The die is cast as Britain starts exit talks with the EU

Last week, nine months after Britain voted in a referendum, on 23 June last year, to leave the EU, the die is finally cast. The British Prime Minister, Theresa May, invoked Article 50 of the Lisbon treaty and sent a letter to the president of the European Council, Donald Tusk, notifying him of the UK’s intention to withdraw from the EU. This will end Britain’s 44 -year political marriage to Europe, triggering arguably the biggest political shake up since the Second World War!

With the notification, Britain will almost certainly leave the EU by April 2019, at the end of the two-year period allowed for the exit negotiations. But the political divorce will be difficult and acrimonious, rather than amicable. Some EU leaders would like to “punish” Britain to deter other member states from leaving. Even if there is no desire to punish, there is certainly the view that Britain mustn’t be allowed to enjoy the same benefits as those members that remain in the EU. As the French President, Francois Hollande, put it, “the UK could not exit the EU while holding on to any of the perks of membership”.

The British are, of course, not naïve. They are aware of the bruised feelings among EU leaders. Which is why the prime minister’s letter was remarkably conciliatory, even though it also sets out bold ambitions. Prime Minister May was at pains to point out that Britain is “leaving the EU, but not Europe”, and that the Brexit vote was “no rejection of the values we share as fellow Europeans”. She praised the EU and its leaders for restoring war-torn Europe to sustainable peace and democracy, adding that “perhaps now, more than ever, the world needs the liberal, democratic values of Europe”. But you might wonder: if Britain holds such positive views about the EU, why then is it leaving the union? Well, according to the prime minister, Brexit was a vote “to restore our national self-determination”.

And central to this “self-determination” is Britain’s desire to have control over its borders and its laws rather than have them controlled by the EU, a supra-national body. But the EU is effectively the “government” of Europe, and if Britain is no longer subject to EU’s legal and institutional controls, it may be denied full rights to participate in the European economy. For instance, a country can only gain full and unrestricted access to the EU single market, the largest in the world, if it’s an EU member-state or if, like Norway, it’s not a member-state, but subject to EU laws and regulations.

But the UK has decided not to be part of the single market, the current destination of over 40% of its exports, given the EU’s insistence that “the four freedoms of the single market are indivisible” and can’t be “cherry-picked”. Of course, control over immigration – the freedom of movement – is one of the fundamentals of Brexit, and the British government can’t trade it even for access to the single market. But this has consequences, for as the prime minister said in her letter: “We know that we will lose influence over the rules that affect the European economy”.

So, without membership of the EU and the single market, how does Britain intend to engage in the European economy post-Brexit? Well, the UK is seeking a new “deep and special relationship” with the EU. Specifically, it wants “a bold and ambitious free trade agreement (FTA)” with the bloc. The UK wants this bespoke FTA to give it “the freest and most frictionless” access to the EU market. But how possible is such a deal? Well, there are few major hurdles. The first is the sequencing of the Brexit negotiations. For the UK, negotiations over its withdrawal from the EU should be conducted alongside those over future trade relations. But EU leaders want to focus on the divorce settlement first before discussing future relations. As the German chancellor, Angela Merkel, made clear, “The negotiations must first clarify how we will disentangle our current interlinked relations. Only then can we, hopefully soon after, talk about our future relationship”. Indeed, the EU’s draft negotiating mandate states that trade deal with the UK will only be discussed if progress is made on the Brexit divorce talks.

But the EU-UK divorce talks can be so messy that it poisons the atmosphere for the negotiations of future trade relations. This is because, like all divorce negotiations, it will be dominated by two difficult issues: money and custody. On the first, the EU wants Britain to make an upfront payment of €60 billion. This is the money that EU leaders say Britain owes as its current commitment on the EU budget. Without such payment, the EU will have a big hole in its budget and unable to fund many of its projects. The second issue concerns the residency rights of 3.3 million EU nationals currently leaving in the UK, and the 900,000 or so British citizens leaving in EU countries.

These two issues are politically sensitive. For instance, while the UK accepts that it might have to make some payment to the EU, it doesn’t believe it owes anything remotely close to the amount being touted by EU leaders, and will find it politically difficult at home to make such a huge payment. Similarly, while both the EU and the UK are sensitive to the rights of each other’s citizens in their territory, negotiations about the specific detail of how to protect these rights might prove difficult and be used as a bargaining chip in the talks. Yet, the truth is that without the money and residency issues being resolved quickly and amicably, negotiations over a trade deal may go nowhere!

The second major obstacle to a comprehensive trade deal is also political, and turns on the level of goodwill and trust between both parties. Technically, there is no reason why both the EU and the UK can’t agree an ambitious and comprehensive FTA. After all, the UK currently has exactly the same rules, regulations and standards as the rest of the EU. So, there is already regulatory convergence between the two parties, and, according to a bill introduced in the UK parliament last week – the Great Repeal Bill – Britain will convert all existing EU laws into UK law so that “the same EU rules and laws will apply in Britain on the day after Brexit as the day before”.

But would this guarantee a comprehensive trade deal? Well, no, because, as noted above, EU leaders may not want Britain to enjoy the same market access as the remaining 27 member states. Secondly, even though there is regulatory convergence now, EU leaders are concerned about divergence later, especially if the UK pursues a policy of low taxation and low regulation and standards, which could undermine the competitiveness of the EU economy. As a condition for a deal, the EU may insist that the UK must accept oversight and scrutiny of its policies and regulations, including by the European Court of Justice. But such EU oversight and control may be politically unacceptable to the UK. The result of such an impasse will, of course, be no trade deal!

To be sure, a comprehensive trade deal is impossible in two years, but unless there is a framework agreement at the end of the Brexit negotiations in 2019, both parties would revert to trading on WTO terms. As I pointed out in a presentation that I gave last week, this would disrupt trade harmony between the EU and the UK. Yet with goodwill, trust and a spirit of cooperation, a bold and ambitious deal that avoids “hard borders” can be done. So, good luck EU and UK!

Olu Fasan