Today’s joint report from the EU and UK negotiators confirms the progress made on the issues of citizens’ rights and the financial settlement. The crucial next phase of talks on the future relationship can now begin at last. Nonetheless, the solutions to the Irish questions still have the potential to shape Brexit for the UK as a whole.

Let’s start with the positives. Earlier this week it looked like the talks might fall apart. Both sides therefore deserve some credit for keeping the show on the road. This might not please either those hard-line Brexiters hoping for ‘no deal’, or the Remainers who want Brexit to be scrapped altogether. But the UK remains on course for a negotiated departure from the EU, which, in my view, offers the best chance of making the most of the opportunities and minimising the costs.

That said, the report emphasised that ‘nothing is agreed until everything is agreed’. The intention is to reflect the commitments made today in the final Withdrawal Agreement anticipated in Article 50.  However, it is still possible that UK leaves in March 2019 without a deal, so none of this is yet certain.

This means that the financial settlement still depends on getting a good deal, and the UK has retained the option of walking away without paying a penny. The lingering uncertainty about citizens’ rights is less welcome, especially if, like me, you think that the UK should already have guaranteed these rights unilaterally.

Fortunately, the commitments made on citizens’ rights should be the least contentious. The two sides have essentially agreed to preserve the existing rights of any citizens from the rest of the EU legally resident in the UK at the time of departure (i.e. March 2019, unless agreed otherwise), and the same for UK citizens living in rest of EU. This was widely expected, but welcome.

The report doesn’t add much to what we already knew about the likely financial settlement, either. The UK has agreed to continue to pay into the EU budget until the end of the current Multi-Annual Financial Framework in 2020 and, more controversially, to contribute its share of net liabilities thereafter, including the infamous Reste a Liquider (RAL).

We have now learned that the UK might only settle these future bills as they become due, particularly pension contributions, meaning that payments could continue for decades. Indeed, it may be a very long time before anyone will be able to put a firm figure on the cost of the settlement.

For what it is worth, though, the UK government is still hoping to keep the net bill below £40 billion. The EU has made some concessions consistent with a figure at the lower range of £40 – £55 billion touted earlier. This includes what is likely to be a more favourable time period for calculating the contributions to the RAL.

But whatever the precise number, the more important points are that this is money the UK would have had to pay anyway if it had remained a member, and potentially a fair price for a better deal on the future relationship. The usual annual contributions will also cease after 2020, and the accumulated savings will soon more than offset the cost of the divorce.

The biggest challenges are still those posed by the ‘unique circumstances’ of Ireland. One paragraph (49) of the report commits the UK to avoiding a ‘hard border’ between the North and the South and states that ‘in the absence of agreed solutions, the UK will maintain full alignment with those rules of the Internal Market and the Customs Union’ necessary to achieve this. However, the report (in paragraph 45) still takes it as given that the UK is leaving both the Internal Market and Customs Union.

At this stage, people can interpret this pretty much any way they like. Some commentators have concluded that the UK will inevitably be obliged to stay in both the Internal Market and Customs Union in all but name, as the only way of solving the Irish questions. This would, of course, prevent the UK from exploiting any of the benefits of Brexit.

However, it is surely far too soon to jump to this result. The outcome will depend on the negotiations over the future relationship between the UK and the EU, and on the feasibility of technical solutions to the Irish border questions, neither of which are yet known. The EU-UK report also leaves room for some regulatory divergence between Northern Ireland and the rest of UK, provided the key parties agree.

Overall, then, there is still all to play for. Being realistic, the statement today is probably the best that could have been expected. The talks over a future trade deal were always going to be the most important and can now finally begin. In the meantime, let’s wish the negotiators a very happy Christmas.

 

Julian Jessop is Chief Economist and Head of the Brexit Unit at the IEA. He has thirty years of experience as a professional economist in the public and private sectors, including senior positions at HM Treasury, HSBC and Standard Chartered Bank. Prior to joining the IEA in March he was a Director and Chief Global Economist at the leading independent consultancy, Capital Economics. Julian has a First Class degree in economics from Cambridge University and post-graduate qualifications in both economics and law.

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