Could Brexit Be Delayed to Give the U.K. Transition Wiggle Room?

  • Officials question if Article 50 deadline could be extended
  • Prolongation would also allow more time to negotiate deal
Burnbrae's Mellon Sees 90% Chance of 2017 Brexit Deal

European Union officials have started questioning whether the U.K. could remain a member of the EU beyond March 2019 as a smoother alternative to a transition deal.

Prime Minister Theresa May said in September that she wants a bridging period of around two years so that businesses have time to adapt to the new regime. Under the current plan, this would be a formal interim phase agreed as part of the overall Brexit deal to take effect after Britain leaves in 17 months’ time.

That’s still the most likely option but it comes with difficulties, not least the tight deadline for any agreement. Businesses are screaming for certainty and even if a transition deal is agreed early next year, its legal status would be fragile: in the event of a no-deal Brexit, the transition arrangement would suddenly be void. That’s because in EU talks “nothing is agreed until everything is agreed.”

Now officials have started floating other ideas, including extending the U.K.’s EU membership to cover what would be the transition period. Germany’s Council of Economic Experts, which advises the chancellor, backed the idea on Wednesday.

The Brexit Bill and Whether Britain Will Pay Up: QuickTake Q&A

While it wasn’t discussed during the first meeting of EU diplomats on the topic on Wednesday, the longer talks remain in deadlock, the more likely it is that alternative options will be explored, diplomats said on Thursday. The proposal would be a difficult sell in the U.K., where May has pledged Britain will be leaving in 2019, and the pro-Brexit camp would see in the proposal a plot to thwart the divorce.

This is how it could work:

  • The Article 50 process -- the two-year timeframe for negotiating Brexit that’s due to end in March 2019 -- would be extended. Unanimous approval from the EU27 would be needed.
  • The U.K. remains a full EU member.
  • Negotiations on the future trade deal would continue with the U.K. as a member.
  • The Brexit agreement -- including the payment the EU is demanding -- wouldn’t take effect until after this period, rather than in March 2019. By that time, the financial settlement demanded by the EU will probably have fallen as much of the bill stems from commitments made in the past but not yet paid for. If the U.K. were to prolong its membership, that sum would fall as those outstanding projects get funded.

While the opposition would be huge in the U.K., the option is gaining some traction in Europe. Germany’s Council of Economic experts said it would be “sensible.”

“This would prevent an abrupt, hard exit by the United Kingdom, with high economic costs for all concerned, that are difficult to assess. In addition, the extension would defuse a contentious negotiating point, namely the EU’s demand for a separation agreement with a one-off payment for financial commitments already entered into.”

For now, a formal transition period agreed as part of the Brexit deal is still the only option on the table. But as the U.K. government’s position on transition remains unclear, businesses’ cries for clarity grow louder.

    Before it's here, it's on the Bloomberg Terminal.