Update on the progress of Brexit negotiations

April 2018 | SPOTLIGHT | LABOUR & EMPLOYMENT

Financier Worldwide Magazine

April 2018 Issue

On 8 December, phase 1 of the Brexit negotiations ended with EU and UK negotiators issuing a joint report with clear conclusions on the progress of negotiations. Those ‘clear’ conclusions have now become ever more muddied as negotiations continue, and raise the caveat contained in the joint report that ‘nothing is agreed until everything is agreed’.

The question remains: is anything actually agreed?

This article provides an update on the most recent developments on two contentious issues in phase 1 negotiations that have implications for corporate immigration – EU citizens’ rights and Northern Ireland – and gives a view of Brexit from Germany, one of the UK’s strongest allies and largest trading partners and arguably the EU country likely to most benefit from the UK’s exit.

Update on progress of phase 1 agreement

According to the joint report, the UK agreed to ‘reciprocal’ protection of all EU citizens in the UK on the date of the UK’s withdrawal from the bloc, in addition to their family members. Pre-existing family members and children (even those born after Brexit) would be able to join the EU member at a later date. On the issue of Northern Ireland (which nearly jettisoned the entire phase 1 agreement when the Democratic Unionist Party (DUP) rejected any provisions that would treat Northern Ireland differently from the rest of the UK), the joint report committed the UK to ‘full alignment’ with EU customs in Northern Ireland and ‘no new regulatory barriers’ between Northern Ireland and the rest of the UK.

The UK has now started to hint that ‘alignment’ only means common rules in certain areas, such as agriculture and energy, for example, and does not mean across all regulatory systems. The European Commission published a set of slides on 21 February saying that such an approach would be “not compatible with the principles” set out in the EU’s own guidelines and would put at risk the “proper functioning” of the single market.

The transition period is also posing problems and fuelling uncertainty for companies and individuals. This period, which is due to commence in March 2019 upon the formal Brexit date, is intended to set up the longer term transition plans and give businesses time to plan for the eventual post-Brexit regimes. The British document, published by the UK’s Brexit minister David Davis, allows for continued free movement in the same form as before the transition period and no powers to implement trade deals without the permission of the EU. This is a softening of the previous (leaked) position which contended that immigrants arriving in the transition phase would not have the same rights (such as the right to continue to work in the UK without a work permit, after the transition end date) as those who arrived before the UK left the EU. But in this softening position there is more risk.

A hard-line Brexit view might still demand full divergence of regulatory systems which necessitates the formation of a hard border between the Republic of Ireland and Northern Ireland. Theresa May says the outcome she wishes to see remains a “bespoke economic partnership” with the EU, which would enable the UK to “take back control” of its laws, money and borders. The problem is that hard-line Brexiteers are demanding that the UK be allowed to conduct their own trade agreements and, once it has left the EU, be allowed the gain full regulatory autonomy. If this view prevails, nothing will be agreed. This would hit the Republic of Ireland harder than all other countries in the EU and could cost up to €18bn. The EU is expected to publish its draft withdrawal agreement, including a legal text on the Irish border. This text is expected to include provisions that the UK would, in effect, commit to keeping Northern Ireland in the single market and customs union, unless a future free trade deal, or indeed the previously suggested technological solution, emerges to avoid a hard border.

Brexit from a German perspective

The UK has been Germany’s biggest ally within the EU, having the third-largest population within the bloc after Germany and France. Hence, the exit of the UK will have a significant impact on Germany’s ability to exercise its interests within the EU.

Germany and the UK have had common approaches and understanding on important subjects such as subsidies, free trade, antitrust law and digitalisation.

The phase 2 negotiations began after concessions were made in the joint report with regard to a number of significant issues, such as the free of movement of EU citizens, including approximately 3 million EU citizens currently residing in the UK and UK citizens’ right of free movement in EU countries.

Under the joint report, German citizens who enter the UK before the cut-off date and who continue to live in the UK will be eligible for settled status, and the more than 100,000 UK citizens currently living in Germany can remain in Germany based on their current status.

Political impacts

Following the UK’s departure, Germany’s role in the EU will become even bigger, particularly in critical situations, such as financial crises and decisions on migration issues. This does not necessarily meet with the approval of German citizens. The re-emergence of far-right anti-immigration political parties in the recent election in Germany can be seen as an indication that a significant number of German citizens favour a more anti-EU approach. This situation will certainly cause challenges for the new German government, and the influence of anti-immigration parties could introduce changes to German immigration policies. However, in the present coalition talks, the SPD and the CDU have agreed to encourage skilled migration using criteria such as qualifications, age and language skills.

Economic impacts

Brexit will also have a major impact on German and UK businesses and their access to labour. Over 2500 German companies are based in the UK with approximately 370,000 employees. Germany hosts about 3000 UK companies, many of which operate in the automotive, financial, insurance, transportation and energy sectors. The ultimate end of free movement may well cause issues for such companies, as well as fears over a potential economic slump.

As the UK is Germany’s third-biggest export market, Brexit may also affect the German economy. Based on recent statements from Theresa May, the UK continues to pursue an anti-customs union approach. Theresa May’s views on the customs union are seemingly opposed by Labour’s Jeremy Corbyn and rebels within the Conservative party, which raises further uncertainty for businesses, both from a free trade and a freedom of movement perspective (the EU has been clear that membership of the customs union requires the free movement of people). If the final agreement resulted in the UK leaving the customs union, then a new free trade agreement between the EU/Germany and the UK would be required to effect the movement of goods, which, depending on the deal, could significantly affect pricing of export goods in the UK and Germany.

The EU budget is also likely to be significantly affected by Brexit, according to EU budget commissioner Günther Oettinger. Germany will need to significantly increase its contribution, though it is already considered the highest contributor to the EU budget.

Future of UK-German immigration

The right of free movement for Germans and UK citizens will eventually depend on the final agreements between the UK and EU. However, based on current agreements, the right of free movement should remain at least during the transition phase after March 2019 (estimated to last approximately two years to 2021).

Global businesses that are looking for an EU base post-Brexit have Germany as one of the countries at the top of their list, as well as France and the Republic of Ireland. The latest polls indicate that Germany is considered the most popular destination for British business operations, with one in seven companies considering withdrawing business units from the UK. The international banking sector, heavily centred in London, will most likely consider shifting some of their branches and operation to Germany (especially Frankfurt) to ensure they can continue profiting from EU privileges.

Students intending to enrol in the Erasmus+ programme (Germans represent a significant number of the EU student population in the UK) will be affected since there is no certainty that this programme will still be available after Brexit. The exchange programme allows for a free fixed-term enrolment in a UK university for German students, and vice versa.

Conclusion

Regarding the transition period, the devil will be in the details, and the joint report leaves many details unclear. In particular, whether the unique issues involving the Republic of Ireland and Northern Ireland and regulatory divergence could disrupt or even sink the fragile agreements made in the joint report, potentially setting up a ‘no deal’ situation. UK political divergence on remaining in the customs union could appeal to Conservative rebels leading to a toppling of the present UK government and further uncertainty for the eventual Brexit outcome.

Emily King is the managing director for Europe, Aaron Flynn is a senior associate and Karin Luzolo is an immigration manager at Berry Appleman & Leiden. Ms King can be contacted on +44 (0)208 987 4101 or by email: eking@balglobal.com. Mr Flynn can be contacted on +44 (0)208 987 3830 or by email: aflynn@balglobal.com. Ms Luzolo can be contacted at +44 (0)208 987 4116 or by email: kluzolo@balglobal.com

Emily King, Aaron Flynn and Karin Luzolo

Berry Appleman & Leiden