Which is the best Brexit option: soft, hard or cliff edge? (Financial Times 14.12.2016)

Kansanedustajien blogit

I spent a couple of days in Brussels last week on my quest to understand the implications of Brexit. Having now visited London, Berlin, Frankfurt and Warsaw, I can only conclude that the more I learn, the more worried I am.

European negotiations have a tendency to advance in three phases: crisis, chaos and suboptimal solution. Brexit is no exception to this rule. The only problem is that the negotiations will most probably be nasty, brutish and long. And with a suboptimal solution, only law firms will emerge as winners.

In the coming years, the UK and the EU will be involved in three sets of negotiations: an exit agreement, a transition arrangement and a new relationship. We will probably not see the end of this process before 2025.

The timetable of the actual Brexit agreement is relatively straightforward. Theresa May, the UK prime minister, has said she will invoke Article 50 by the end of March 2017. This will kick off a 18 month period of negotiation followed by six months of legal technicalities and ratification. Unless someone stops the clock, Brexit will take place on 1 April 2019, a few weeks before the European Parliament elections.

Brussels continues to say there will be no negotiation without notification, but never underestimate the EU institutions’ level of preparation. The commission is in the final stages of screening the key issues and ready to start the talks whenever London sends an email with an Article 50 heading.

The negotiating hand of the British government is weak. In its crudest form there are only two things that need to be decided: the date and price tag of exit. Once the negotiations begin, Mrs May will have very little to say on either. The EU is not an accounting exercise in which you can calculate the cost of membership by extrapolating how much you pay into and get out of the EU budget. Yet the price tag of the UK’s prior commitments to the budget is estimated around €55 to 60bn. That is how much the UK will have to pay to get out of the EU.

There are three basic options for Brexit: soft, hard and cliff edge. I still insist that a soft exit would be the best way forward, but this seems highly unlikely. If the UK does not accept the free movement of labour, a financial contribution to the budget or the jurisdiction of the European Court of Justice on relevant issues, it will be very difficult to remain part of the internal market. You can’t have your Christmas pudding and eat it too.

In a nightmare scenario the UK would be pushed off the cliff edge, without a proper agreement on the terms and conditions of exit. This would lead to political, economic and legal uncertainty of an unprecedented nature. Populism, market turbulence and endless litigation would follow on both sides of the channel.

The best we can therefore wish for is a hard Brexit. In this scenario the EU and the UK settle on a date, price tag, rights, obligations and supervision of the exit agreement. This will mean severance from the internal market, including financial services. At the same time this will pave the way for proper transitional arrangements and a new treaty between the EU and the UK.

The transitional arrangements will be important, but by definition temporary. The length and scope will depend on the direction of the future relationship. They will not be a substitute for EU membership, but simply an arrangement which gives time to negotiate a new deal between the EU and a third country.

Various options for a new relationship — everything from joining the European Economic Area to an arrangement governed by World Trade Organisation rules — have been floated in public discourse. The most likely outcome is something that could be called Canada+, a free-trade agreement with a few special arrangements on security, defence and terrorism.

In financial services the UK will lose out on passporting and its strong position as the centre of the euroclearing system, but nothing will prevent a functional deal based on equivalence. The City of London will be weaker, but not dead.

The EU27 will make sure that the alternative cost of non-membership is substantially higher than being a member. This means that the UK will not be allowed to pick and chose the policies which it wants to plug into. If the UK wants more than a free-trade agreement, it will not be allowed a competitive advantage through lower levels of taxation, environmental standards or social security.

No one can blame Theresa May for wanting a “red, white and blue” Brexit, but the reality is dark grey, if not black. British negotiators have very little to lean on, legally or politically. The EU27 have been surprisingly united since the European Council at the end of June. And when it is in their national interests to remain so, the situation will not change.

As a pro-European anglophile and advocate of liberal democracy, I still pin my hopes on a second referendum on the new deal between the EU and the UK. In terms of overall impact, an exit in 2019 is much more substantial than entry in 1973. Forty years ago national sovereignty was perhaps a comfortable myth, today it is simply post-factual.

But even if I remain an eternal optimist, I think that Brexit is inevitable. When it does happen, it would be in everyone’s interest to manage the process in a civilised and orderly manner. With twenty years of experience in EU negotiations I hope for the best but prepare for the worst. When EU heads meet in Brussels on Thursday, they will be fully aware that Brexit could represent a new definition of suboptimal