Brexit Briefing No. 55: Rumours swirl around Brexit deal (Week Beginning 8th October 2018).

This article has been kindly given to the SSCA by Daniel Dalton MEP, Conservative MEP for the West Midlands (daniel.dalton@europarl.europa.eu).

It has been a rollercoaster few months laden with speculation on which way the Brexit winds were blowing. Earlier this week was no different. On Monday and Tuesday, diplomats were briefing that a deal was tantalisingly close to being agreed. Negotiators were hunkered down inside the European Commission's Berlaymont building, trying to hammer the details of the withdrawal agreement. While there were no meetings between EU chief negotiator Michel Barnier and his British counterpart Dominic Raab, the Prime Minister’s top Europe advisor Olly Robbins was spotted in Brussels after holding talks with the EU’s deputy negotiator Sabine Weyand.

It has been a time-old EU tradition, that at the last possible moment, after months of the negotiations seemingly going nowhere, white smoke would rise and an agreement would be found. At the time of writing on Friday morning, we are no closer to knowing whether a deal will be announced next week. Officials in both Brussels and London were keen to downplay their earlier optimism, with Michel Barnier himself telling business leaders that the deal was 80-85 percent done. 

However, it is worth reminding ourselves that this is only a deal on the withdrawal, or divorce, agreement. We are a long way from knowing what the final UK-EU trade relationship will look like. More importantly, it is not clear if any deal struck in Brussels can survive once it returns to the UK Parliament. 

The main sticking point has been the Irish border and how to avoid a hard border between the Republic and Northern Ireland, whilst also avoiding an East-West border between Northern Ireland and the rest of the UK. 

Another key issue linked to the border problem is the so-called backstop. The government argues it should apply to the whole of the United Kingdom, rather than just Northern Ireland as the EU suggests. 

The backstop is an insurance policy, which the EU wants to keep the border open and frictionless in case future trade talks break down. It involves the UK staying in the customs union and Northern Ireland staying in the single market for goods with some enhanced checks for goods exported from Great Britain to Northern Ireland. 

It will apply (if the EU gets its way) indefinitely. The UK is still pushing for a time-limited backstop. The two sides have not yet agreed on this point but for the UK this is very important. If they sign up to an unlimited backstop until a trade deal is agreed, the backstop may become the permanent solution, with the UK stuck in the customs union permanently and checks between Great Britain and Northern Ireland a permanent feature. 

This week’s move has been part of an attempt to persuade EU leaders to agree that there has been “decisive progress” on this divorce deal when they meet at an EU summit in Brussels on the 17th and 18th of October. That would allow them to schedule a special Brexit summit in mid-November that will focus on a political declaration on what the future relationship between both sides should look like after the UK leaves the EU. After that the whole agreement will need to be approved by the remaining 27 EU governments. If a week is a long time in politics, the next month will seem like an eternity.

The British government is reluctant to sign up to any divorce deal which doesn’t include at least some vision for the future trade deal, especially considering that the UK will agree to stay in the customs union until a trade deal is finalised. This could take up to a decade. 

Herein lies the huge issue. A fudge deal on future trade might be enough to get the withdrawal agreement over the line during late night summit wrangling in the Belgian capital, but it will not persuade British MPs to agree to pay the £40 billion divorce payment without a clear idea of what the trade deal will look like and whether Northern Ireland will be included in it or not. 

Given that the trade deal is likely to take a long time to finalise, with all 27 national and several regional parliaments and the European Parliament having to ratify it, the backstop compromise could well govern EU-UK relations for the foreseeable future, well beyond the proposed end date of the transition in December 2020 and could become a quasi-permanent State of affairs. 

It also limits the scope of a trade deal, as any deal would have to ensure the Irish border stays open otherwise the backstop would kick in again, and that limits how far the UK could diverge from EU rules, standards and trade relations. 

The still unresolved problem is that Michel Barnier, backed by the 27 remaining EU governments, will not accept a time-limited backstop. They argue that the Good Friday agreement requires a non-conditional safeguard that would hold up under any circumstances. However, what is really at stake here is the EU’s single market. Allowing the UK to diverge too far on regulatory and customs checks, risks undermining the single market as cheaper goods from trading partners, such as China, could get into the EU over the Northern Irish border, into Ireland and then into the EU. 

This is why the EU is doing all it can to keep the UK in the EU customs union. This would suit Brussels, but would be disastrous for the UK. The country would be unable to strike its own trade deals, but it would also not benefit from EU trade deals for exports from the UK.

It is also why the EU is far more open to the customs partnerships proposals contained in the Chequers proposals than is sometimes reported in the UK. The talk in the corridors of Brussels is that this part of the Chequers agreement (the “facilitated customs proposal”) could be the basis for a future deal. 

It is the other main part of Chequers which is problematic for the EU. It calls for frictionless trade in goods, but not for services, which make up some eighty percent of the UK economy. However this opposition also feels soft, as virtually all the EU trade deals are heavy on goods but light on services.

Even within the single market, services legislation is far less integrated than it is for goods. In many cases, especially in the digital world, you do not actually need a trade deal in order to sell services into the EU. The US, for example, does not have a bilateral trade deal with the EU. Yet it is the biggest external provider of services into the EU.

The reality is that the UK is highly competitive in services and the EU would find it difficult to keep UK services out of the EU market even without a trade deal, given the competitiveness of the UK sector. The EU position is likely to be more about keeping the UK aligned to EU services rules (which are and will become increasingly restrictive) in order to blunt some of the British competitive advantage in services. The last thing the EU wants is an independent services superpower right on its doorstep.

When and if a withdrawal agreement comes, the story does not end there. The deal then returns to Parliament. There are many indications that an agreement along the lines described above will face challenges passing the Commons. The Northern Irish Democratic Unionist Party (DUP) have ten MPs and currently have a confidence and supply agreement with the government. Without that agreement, the government does not have a majority. They have already indicated their concern about the rumoured deal that is emerging, as have some Conservative MPs. It is not clear yet how the government will get the numbers to pass the deal in Parliament, although some Labour MPs are support it. 

Given the fact that it is now less than six months until the UK leaves the EU, if the deal does not get through Parliament it is virtually impossible to predict what would happen. As has been the case from the start, the final course of Brexit will be decided in London. Any deal made in Brussels will just be the starting gun for the domestic debate across the UK which will ensue over the next few months.

Daniel Dalton MEP