After five rounds of negotiations on Brexit between UK and European Union (EU), the process of Britain’s exit from EU remains entangled in ambiguity and chaos, both political and economic. Ideally, the negotiations should have moved to the second phase covering the transition period after UK exits EU in March 2019 and future trade relations between the two sides. Instead, the talks which began on June 19 – after the June 8 snap poll in UK in which Prime Minister Theresa May lost the advantage of a simple working majority – are still stuck on three key issues: rights of UK and EU expat citizens after Brexit, divorce bill amount and what happens to the Northern Ireland border.
As Brexit talks are caught at the same point they have been for many weeks, business communities in UK and Europe have urged the UK prime minister to break the impasse before December. However, EU remains insistent on clarifications regarding UK’s financial obligations if future trade talks are to go ahead in December. EU’s chief negotiator, Michel Barnier, has said that ‘a failure of negotiations would have consequences on multiple domains’, though failing to reach an agreement with the UK is not his preferred option. While UK has argued that a deal on the citizens’ rights is not ‘far away’ and ‘solid progress’ has been made on Northern Ireland border issue, the divorce bill is proving to be a sticking point.
In her Florence (Italy) speech two months ago, Mrs May had opened the door for the UK to contribute about 20 billion Euros to the EU budget in 2019 and 2020. She had also added that the UK ‘will honour the commitments we have made during the period of membership’. But EU negotiators want to know far more details than a mere vague promise. Looming in the background is the EU money that has already been committed to projects in the long-term budget but has not been spent so far: 239 billion Euros. This could mean a UK share of more than 30 billion Euros. The EU is not asking for an exact figure to be agreed but for a guarantee within the negotiating process that ‘honouring commitments’ means ‘all commitments’, that includes all long and short-term commitments made while an EU member. So, money is what it boils down to.
Despite the deadlock, both sides are keen on accelerating the negotiation process and prepare for discussions on future trade deals. Reports suggest that the EU may extend the status quo by two years after March 2019. In other words, after Brexit Britain will be out of Eurozone’s political union but will be inside the existing economic arrangements. This means that UK will have to honour all its EU budget payments, EU regulations as well as the jurisdiction of European Court of Justice, a highly contentious issue between pro and anti-Brexit factions in UK. Given the close verdict of referendum on Brexit – 52 per cent for ‘Leave’ versus 48 per cent ‘Remain’ – the economic consequences of Brexit worries those who voted ‘Remain’ and rankles many of those who voted ‘Leave’.
On the eve of the Brexit vote in June last year, the UK economy was expanding faster than Germany, France, Italy, the US and Canada. After the referendum, Britain has gone from being the fastest growing economy in the G7 to one of the slowest. Last week, Bank of England governor Mark Carney warned that Brexit will hurt the UK economy and damage people’s finances over the next 2 to 3 years. Carney also suggested uncertainty about UK’s potential for growth amid stumbling negotiations between the UK and EU and hinted at gradual rise in interest rates in the relatively near term. As uncertainty surrounding UK’s departure from the EU continues, Carney said productivity has been flat because businesses have been put off from investing.
Despite a strengthening and broadening global economic recovery, financial experts are of the view that the relative deterioration in UK economy and accompanying fall in living standards as well as depreciation of pound over the past year are a consequence of a vote to leave EU. A ‘no deal’ or hard Brexit – according to Baker McKenzie report produced in conjunction with consultants Oxford Economics – would be hugely damaging for four sectors which make up 42 per cent of the UK’s manufacturing GDP and 45 per cent of manufactures exports to the EU. The report also claims that increased costs brought about by the introduction of tariffs could result in EU consumers switching to domestically produced alternatives or to a different exporting country. The impact would be most pronounced in the consumer goods and car sectors. It’s not difficult, therefore, to understand why there is mounting pressure on UK to negotiate a new customs arrangement for post-Brexit trade with the EU.
If the money issue is not put to rest and UK fails to bring clarity on its financial obligations to EU in coming weeks, the possibility of EU talking to UK on trade and transition appears difficult. If the December summit is missed, the earliest talks of a future UK-EU trade relationship could start would be in March 2018, the next EU leaders summit. March 2018 would be one full year after the UK triggered Article 50, the formal process to leave EU. That’s also six months from the time the EU wants to close Brexit negotiations in order to be able to vote on any agreement reached. While Brexit time is running out, experts believe that even if the terms of separation are agreed in December, the negotiation on future relationship is likely to prove much harder. The broader consensus is that if Britain gets a deal, it will come at a price.
The impact of Brexit on the UK economy can be assessed in three scenarios: soft Brexit, FTA and hard Brexit. In case of soft Brexit, the UK remains part of the EU single market but leaves the customs union. This will cost the UK economy about 10 per cent of GDP growth until 2030. If UK signs a bilateral trade agreement (FTA) with the EU – similar to the FTA between Switzerland and EU – it will cost UK roughly 12.5 per cent GDP growth until 2030. However, if UK leaves EU without a trade deal in place (hard Brexit) it will cost UK roughly 20 per cent of GDP growth until 2030, compared to a situation where UK would continue its EU membership. Whatever the deal, one thing is for sure: more than EU, the bigger loser will be Britain.
The author is an independent senior journalist.