Brexit — a story with a beginning, but no end in sight
On June 19 the Brexit negotiations officially started with an exchange of token gifts between the two chief negotiators — David Davis for Britain and Michel Barnier for the EU. The two gentlemen also exchanged pleasantries, but the negotiations threaten to become anything but pleasant down the line.
Let us backtrack. When Theresa May invoked Article 50 on March 29, 2017, everything looked clear. The hardliners had the upper hand in government. Much to the chagrin of business circles fearing for their access to the common market, the prime minister touted phrases such as: “Brexit means Brexit and we are going to make a success of it.” This rhetoric, while lacking in substance, probably helped her keep the staunch Brexit supporters on her side.
For the EU things looked different. In the bloc there are four movements in which freedom is guaranteed: The movement of people, goods, capital and services. Even if the UK government felt it could still get reasonable access to markets without allowing for the movement of people, this will prove to be a sticking point for the EU negotiators. The UK side used rather harsh rhetoric and made plenty of unilateral declarations, with May saying: “No deal is better than a bad deal.” The EU negotiators also dug their heels in on the sequencing of the negotiations and the exit bill for the UK. The two parties had been talking at cross purposes long before they started negotiating.
In April, the prime minister had declared a general election with much hubris. She had sought a clear mandate for her Brexit negotiations. This backfired big time and now May is set to rule in a minority government aided and abetted by the Democratic Unionist Party (DUP) — a small pro-Britain party in Northern Ireland.
The new political constellation has brought to the forefront the debate over what sort of Brexit the UK should aspire to. Politicians who had fought to remain in the EU have more sway now; for example, Chancellor of the Exchequer Philip Hammond earlier expressed caution over the UK leaving the customs union. Many of the forces favoring a “soft” or no Brexit had gained the upper hand during the election.
Whereas many “Remainers” and business leaders may rejoice that a certain degree of reason has re-entered the debate, this may be too little and is certainly much too late. After invoking Article 50, the UK has two years to extricate itself from the EU. Three months have already passed. The EU chief negotiator Barnier had pointed out as early as March that the two-year timeframe was more like 18 months, once the time for ratification and preparatory work are taken into account.
Unless the UK and EU start talking to each other rather than declaring their own visions unilaterally, the negotiations are a train-wreck waiting to happen.
While the starting salvo was friendly, the negotiations will prove extremely complex. The EU Canada Comprehensive Economic and Trade Agreement (CETA) may serve as a comparator; it passed the European Parliament in February 2017 after taking more than eight years to negotiate.
The EU seems to be ahead regarding the process so far. Despite the UK’s insistence to start negotiations on all issues in parallel, the negotiators will now initially focus on the UK’s exit bill, the rights of EU citizens in Britain and those of UK residents in the EU. The tricky situation of the border between Northern Ireland and the Republic of Ireland will be addressed separately by the two deputy chief negotiators. Only then will the future economic relationship between the UK and the EU be discussed.
Disentangling Britain from the EU will be far more complex given that the country’s trade in goods and services is completely integrated with the European bloc. It will have huge ramifications for automotive and other manufacturing industries, which are integral parts of the EU supply chain and vice versa. The City of London fears for its right to clear euro-denominated transactions. Thousands of employees in the financial industry will potentially have to be relocated to financial centers in the EU. Frankfurt, Paris, Dublin and Luxembourg have great expectations of expanding their reach. Big institutions such as Deutsche Bank have a big headache, because they need a clear time horizon in which to decide if they need to move people and systems — something that cannot happen overnight.
Meanwhile, “Remainers” and “Leavers” are locked in verbal battles within the UK, while the EU negotiators have not seen a clear road map from the UK government.
Unless the two sides start talking to each other rather than declaring their own visions unilaterally, the negotiations are a train-wreck waiting to happen. It is true that the UK runs a trade deficit of £60 billion ($76 billion) with the EU, and therefore it is in many EU companies’ interests to get things settled. However, the EU constitutes a 44 percent share of the UK’s total exports in goods and services. London’s status as the world’s premier financial center is also at stake. One could argue that both parties have an interest in reaching an amicable solution, but will they have enough time to get there?
• Cornelia Meyer is a business consultant, macro-economist and energy expert. She can be reached on Twitter @MeyerResources.