Government and Institutions

The PM’s Florence speech is helpful, but all still to play for

Mrs. May’s latest Brexit speech provided some welcome clarity on the UK’s preferred transitional arrangements and puts the ball back firmly in the EU’s court. The speech was also refreshingly upbeat about the future relationship. However, the result of the match remains in doubt.

Forgetting the politics and personalities for a moment, the Brexit talks have actually been making some headway, particularly on the status of Northern Ireland and citizens’ rights. But the EU had created a stumbling block by refusing to discuss the future economic relationship with the UK until there has been ‘sufficient progress’ on the financial settlement. This has made it impossible to begin negotiations over a comprehensive free trade agreement, or the transitional arrangements that will apply in the interim.

The offer to pay the UK’s contributions until the end of the current EU budget period in 2020 is therefore fair and reasonable – and consistent with what the IEA Brexit Unit proposed back in June. Admittedly, the final bill is likely to be nearer €30bn than the €20bn now being mooted in the press. But the UK would have to pay this amount anyway if it remained an EU member, and continue paying large annual bills thereafter. The ‘divorce bill’ is not an additional cost of leaving.

Nonetheless, the UK must get something in return for its flexibility. After all, the UK would be on strong legal ground if it decided to walk away without paying a penny. The Prime Minister is therefore right to link this offer to a two-year transition period retaining the main elements of both the Single Market and the Customs Union. Note that both sides had always anticipated some sort of transitional arrangements, so this is not a U-turn. What’s more, the aim is to negotiate a bespoke deal for the UK, rather than settle for an off-the-peg arrangement that simply replicates the position of Norway or Switzerland.

Of course, some will regard this as simply kicking the can down the road. But another two years after March 2019 should be long enough to agree a comprehensive free trade deal and ease fears about a cliff-edge Brexit. Given that uncertainty is already holding back investment in the UK and prompting some firms to relocate, this reassurance cannot come too soon.
The details of the transition still need to be negotiated. The entire world has ‘access to the Single Market’, so for this to be worth paying for the UK’s access must be tariff-free. This begs the question of the obligations that will come with this – including free movement and accepting EU regulations.

Similarly, continued membership of some form of Customs Union might minimise non-tariff barriers. But it would delay the point at which the UK can implement its own free trade deals with the rest of the world, or be able to lower prices for UK consumers by cutting tariffs on imports unilaterally.

A two-year wait here is not a game-changer. Nonetheless, the UK’s long-term future should lie outside both the Single Market and the Customs Union. It is essential that any transitional arrangements are indeed time-limited and not a backdoor to continued EU membership. Compared to this, the precise amount of the financial settlement or the length of the transition period are a sideshow.

Finally, all this depends on the EU showing some flexibility too. The EU will still have to decide whether the Prime Minister’s offer on the financial settlement and further commitments on citizens’ rights represents the ‘sufficient progress’ necessary to begin to discuss the future economic relationship. But the Florence speech does feel like a major step forward.

Julian Jessop is an independent economist with over thirty years of experience gained in the public sector, City and consultancy, including senior positions at HM Treasury, HSBC, Standard Chartered Bank and Capital Economics. He was Chief Economist and Head of the Brexit Unit at the IEA until December 2018 and continues to support our work, especially schools outreach, on a pro bono basis.

2 thoughts on “The PM’s Florence speech is helpful, but all still to play for”

  1. Posted 23/09/2017 at 15:23 | Permalink

    It seems to me that May’s speech, like the activating of Article 50, is about the Fixed Term Parliaments Act not the conduct of the negotiations. To avoid the destruction of Brexit at the hands of an electorate becoming aware of the costs (and the growing boom in the EU due to this phase of the raw materials cycle), the Europhobes had to get the job done by 2020, hence the premature activation of Article 50.

    May’s calling of a general election, despite the Pyrrhic victory does give the Europhobes an extended window to deliver a more coherent transition in a two speed Europe, damage limitation exercise. Hence the conversion of people like Davies to a transition period. It is still scheduled to end before the election to avoid potential extensions and reversals. This is needed because they face Vince Cable now, not Tim Farron and Corbyn now has a winner’s reputation that will be hard to erase. A transition period also removes UKIP for good as their MEP’s and thus their finance disappear at the end of Article 50 time. These are the factors that matter for politicians not the actual terms of the negotiations. So how many Tory MP’s are old enough and fat enough to be at risk of early death? This is the key element to the completion of Brexit under terms Farage would recognize. Even as a minority, the Tories will still shelter behind the Fixed Terms Parliament Act to preserve their rule and Brexit but every month that happens will destroy their electoral support.

    Every other party will vote for a further extension to the negotiations, even the DUP. The longer the extension period, the more the UK’s post 2014 oil shock performance will be exposed. The raw materials peak pricing from 2008 to 2014 is over. China’s workforce peaked in 2011.

  2. Posted 25/09/2017 at 10:26 | Permalink

    Surely if we stay in the customs union then we face continued restrictions on opening ourselves up to international trade with non-EU countries. It seems hardly likely that Britain would be able to encourage imports from outside the EU during such an agreement as that would then give us an advantage vis-a-viz other countries in the EU. The whole point of a customs union is to avoid such competition.

    If we are not allowed to trade outside the EU then where are the benefits of Brexit? No competitive boost for UK companies so no structural change to the British economy so no uplift for GDP. No cheaper products for British consumers to help raise their standard of living.

    To me a transitional deal sounds like a delaying tactic designed to put off departure in the hope that there will be both a change in the leadership of the conservative party and the mood of the electorate to one more predisposed to closer union with the continent.

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