Now for the Real Fight: Why the Brexit Bill Is the Easy Part

  • U.K. and EU have different expectations from trade talks
  • Britain needs to define what regulations it wants to follow

U.K. and EU Agree to Outline on Brexit Divorce Bill

As negotiators close in on an agreement over the Brexit divorce terms, the long-awaited prize of trade talks comes into view. That’s where the real fight begins and the U.K.’s hopes for a tailor-made deal from its estranged ally will be put to the test.

German Chancellor Angela Merkel has already warned that talks about the future relationship will be “incomparably more difficult than the first stage,” which dealt with the financial settlement and other separation issues.  

The first obstacle is that the two sides are approaching their future relationship with wildly different expectations: the U.K. wants to keep as much of the status quo as possible even as it leaves the club and its rules behind. The EU is offering a deal like the one it gave Canada, which is the best in its class but well short of what the U.K. has now.

“In the U.K., there is an expectation that the bill offer is conditional, and that it will buy a good trade deal, which is not how the EU sees it,” Fabian Zuleeg, Chief Executive and Chief Economist at the European Policy Centre in Brussels, said in an interview. That means the divorce bill will come back on the table.

The U.K. will need to decide what kind of country it wants to be: does it want to keep its rules on things like food and agriculture aligned with Europe or would it prefer to break free? Plenty of Brexit-backers want to take advantage of the split to loosen regulation, even as Prime Minister Theresa May pledges it won’t happen. EU chief negotiator Michel Barnier warned Britain last week that the decisions it takes on social, consumer and environmental standards will affect the kind of trade deal on offer.

Vague Direction

The two sides will also struggle to get into much detail on trade in the time available. They only have until October 2018 to hash out an outline deal so that it can get ratified by the European Parliament before Brexit day in March 2019. The U.K. says it will get a “heads of agreement” on the trade deal sorted by the time it leaves and wants the full agreement signed shortly after.

But it’s more likely that just a “vague direction of travel” toward the new relationship will become visible by exit day, according to Zuleeg. As the U.K. won’t get much clarity on the future access of its financial services industry to the EU’s market, it will be difficult to agree to concessions. In EU negotiations, “nothing is agreed until everything is agreed,” which means an angry walkout remains a risk.

The complexities of reaching a free trade deal mean transition -- the grace period that will let businesses prepare for Brexit -- will last much longer than two years, according to Charles Grant, director of the Centre for European Reform. During transition, the U.K. will have to accept all the EU’s rules while having no say in making them -- politically not a very attractive situation.

“The EU and the U.K. will both pretend that the transition will last for only about two years. In fact it will take much longer,” he said in a note.

But a limbo in perpetuity however is neither legally nor politically feasible, according to Zsolt Darvas, a senior fellow at the Brussels-based Bruegel think-tank. British politicians wouldn’t accept being a rule-taker for ever. At some point, the U.K. would either have to re-apply for EU membership or fall back to WTO rules.

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