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UK/ EU: May Still Likely to See Brexit Talks Move to Stage Two in December

November 14, 2017
By Carsten Nickel

The domestic politics of Brexit are entering a crucial two weeks. May’s position is volatile, but she is more likely to stay than to be ousted. It remains likely that the December European Council paves the way for trade talks.

The House of Commons began debate on the former “great repeal bill” (now: EU withdrawal bill) on 14 November. Chancellor Philip Hammond will present his autumn statement on 22 November, and if respective EU remarks are to be taken at face value, the UK will have to clarify how much of its financial obligations it is willing to pay by the end of that same week (26 November).

PM likely to stay for now

Despite the impression that crunch time is nearing, the base case remains unchanged. Though under intense pressure, PM Theresa May is likely to retain her job – if only given the lack of a viable alternative. Her position between the Conservatives’ two Brexit camps is awkward, but the party’s division also limits the ability of challengers from either side to assemble a majority large enough to oust her. The risk of a Labour victory in potential early elections acts as another deterrent.

Finally, even Tory Leavers know that the UK will have to make uncomfortable compromises to unlock transition and trade talks with the EU; they probably want May to take the blame for these concessions rather than taking responsibility themselves. That 40 MPs (eight short of the required quorum) are allegedly demanding a leadership contest right now should at least partly be seen in the context of the upcoming parliamentary debates on the EU withdrawal bill.

The week in Westminster

MPs have brought forward a large number of amendments to the withdrawal bill. The government has already given in to the most controversial demand, granting Westminster MPs a final say on the EU exit deal. Regardless, the offer from Brussels will likely be a take-it-or-leave-it deal, and the alternative to whatever deal the government brings home would be a disorderly Brexit and WTO rules.

Given the large number of amendments, the government will have to tread carefully to avoid defeat. Amendments on which May lacks support might get delayed to later stages of the legislative process. The concession of a final vote for Westminster might have calmed the mood, but the job of gauging majorities on each amendment is complicated by the fact that divisions are crossing party lines.

A deal is likely by December

Meanwhile, the European Council on 14/15 December remains likely to clear the way to stage two of the talks. As expected, last week’s talks in Brussels yielded some limited progress on citizen’s rights. Ireland is demanding clarifications on the future of the Northern Irish border, but the issue will likely be carried forward into the second stage of the talks, to address it in the context of the future of the customs union.

On finance, the EU has demanded clarity within two weeks on the UK’s willingness to pay for its obligations. This might be unrealistic by 26 November, given the UK budget will only be out of the way by 22 November. But even if the UK takes until early December to specify its position, the EU’s main signal is simple: hopes of a high-level political deal at the December Council were always unrealistic. Council conclusions need to be coordinated well in advance, and there is no interest in compromising on this in France and Germany. Comparable to the case of Greece, the UK will have to strike agreement with Michel Barnier in advance of the Council meeting (our base case). The alternative would be to do so in time for the March 2018 Council.

Beyond the December Council

The base case remains agreement in December, after the UK will have committed to a methodology for calculating its obligations that would return a bill of around EUR 40bn. Difficult questions relating to national sovereignty will only be discussed after that, including the initial divorce issue of the Irish border. It is in this medium-term context that the joint letter to May from Michael Gove and Boris Johnson should be seen – rather than signalling an immediate threat to the PM’s leadership. It shows that even if the Leavers accept a status-quo transition, they are doing so only in return for a rather basic trade deal thereafter, enabling the UK to “take back control”. That Gove and Johnson have allegedly called for any transition to last no longer than mid-2021 demonstrates their exclusive focus on domestic politics. The EU might only offer a transition until 31 December 2020.

While talks about the future relationship will eventually force the UK to take fundamental decisions, this moment might not arrive right away, in January 2018. In Brussels, the idea is gaining ground to start stage two with negotiating a 21 months’ transition agreement that freezes virtually every aspect of the UK’s current EU membership after March 2019, except for UK participation in EU decision-making and regulatory bodies. Since such a sequencing of stage two talks would further delay final decisions about the post-transition relationship, this might also prolong a situation in which both Tory Leavers and Remainers wait with challenging May.

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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