Are we heading towards no deal, "blind Brexit" or something else altogether? We look at what to expect in the final months of the Brexit negotiations.
EU reaction to Chequers proposals
Although the EU has not rejected the Chequers proposals outright, it appears very unlikely that they will be accepted as they stand. For example, the EU is known to have serious reservations about the proposals for a "Facilitated Customs Arrangement" (FCA), which is the mechanism by which the UK would seek to maintain current levels of frictionless trade with the EU whilst at the same time being able to pursue its own independent trade policy. In particular, the EU regards the FCA as posing an unacceptably high risk of fraud, for reasons which we discussed in this article.
The EU has also expressed concern over the level of "cherry-picking" in the Chequers proposals, including how far goods can be separated from services (as noted in this article, the Chequers proposals effectively seek to replicate the benefits of being in the Single Market for goods, but not services).
A "blind Brexit"?
There have been suggestions that, given these difficulties, the expected political declaration about the future EU-UK relationship is likely to be an exercise in "constructive ambiguity" and will merely postpone difficult choices about the future relationship until after the UK has left the EU (the so-called "blind Brexit"). Such an approach could help to secure a deal on the Withdrawal Agreement and reduce the risk of a disorderly "no deal" Brexit in March 2019. However, this would be an extremely undesirable outcome for a number of reasons:
- the proposed transition period only lasts a little less than 2 years – but most of it is likely to be taken up with negotiations on the future relationship;
- as a result, businesses will not be able to use that time to prepare for the new relationship because they will not know what the shape of it will be – all they will be able to do is prepare for a possible hard Brexit in 2021 (if the negotiations fail); and
- at the end of the 2020, an extension of the transition period is likely to be needed in order to avoid a hard Brexit in January 2021; this will involve reaching agreement with the EU over additional payments into the EU budget (over and above the €39 billion exit bill) to pay for continued participation in the Single Market beyond December 2020.
The UK would thus be left in an extremely poor negotiating position and business would face continued high levels of uncertainty until 2021 and probably beyond.
How high is the risk of a no deal Brexit?
Some have argued that as the EU has a history of last minute deals, a no deal Brexit is unlikely – and that in many negotiations, the "hard talking" only happens at the eleventh hour. However, the unprecedented complexity involved in leaving the EU means that these are no ordinary negotiations. Our concern is that at this relatively late stage of the process, there may be too much to do in the very limited time available (see "What happens next?" below). In particular, complex issues that the parties had hoped to "put to bed" at an earlier stage – such as the "backstop" for the Northern Ireland border – remain "live" and limited progress appears to have been made in finding a mutually acceptable resolution. Moreover, the political environment in the UK remains extremely difficult and there is a risk that Parliament may reject any agreement reached between the UK government and the EU.
We therefore share the Bank of England's assessment that the risks of no deal are "uncomfortably high" - even if it is not the most likely outcome and both sides have indicated that they wish to avoid it. Our advice remains that businesses should hope for the best, but prepare for the worst – an issue brought sharply into focus by the UK government's recent "no deal" notices, which can be accessed here.
What happens next?
Key dates/stages in the Brexit process leading up to March 2019 (assuming that a deal can be reached) are as follows:
- 19-20 September 2018 – informal meeting of EU heads of state in Salzburg, where Brexit is expected to be discussed but it is very unlikely that the negotiations will have concluded by then.
- 18 October 2018 – European Council meeting at which Brexit may be discussed (originally, it had been hoped that the negotiations would have concluded by this point and the Council could signify its agreement in principle to the outcome, but this is now thought to be unlikely).
- November 2018 – assuming that agreement has been reached in the Brexit negotiations by November, an additional European Council meeting could be convened to approve it in principle.
- 13-14 December 2018 – European Council meeting; if the negotiations have not concluded by this point, then it is difficult to see how there would be sufficient time for ratification of the Withdrawal Agreement by the UK Parliament and the European Parliament (see below).
- Parliamentary ratification of the Withdrawal Agreement – whilst there is as yet no indication of the timetable for this in the UK Parliament, the European Parliament (EP) is reported to have scheduled its vote for the week of 11-14 March 2019 (which leaves very little time to salvage a deal should the EP fail to ratify the agreement). The timetable in the UK Parliament is also likely to be extremely tight as the legislation needed to give effect to the Withdrawal Agreement will need to be passed within a much shorter period of time than is usually allowed for a reasonably complex piece of primary legislation.
- European Council formal approval – the European Council would then need to meet to give its final approval to the Withdrawal Agreement (but this is expected to be a formality assuming that the relevant Parliamentary ratifications are in place).