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Brexit Bulletin: Battle lines drawn

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The EU 27 have toughened their stance and some elements of the UK’s negotiating position are becoming clearer while others are still to be resolved. The EU has a very powerful negotiating position, but the UK Parliament could throw a spanner in the works

Battle lines drawn

Theresa May’s speeches at her party conference were a little like bad Budget statements. It went down well in the hall and in the first day’s newspapers but far less well afterwards.

Sterling’s fall reminded the UK Government that sterling is a one way bet at the moment and that the currency is very fragile.

The reaction to May’s speech and Home Secretary Amber Rudd’s unfortunate comments about publishing numbers of immigrant workers was extremely negative and hostile from the media and the politicians of the EU 27.

The EU 27’s position has hardened considerably in recent weeks.

Merkel and Hollande, in addition to Juncker from whom you would expect this, have publicly hardened their line and are now committed to the interests of the Single Market and the EU 27 being more important than any damage to trade with the UK from Brexit. Merkel even went as far as to say that she hopes that German industry associations and trade bodies will not lobby for generous treatment for the UK to help German trade. The German employers’ federation, the BDI, had said something similar a few weeks before in a reversal of their previous stance shortly after the referendum vote.

May will try to improve the tone of the debate in the one to one meetings she is having with the leaders of the EU 27. She will see all 27 in advance of the EU Council meeting in December. She will also try to be as positive and constructive as she can at the EU Council this week.

The Outlines of the UK’s Approach

The following represents the most likely UK negotiating position:

  • UK sovereign control over immigration. A work permit system to be introduced that will allow highly skilled migration, some sector specific migration and a significant reduction on low skilled migration
  • EU citizens to be given the right to remain if the EU offers the same to UK citizens in the EU. Cut off date to be decided
  • No power for the European Court of Justice (ECJ) over UK courts. In a UK / EU Free Trade Deal, there would need to be an international arbitration body, but for the UK this cannot be the ECJ
  • Mrs May will not admit this publicly, but everyone knows that the above means that the UK will leave the Single Market
  • No tariff deal if at all possible. Failing that, no tariffs on specific sectors such as the car industry. If tariffs are introduced, the UK invest the money from tariffs into schemes to support affected sectors and allow rapid innovation with legal and regulatory assistance to make up for lost competitiveness.
  • Passporting will be under threat. If passporting goes, then the UK would seek equivalence and mutual recognition on day one
  • Assuming the UK is no longer a member of the Single Market, some sector by sector deals on access to the Single Market will be sought
  • Customs Union is an issue where the UK has yet to decide on a position. The UK Cabinet is split and the Treasury is reviewing the impact on the economy and on importers / exporters of the UK leaving the Customs Union. The issue is potentially explosive as Liam Fox, International Trade Secretary, is desperate for the UK to leave as that will enable him to sign global trade deals after Brexit, but Chancellor Hammond is terrified of the impact on the UK economy of leaving the Single Market and the Customs Union on the same day in 2019. The Treasury presented some of the data on this to the Brexit Cabinet Committee last week. There is a possible compromise under which the UK might remain partially in the Customs Union or remain in it for a transitional period.
  • The UK will be willing to pay or enhanced access to the Single Market before a final Free Trade Deal is signed between the UK and the EU. Given that the UK wants control over immigration, the UK hopes that paying for access (perhaps via different programmes to make the link less visible to a sceptical electorate) may be a way of lessening the blow for business
  • The UK will offer assistance to the EU in the UN, the G20, the G8, on security, criminal justice, defence, military and diplomatic matters such as sanctions on Russia as a bargaining chip to try to get concessions in return

The EU 27’s Reaction

The EU 27 can strike a very hard bargain. They all face populists at home and they know they cannot be too generous to the UK for fear of encouraging eurosceptics in their own countries.

To an extent, the French and German elections in 2017 will make no difference to this whatever. If Merkel wins in Germany and if either Juppe or Sarkozy wins in France, the position of the French and German governments will remain unchanged from what it is now. The EU 27 will prioritise the integrity of the Single Market and the EU’s position for the remaining 27 over any desire to trade and work with the UK.

The EU 27 will demand that the UK pays a very large bill and continues to make significant annual payments after that if it is to have any preferential access to the Single Market. Sector by sector deals may have a sceptical reaction. Why should the EU 27 allow the UK access in sectors where the UK excels but not in other sectors where the EU 27 excel? The EU 27 will reciprocate by treating UK nationals in the same way as the UK treats EU nationals.

The EU 27 know that the UK will have to fall back on WTO Rules if there is no deal and that gives them huge leverage. They also know that time is on their side as two years is such a short space of time to agree on anything and then have it ratified by the Member States, the European Parliament and then all of the EU Member States’ legislatures. The blocking of the Canadian Free Trade Deal CETA by the Walloon Parliament in Belgian is instructive in this regard.

The UK Cabinet and Parliament

The Cabinet Committee on Brexit in the UK has all 6 Brexiteer Cabinet Ministers on it. However, they are balanced by 6 Remain supporters including Mrs May herself and Philip Hammond, the Chancellor, who is leading the charge within Cabinet on the need to reduce the economic and business damage of Brexit. Hammond is being supported in his efforts to avoid the worst economic consequences of Brexit by Amber Rudd, Home Secretary, Greg Clark, Business Secretary and Damian Green, Work and Pensions Secretary and Patrick McLoughlin, Conservative Party Chairman.

May’s strategy so far has been to give the Brexiters some of the things they are really passionate about – moving early on Article 50, control over immigration and freedom from the European Court of Justice – in order to persuade them to accept other measures to help ensure access to the Single Market – e.g. paying into the EU Budget and possibly remaining partially or temporarily in the Customs Union.

Can she get the Cabinet to agree to the necessary compromises?

Can she get the UK Parliament to agree?

While the UK Government will do anything to avoid Parliament having a vote on the triggering of Article 50, (the court case on this will probably end up in the UK Supreme Court in December), there are several ways in which Parliament will be closely involved. First, the UK Parliament will seek to force the Government to publish a Green Paper on its negotiating strategy in advance of triggering Article 50. Second, it will have to vote on the Great Repeal Bill that will repeal the European Communities Act 1972 and include all EU Regulations into UK law. Third, the UK Parliament will also vote on whatever deal is finally done between the UK and EU in the run up to Brexit in 2019. This latter point was confirmed as highly likely in the High Court this week by counsel for the Government. Could the UK Parliament vote down the Great Repeal Bill or the final deal? May only has a working majority of 16, but it is worth remembering that the Northern Irish Democratic Unionist Party (DUP) who have 8 seats, would also support her. But if they did, would that prompt a General Election?

Early General Election

Mrs May is on record many times repeatedly stating that there will not be an early General Election and that it would create unnecessary instability at a time when the UK needs certainty and stability. She promised her new MPs in the South West that there would not be an early GE to give them time to build up support locally through incumbency. In 2018, new boundaries will gift the Tories about 15-25 extra seats and so waiting until at least then has some merits. The longer the Labour Party has Jeremy Corbyn as Leader, the better for the Tories and the only way Corbyn will leave is after a GE if he is soundly beaten. May got the job as PM because the Tory party wanted safety and certainty and someone who has strength of principle and substance. Then there are the difficulties of triggering an early election under the Fixed Term Parliament Act.

But one cannot be discounted. If Parliament were to vote down the Great Repeal Bill or the final deal between the UK and the EU, it would prompt a political and constitutional crisis. In such a crisis, May could be forgiven for going back to the country and of course if she won an enhanced majority, that would make it far easier for her to see through her domestic programme of reform.

The views and opinions in these articles are solely of the authors and do not necessarily reflect those of Teneo. They are offered to stimulate thought and discussion and not as legal, financial, accounting, tax or other professional advice or counsel.

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