Confused About Brexit? Don't Be: Here's What Comes Next For The UK

With the locus of Brexit-related squabbling drifting back toward the Continent this week, it's important to remember that Spain's threats about opposing the Brexit plan over Gibraltar (and France, the Netherlands and Belgium's threats about opposing it over access to UK fisheries) are only a temporary distraction.

The EU doesn't need unanimity to approve the final Brexit treaty and accompanying 'political statement' (though the EU parliament will need to approve the deal after the UK, and any final trade deal reached at the end of the post-Brexit transition period would require unanimous approval by the member states), and while the EU has placed tremendous emphasis on presenting a united front, it's doubtful that the negotiators and sherpas who have put so much effort into hammering out the current 580+ page draft deal (and the accompanying 26 page framework for negotiations on a post-Brexit trade relationship) would let all of that work go to waste. According to the most recent batch of media reports surrounding the negotiations, the fisheries issue has been resolved (though the details haven't been released). And it's still unclear whether the deal struck by Europe will be accepted by Scottish Tories who have already sent one letter threatening to sabotage the whole thing if the UK doesn't commit to blocking European fishermen from Scottish fisheries.

May

But assuming the Brexit plan is finalized on Sunday at the planned weekend summit, on Monday, the focus will almost certainly shift back toward Theresa May and her increasingly fraught relationship with Brexiteers within her own party. May's internal opposition is already near the threshold needed to force a leadership challenge within the conservative party. Most of their objections are related to the wording of the 'Irish backstop', which has caused a lot of trouble for a piece of the agreement that's designed to, under ideal circumstances, never come into effect. According to the current terms, if no deal is reached, the UK would remain in a customs union with the EU until both sides sign off. That, according to the Brexiteers, would risk leaving the UK stuck as a "vassal state" under the thumb of a possibly vengeful EU.

And with the March 29 'Brexit Day' looming ever closer, May is quickly running out of options (even her attempt to win Tories over with the so-called "fantasy unicorn" option of possibly replacing the backstop with a commitment to leverage technology that hasn't even been invented yet to prevent a hard border on the island of Ireland failed to placate her Brexiteer colleauges). The EU, for its part, has said it is done negotiating, and it's unclear what, if anything (aside from an imminent no-deal Brexit), could entice them to return to the table.

Time

With that in mind, May and her Continental counterparts have probably already started looking at the different permutations of what could happen in Parliament over the next week. Before we embark on this treacherous journey through the minutiae, here is Citi's ironically chaotic flowchart for the next steps...

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To that end, Bloomberg has created a handy guide, which we have augmented with some additional commentary and charts. Here are some of the most probable outcomes assuming May can't get the draft Brexit plan passed during a vote expected next month.

Go Back to Parliament

By now, anybody who has been paying attention to the increasingly tedious Brexit drama probably understands that the only person who believes that the draft plan can pass Parliament is the prime minister. If she brings it up for a vote in the House of Commons next month, she will probably lose. If she does, she could wait for what many expect will be an "adverse market reaction" to effectively threaten her rebellious Tory colleagues into falling in line (in a scenario that has been compared with the passage of the TARP package in the US back in 2008). May's line would be: The EU has closed the door on future talks. This is the deal. It's not changing. It's this, or a "no deal" Brexit that would risk total unmitigated chaos.

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However, a plan that's so totally dependent on an adverse market reaction could be thwarted by markets just as easily.

Go Back to the EU

Parliament has sent a message: This doesn't work for us, we want more. So May goes back to Brussels, hat in hand, and asks for more. It's possible Brussels could try and sweeten the deal. But the likelihood that a dramatic change surrounding the backstop can be made is low.

May Quits

She's had enough. So much for the "national interest", May has given this thing her all, and has decided to quit while she's ahead. The Tories would hold an instant leadership election. Whoever wins would be faced with much the same options. May has said she has no intention of resigning.

As a reminder, here's a chart showing the most popular politicians in the UK (courtesy of Statista).

Infographic: The most popular political figures in the UK | Statista

You will find more infographics at Statista

Conservative Confidence Vote

Rebellious Tories came close last week to securing the 48 letters of no confidence needed to force an intraparty leadership challenge.

If they succeed in securing that number, a leadership election will be called. It's widely expected that May would win. But if for whatever reason the vote count turns against her, it's likely she would resign. If she wins, her grip on power will be secure - Tories won't be able to call another no confidence vote for a year. But nothing material will have changed.

Government Confidence Vote

Now we're starting to get into the more extreme possibilities. Only seven Tory turncoats would be needed to join with the opposition to call a general government-wide confidence vote. The Fixed Term Parliaments Act says that if the government loses a confidence vote in Parliament, it has 14 days to win one. If it doesn't, another general election must be held. That could take months. Members of May's government have said in the past that if they lost the Brexit vote, they could call a confidence vote. However, Brexiteers have said in response that, while they'd be happy to kill the draft Brexit plan, they wouldn't risk voting down the government. By rebelling against the government, turncoat Tories would risk being expelled from the party. Then again, the 10 DUP MPs who have repeatedly expressed their frustration with the deal could also bring down the government.

The failure of May's government, and an ensuing general election, would likely mean chaos in markets as the 'uncertainty' that May often speaks about would be ratcheted up to absurd new heights.

Second Referendum

If Parliament can’t decide, then give the people another shot. May has repeatedly insisted that there won't be another referendum under any circumstances. But Wall Street has put the probability of a second referendum as high as 30%.

Even if another referendum was called, it would take months to hold a vote. So the EU would need to extend Britain’s negotiating period. And Parliament would need to make certain considerations.

No Deal

If May's fractious Tory caucus can't get behind the deal, then 'no deal' it is. That would be a hard sell politically. The country is believed to be woefully unprepared for food and medicine shortages that economists have warned about. There has been talk of traffic jams in both the EU and UK as customs barriers rise. Then again, it's also possible that the pain would be transitory, and it would only create further incentive for both sides to hammer out a trade agreement, maybe one similar to the 'SuperCanada' deal that Brexiteers have been trying to sell. While members of May's cabinet, and May herself, have insisted that no deal won't happen, it's not clear how it would be prevented.

Go For Norway

Parliament doesn’t want No Deal, so let’s got for the closest possible relationship to the EU instead. Some Tories have been pushing this approach recently. However, as Open Europe points out, given the wording of the leaked political statement draft, a Norway-style trade agreement is unlikely.

A leaked version of the declaration sets out a spectrum of possibilities for the future partnership, ranging from a “Canada-plus” comprehensive Free Trade Agreement, to what might be termed a “Chequers-minus” deal. Where the final agreement falls on this scale will depend broadly on how far the UK is willing to align with EU rules, and, correspondingly, how much it would accept in terms of level playing field obligations and an indirect role for the European Court of Justice.

The text does not provide a clear path to a Norway-plus agreement, where the UK remains integrated in the four freedoms of the EU single market.

It's also unlikely to garner the support among the Tories that would be needed to make it a suitable alternative to the current deal.

Call a General Election

There’s already legislation in play to call for a general election. But Tories are too fearful of relaxing their already tenuous grip on power and losing control to Labour. It's more likely that a general election would follow a vote of no confidence in the government. 

Government of National Unity

What many Americans don't realize about the Brexit situation is that there already is a comfortable majority in Parliament to support the deal - it's just spread between different parties. And Labour MPs who break ranks to back May's plan could risk expulsion from the party, as party leader Jeremy Corbyn has come out against it.

Assuming 'no deal' is averted, negotiations over the future trade relationship between the EU and the UK would begin. Given the fraught nature of the Brexit treaty talks, this will almost certainly be another trainwreck requiring the squaring of many opposing interests.

As it stands, here's a chart of some of the most likely scenarios for the future trade deal, compared with what the UK has now.

Deals

The non-binding withdrawal agreement that's still being hammered out in Europe is supposed to set a framework for these negotiations.

The 26-page document that leaked yesterday includes many stipulations, all of which are non-binding. Here's a rundown of the big points, courtesy of Open Europe.

Movement of goods

  • Both sides “envisage comprehensive arrangements that will create a free trade area, combining deep regulatory and customs cooperation.” The objective is for a relationship that is “as close as possible,” rather than the “frictionless” trade the Prime Minister had previously suggested. Nor is there any reference to the government’s Chequers proposal for a “common rulebook.”

  • The latest version of the declaration suggests the UK and EU would “build and improve on” the single customs territory set out in the backstop as regards tariffs, “in line with the Parties’ objectives and principles above.” The reference to the Parties’ principles refers back to “respecting the integrity of the Union’s single market and the customs union” and “recognising the development of an independent trade policy by the United Kingdom.” This is an adjustment from the previous draft that suggested only that the future customs arrangement would “build on” the backstop – a provision that former Brexit Secretary Dominic Raab felt went too far.

  • Elsewhere, the declaration also notes, “The Parties envisage making use of all available facilitative arrangements and technologies” as part of the future customs agreement, including in order to address the Irish border. This leaves open the possibility of considering a deep customs facilitation agreement, or a modified version of the UK government’s Maximum Facilitation proposal, in negotiations on the future relationship.

  • Similarly, it notes that the future economic partnership should “ensure the sovereignty of the UK and the protection of its internal market…including with regard to the development of its independent trade policy.” This is seemingly in tension with a long-term UK-EU customs union.

  • On regulation, the document notes the potential for UK alignment with EU rules in relevant areas, in particular to allow for cooperation with the European Medicines Agency, the European Chemicals Agency and the European Aviation Safety Agency.

  • In all, the declaration notes a “spectrum of different outcomes” for checks and controls on bilateral trade in goods is possible. While a Chequers-style agreement on goods is not signposted, the declaration suggests that that the UK and EU could ensure fewer barriers to market access if the UK agrees to align with EU rules.

The backstop and customs

  • It is not clear whether the proposals for an economic partnership set out in this document would meet the criteria necessary to supersede the backstop – and therefore whether the future economic partnership would be available to the whole of the UK, including Northern Ireland.

  • The document states both sides’ “determination to replace the backstop solution on Northern Ireland by a subsequent agreement that establishes alternative arrangements for ensuring the absence of a hard border on the island of Ireland on a permanent footing.” The language has strengthened slightly – the previous outline declaration noted both sides’ “intention” to replace the backstop. It also states that trade and investment facilitation should respect the integrity of the UK’s internal market.

  • It notes that “facilitative arrangements and technologies will also be considered in developing any alternative arrangements for ensuring the absence of a hard border on the island of Ireland on a permanent footing.” The leaves a path for the UK to offer technological solutions, in the vein either of its Maximum Facilitation proposal or its Facilitated Customs Arrangement, to ensure an open Irish border – potentially offering a route away from the backstop arrangement on customs. However, this is unlikely to offer sufficient reassurances to Unionists in Northern Ireland that they would not be treated differently to the rest of the UK under the future partnership.

  • No further role is set out for Northern Ireland institutions in determining whether or not the conditions for replacing the backstop have been met.

Services

  • As expected, the Political Declaration broadly sets out traditional third country arrangements in services. It states both sides’ intention to “[build] on recent Union Free Trade Agreements,” but is thin on detail.

  • In financial services, both sides commit to assessing equivalence before the end of June 2020 – the intention is therefore for an equivalence regime to be ready to be phased in at the end of the transition.

  • The declaration allows for a data adequacy decision for the UK, and aims to ensure this can be adopted by the end of 2020 – again allowing for this framework to be phased in at the end of the transition.

  • Both sides commit to establishing a Comprehensive Air Transport Agreement, ensuring “comparable market access” for road transport, and agreeing bilateral agreements on rail transport.

Level playing field

  • Provisions included in the outline political declaration to “build on” the level playing field commitments agreed in the Withdrawal Agreement have been maintained. It notes that these commitments should “have regard to the scope and depth of the future relationship” – this allows a route for the EU to scale up level playing field obligations if the UK pursues deeper regulatory alignment.

Fishing

  • A future agreement on fisheries, covering access to waters and quota shares, will be established “within the context of” the overall economic partnership. However, this does not mean that fishing rights will be negotiated as part of the trade agreement, and falls short of the “no fish, no deal” commitment that some EU member states were reportedly pushing for.

  • The declaration notes that the UK and EU will “use their best endeavours” to conclude the fisheries agreement by July 2020 – the same deadline as is required for a decision to extend the transition period, as per the Withdrawal Agreement.

Law Enforcement and Police Cooperation

  • The document states, “The closer and deeper the partnership, the stronger accompanying obligations” for the UK. It notes that the UK has agreed to remain a party of the European Convention of Human Rights (ECHR), and to respect the jurisdiction of the ECJ in the interpretation of EU law.

  • Both parties are aiming for continued UK operational cooperation with Europol. The government’s previous proposals sought to go beyond such an operational agreement, which would not grant the UK a direct access to Europol databases. The Political Declaration does not make it clear whether this is possible or not.

  • The document mentions maintaining cooperation in relation to exchanging Passenger Name Records (PNR) and Prüm databases (to which currently non-Schengen countries do not have access). But there is nothing on possible UK access to Schengen Information System (SIS II), or the European Criminal Records Information System (ECRIS), which the Prime Minister indicated would be addressed in further negotiations.

  • In line with previous EU statements, the UK will no longer be a part of the European Arrest Warrant, but both sides state their commitment to a streamlined and time-limited extradition procedure.

Foreign policy, security and defence

  • Both parties plan for the future relationship to “enable the UK to participate on a case by case basis in CSDP missions” through a Framework Participation Agreement (FPA).This would allow the UK to second staff to missions/headquarters, but not take part in decision-making.

  • The UK will also be allowed to take part in projects of the European Defence Agency (EDA), the European Defence Fund and the Permanent Structured Cooperation (PESCO) on “an exceptional basis.” It is important to note that the conditions for third party participation in PESCO have not been yet agreed. European diplomats have reportedly decided to postpone the decisions until negotiations over the terms of the UK’s withdrawal are concluded.

  • Both parties agree to consider “appropriate arrangements” for the UK’s participation in the EU’s space satellite programmes, reflecting continued disagreement over the UK’s access to Galileo’s secure system.

Free movement of people

  • The declaration specifically notes “the ending of free movement of people between the Union and the United Kingdom.”

  • The provisions on mobility remain thin, recalling commitments to “non-discrimination” between member states, and “full reciprocity.” The Common Travel Area between the UK and Ireland remains protected, however.

  • The declaration also aims to ensure “the temporary entry and stay of natural persons for businesses purposes in defined areas.”

  • Both sides aim to provide visa-free travel for short-term visits, and consider different conditions to entry for study, research and youth exchanges.

Governance

  • The document states that the overarching institutional framework for the UK-EU partnership could be an Association Agreement – this was a clear ambition of the European Parliament. The declaration leaves open the possibility that some discrete bilateral agreements could sit outside this structure, subject to other governance arrangements.

  • The governance architecture of the future relationship is broadly expected to follow that set out within the Withdrawal Agreement.

  • The bilateral relationship will be supervised by a UK-EU Joint Committee. Both parties can also refer to the Joint Committee for dispute resolution.

  • Where the Joint Committee cannot decide a dispute, it may refer this to an independent arbitration panel, whose decisions are binding on the UK and EU. However, if a dispute raises a question of EU law, the interpretation of the EU law should be decided only by the ECJ – not independent arbitration.

  • This governance structure was largely to be expected. In any economic relationship with the EU, the UK cannot expect fully to insulate itself from the role of the ECJ, given the EU’s stated legal autonomy. However, under this system, the ECJ would not have direct jurisdiction in the UK, and would only have authority to decide in areas where the UK agreed to apply EU law. The less regulatory integration between the UK and EU, the more restricted the role of the ECJ.

The upshot, is that the document envisions a strong free-trade relationship between the UK and the EU, but one that's far less integrated than what exists today.

And as a bonus for making it through all that, here is the simplest flow chart of 'what happens next' (and the odds of it happening) we have come across so far...

Outcomes

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