As Brexit negotiations with the EU continue, pressure on the Government grows to secure an early transitional agreement. But what would it look like, and what happens if we don’t get one?
The Brexit decision tree
An orderly Brexit is likely to involve three phases:
- An agreed divorce – the Article 50 agreement
- A standstill period to preserve the status quo pending a final agreement
- A final trade deal with the EU
A transitional agreement is normally taken as referring to the second of these elements, but all three agreements are likely to have transitional elements to allow smooth implementation. In this briefing we take the transitional agreement to be referring to phase two - a bridging period to provide an orderly transition between the end of the UK’s EU membership and the point at which the UK’s new trading relationship has been finalised.
What kind of transitional agreement?
Business leaders have made it clear that a successful transition agreement should as far as possible avoid the need for two separate periods of adjustment. That means that from their perspective the transitional agreement should involve as little change as possible from the current arrangements. That appears to be what Theresa May was envisaging in her Florence speech in September, though she used slightly different terminology.
Clearly the simplest option would be for the Council of Ministers to agree to extend the Article 50 notice, so that the UK stays in the EU until a separate trade deal can be negotiated. However this appears to be politically unacceptable to the UK Government, leaving aside whether the EU 27 would be prepared to agree to it (unanimity would be required in this instance).
It therefore seems more likely that the transitional agreement would be concluded on the basis that the UK leaves the EU, but would continue to be part of the single market for a defined period. That would involve the UK continuing to pay into the EU budget, continuing to be bound by EU laws (including freedom of movement) and continuing to be subject to the jurisdiction of the European Court of Justice.
When could a transitional agreement be concluded?
Given that extending the Article 50 notice period does not seem likely, there appears to be no simple off the shelf process for approving a transitional agreement under the EU Treaty. However the weight of legal opinion seems to support its incorporation as part of the Article 50 agreement. That means that only a qualified majority in the Council of Ministers would be needed to approve it. Although approval by the EU Parliament would be necessary, unlike a future trade relationship, ratification by individual member states would not be required.
It follows that any talk of an early deal on transition means a political agreement at the Council of Ministers, pending negotiations on the points of detail and ratification by the EU Parliament as part of the divorce settlement.
What happens if there is no deal?
There has much recent talk about a “no-deal” Brexit, but like discussions about a transitional agreement, there are a number of different scenarios to consider.
Leaving without a divorce agreement is often referred to as a chaotic Brexit, since not only would there be no agreement on future trade terms but there would be no certainty about how all the different facets of EU membership should be unwound.
However it is also possible that while the terms of the divorce could be agreed, no agreement is reached on a future trade relationship, or any transitional arrangements to bridge the gap until we get there. This could be referred to as a cliff-edge Brexit, as we would have to jump into a new trading relationship on fall-back WTO terms, but at least the edge of the cliff would have been defined.
In reality the position is more nuanced, because our EU membership is supplemented by a large number of bilateral and multilateral agreements between the EU and other nations. The same is true of our WTO membership, where default trade terms are modified by numerous bilateral agreements, even where no free trade agreement is in place between the EU and the member nation concerned. The height of the cliff will depend on how many of these relationships the UK manages to replace or inherit as a separate nation at the point it leaves the EU. The range of these agreements is vast, not only covering trade in goods and services but anything from aviation to visas.
Given that “nothing is agreed until everything is agreed” it seems unlikely that we will have a divorce settlement without a transitional agreement, assuming the UK Government continues to press for one. Despite the rather artificial sequencing imposed by Brussels, the two are clearly interlinked.
As much certainty as possible as soon as possible
Absolute certainty is not possible, but the fears of both businesses and individuals would be greatly eased if political agreement could be reached between the EU27 and the UK about the outline of a future relationship and how we get there. Business leaders are saying this needs to happen by the end of the first quarter of 2018 at the very earliest, to avoid decisions being taken to relocate businesses on a worst case scenario.