient time to get ready for a post-Brexit world and restructure their operations, if necessary. However, Ms May made it clear in her comments that while she wanted to break the current deadlock, her presence in Florence was no EU ‘love in’.

This is a significant proposal which was designed to unblock the Brexit talks which have been plagued with controversy and stalemate since they first began in June. It was undoubtedly a step in the right direction, but there is a long road ahead.

But what price will the EU27 put on agreeing to such a proposal, and what will the trading and jurisdictional relationship between the UK and the EU27 be during the transitional period? These questions remain unanswered. In addition, could a transitional period end up being a ‘poisoned chalice’ allowing both parties to kick the key, contentious issues into ‘the long grass’ and avoid reaching early agreement? Would this just prolong the uncertainty?

Transitional arrangement

The two-year transitional deal not only buys both parties time to address a trade deal but it also amounts to a substantial concession to the EU27 whose principal concern is basically the amount of money the UK is willing to pay to plug the hole in the EU finances upon exit.

The financial effect of Ms May’s proposal, as spelled out in her speech, was designed to ensure that no Member State is disadvantaged by the UK’s departure by the need to reopen the EU long-term budget plan. It has been widely reported how the UK’s withdrawal will leave the EU with a €20bn a year gap in its budget. The terms of the transitional period will no doubt contain full or near full contributions over the two years, undoing one of the Commission’s main fears. The transitional period also represents a victory for chancellor Philip Hammond who had been advocating such a proposal on grounds of stability and workability.

However, the UK is likely to try to force the EU27 itself to make concessions as the price for guaranteeing the continued flow of funds during the transition.

High on the list of priorities is agreement to a third-party arbiter for future legal disputes over the UK/EU27 exit agreement, including safeguarding EU citizens’ rights. Currently the UK has indicated flexibility on this point but the EU27 remains steadfastly committed to the jurisdiction of the European Court of Justice to be the ultimate arbiter of such disputes.

This is a major sticking point for the UK because one of the principles of Brexit is that it would end EU legal sovereignty over UK affairs. In July, the Brexit secretary David Davis made a compelling case on this point by stating: “If Manchester United played Real Madrid, you would not let Real pick the referee.”

So an independent tribunal is needed in which both parties have confidence. The UK has suggested third-party arbiters such as the EFTA court in Luxembourg. However, the debate surrounding this issue looks set to run and run.

EU citizens

The rights of EU citizens were mentioned as part of the transitional period proposal during the prime minister’s Florence speech. Although much conciliatory language was used, there was talk of a registration process over the two years for EU citizens living and working in the UK. This was mooted as an ‘essential preparation’ for the new regime after Brexit when the UK will be free to set its own immigration policy.

It has been reported in some news outlets that the system would guarantee lower skilled workers their right to stay in the UK for only two years. It has also been suggested that there will be severe restrictions on those lower skilled migrants being able to bring their families to the UK. This is designed as a deterrent so that unskilled jobs would be taken more readily by UK citizens.

However, better treatment of higher skilled workers was proposed, with them able to stay for longer periods. Not one of these further potential policies was mentioned in the speech. These proposals are unlikely to find favour with the EU27.

The defence card

Some of the speech focused on the UK’s continuing commitment to European defence post-Brexit; Ms May made it clear that this was a big offer. She has now mentioned the subject twice in her set-piece Brexit speeches.

In the Florence speech, the prime minister proposed the new security relationship be drawn up formally through a new defence, criminal justice cooperation and law enforcement treaty between the EU and the UK. The EU Commission, which has a limited remit in defence matters, dismissed defence considerations as being irrelevant to the negotiations. However, the reality is somewhat different and the UK has every intention of using this as leverage to its maximum extent.

Defence considerations, including criminal justice cooperation and enforcement, are in fact centre stage; the fight against terrorism is a central threat faced by all EU member states. Regarding defence, the UK’s commitment might not be as important to France or Germany but it certainly resounds more significantly among those Member States that share a border with a newly aggressive Russia.

The UK has devoted considerable military resources to Eastern European security. This issue is likely to result in tension between these Eastern member states and the Commission in Brussels if the former feel their security could be threatened by the Commission’s negotiating stance.

Future trade agreement

What Ms May could not promise was the type of future trading relationship, specifically, a free trade deal between the UK and the EU. The trade part of her speech was, nevertheless, quite clear.

It outlined that the UK was seeking a bespoke bilateral agreement, neither an EEA deal like Norway, nor a limited free trade agreement similar to the Comprehensive Economic and Trade Agreement (CETA) with Canada. The hope in the business community and others in the UK, as well as elsewhere in Europe, is that this accommodation can one day be reached.

There is a growing acknowledgement that the UK ‘cannot have its cake and eat it’. So the price for agreement may well be significant future financial contributions from the UK to the EU, albeit at a lesser rate than current EU membership.

But neither side can openly agree to such a compromise so early in the negotiations. The UK government cannot be seen domestically to hand over billions to the EU over the long term without putting up a fight, while the EU cannot be seen to give its former member most of the advantages of EU membership (such as free trade and international cooperation) without the obligations which are not to the UK’s taste (such as federalism, interventionist employment laws and membership of the euro).

When the political grandstanding stops, the question is how much will or can the EU give the UK in terms of preferential trade access. If it gives too much, it may endanger its own existence.

Robert Bell is a partner and Roman Madej is an associate at Bryan Cave. Mr Bell can be contacted on +44 (0)203 207 1232 or by email: robert.bell@bryancave.com. Mr Madej can be contacted on +44 (0)203 207 1304 or by email: roman.madej@bryancave.com.

Robert Bell and Roman Madej

Bryan Cave