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