Key elements of the transition deal have been agreed.
Read more2018 Edition available now.
Read moreKey elements of the transition deal have been agreed in what has been called a ‘decisive step’ towards an ‘orderly withdrawal of the UK from the EU.
Read the full document
Mr Tusk re-stated that any free trade agreement (FTA) could not offer the same benefits as membership and cannot amount to participation in the Single Market.
The agreement would cover:
Other areas of interest to the Union, for example access to public sector markets, investments and protection of intellectual property rights.
The governance of the future relationship with the UK will have to address management and supervision, dispute settlement and enforcement, including sanctions and cross-retaliation mechanisms.
Speech by the UK Prime Minister, Teresa May
In her London speech today, (2/03/2018) Teresa May laid out the UK Government’s position on what it is looking for in terms of the UK’s future economic partnership with the EU.
She confirmed that real progress has already been made, but differences between the UK and the EU still exist. Mrs May went on to set out five tests to guide the UK in its negotiations:
Mrs May went on to outline the nature of a new economic relationship which, she argued, should not simply be based on an existing model – not based on the Norwegian or Canadian models. Existing models, she insisted, do not provide the best way forward. Mrs May stressed that it was essential to build a new and deep relationship covering more areas than are covered in existing models.
In terms of the Irish border, she confirmed that the Belfast Agreement must be respected, and that physical border infrastructure is not something the UK wants – if the EU wants to create a hard border, then that is a matter for them.
In terms of 'taking back control' of laws, Mrs May confirmed that while ECJ judgements and case law will continue to be taken into account, the UK will no longer fall within the jurisdiction of the ECJ. In terms of regulations covering standards, Mrs May said that the EU should be confident that it will not be a 'race to the bottom' to remove them, and that UK standards should be at least as high as those in the EU.
Mrs May went on to re-state that the UK government did not accept the EU’s position that only an existing model can be applied. Trading relationships between the UK and the EU should be based on five key principles:
The UK's position as a free trade advocate was, Mrs May argued, the key driver for the position that post-Brexit trade between the UK and the EU should be as free as possible, with trade at borders to be as frictionless as possible. She went on to clarify that while there was a commitment that the UK would ensure that laws are harmonised, they would not necessarily be identical, and stated that the outcomes of the laws can be agreed, if not the specific rules. Regarding European industry agencies, the UK could remain as associate members.
Mrs May confirmed that a new agreement on customs was essential to ensure mutually beneicial trade continues, with two options put forward:
Mrs May confirmed that agriculture, food and drink would require additional rules given the UK will leave CAP and the CFP. There was also a clear recognition by the UK government of the need for mobility of labour across Europe, and that mutual recognition of educational qualifications should continue.
Mrs May stated that a special relationship covering broadcasting must be agreed, given that the UK provides over 30% of EU broadcasting.
She also confirmed that the UK was not looking for passporting rights, which are specifically related to the EU. London is the most important global financial centre with the UK having considerable responsibility for the stability of the UK financial markets – many EU businesses rely on a flow of finance from the UK and a new reciprocal arrangement is required to ensure that capital mobility is maintained to the benefit of both the UK and the EU.
Michel Barnier, the EU’s chief Brexit negotiator, has stated that if the UK leaves the customs union, as the government has now confirmed, some barriers to trade will be ‘unavoidable’.
This comes at a time when Brexit negotiations are entering a critical phase covering the nature and length of the transition process, and the nature of the future trading relationship between the UK and the EU. The talks are set to continue all this week.
The EU has now made its position clear on the transition, or implementation, phase of the Brexit talks.
During this 2-year phase, which is due to end on 31st
December, 2020, the UK will continue to take part in the
customs union, and Single Market. However,
the UK will have to implement any new EU laws while having no involvement in
the EU decision making process, which, according to Brexiteers puts the UK
in the position of a ‘vassal’ state. Nor is the UK free to implement any new
trade deals during this period with non-EU countries without the agreement
of the EU.
Despite agreement that sufficient progress has been made on the UK's 'divorce bill', and on the Irish border question, it is still unclear exactly when talks will start on Phase 2 - the trade talks. While preliminary talks may start in February, virtually all observers (See FT Report) expect the serious negotiations to commence in early March, 2018. All parties accept that Britain will leave on March 29th 2019, which means that talks must be concluded well before that date.
European Commission President, Jean-Claude Juncker, announced this morning (Friday December 8th, 2017) that 'sufficient progress' has been made in the Brexit talks to allow negotiators to move on to discussions on the UK and EU’s future trade relationship. Critical to this was significant progress on the Irish issue, with a firm commitment that there will be no hard border. Talks involving all parties continued through the night, with agreement reached in the early hours of Friday. Provisional agreement on the financial 'divorce' settlement had already been made, with just the Irish border issue and the situation regarding citizens rights remaining.
As a result, sterling was up against most major currencies in early trading.
See also:
Bloomberg.com
Despite the absence of any official comment, it now seems probable that the UK and the EU are close to settling the first key element in Brexit talks – namely, the financial ‘divorce’ settlement.
The Daily Telegraph has reported that its sources have suggested that a figure of between €45bn and €55bn, depending on how the agreed methodology is calculated. The Financial Times says that the UK will assume liabilities ‘worth up to €100bn’ (£88bn), which would fall to less than half of this when adjusted for payments back to the UK. Of course, details of the settlement figure, what it relates to, and how and when it will be paid will not be made available quite just yet. It is likely that, to avoid appearing to have ‘won’ or to sound too triumphant, EU negotiators will not want figures released, given that the figure is very close to their initial assessment of net liabilities.
EU negotiators are likely to want to avoid causing any political embarrassment to the UK government, given that many its backbenchers would prefer a much smaller settlement. However, both Boris Johnson and Michael Gove – two leading pro-Brexit Cabinet ministers - have given Mrs May their support over the financial settlement, although adhering to the accepted principle that ‘nothing is agreed until everything is agreed’. Indeed, a final figure may not be known even after trade talks have finished, given that some of the UK’s financial liabilities relate to pension payments to EU officials, which are impossible to calculate ahead of time. What it does mean is that two further issues can now be moved into the spotlight – the question of the Irish boarder, and the position of EU and UK citizens, post-Brexit.
The UK government has already rejected the possibility of Northern Ireland remaining in the customs union, or the whole of Ireland forming a separate customs union. However, the UK government has said that it has actively looked to find 'creative solutions' which might eliminate the possibility of having a hard border between Ireland and Northern Ireland. What is clear that the precise nature of any border - hard or soft - will depend on any trade agreement that is negotiated.
On June 23rd 2016, the UK voted to leave the EU - commonly known as
‘Brexit’. By July 14th a new government was in place, led by Theresa
May, with Phillip Hammond as the new Chancellor. In the lead up to the
referendum vote there was a broad consensus that Brexit was likely to
cause a sizeable short term
economic shock. This shock would,
forecasters argued, be followed by a period of low growth, with fall-out
adversely affecting the value of sterling, inflation, productivity and
jobs.
The initial impact of Brexit on the financial markets stemmed from the uncertainty which followed this momentous decision - uncertainty about the short term impact on prices, jobs and growth, and about the kind of trading relationships that would emerge. Financial markets responded to this uncertainty in dramatic fashion, with the pound falling to a 30-year low against the US dollar, and stock markets around the world suffering considerable falls. There was a bounce back as the markets calmed immediately following the formation of the new government.
Despite the
Bank of England indicating that monetary policy would be loosened,
interest rates were kept on hold at 0.5%, giving some room for manoeuvre
later in 2016. The Bank of England’s MPC decided not to reduce rates
immediately, until some hard evidence had become available regarding the
impact of Brexit on the real economy.
Looking beyond the immediate shock, what is less certain is the
medium and longer term impact of Brexit on the UK economy, given that,
at the time of writing, there was no clear government policy on which
‘version’ of Brexit would eventually be adopted.
The main reason for the negative forecasts prior to the vote was the
assessment that, while the benefits of remaining in the EU seemed clear,
the benefits of leaving were far less clear, especially given the
uncertainty about how Brexit negotiations would unfold. A consensus view
emerged that the UK might find it difficult to compensate for the loss
of the benefits that being an EU member bring. These include:
Add to these benefits, the fact that UK trade as a share of national
income – trade openness - has risen to over 60% in the past decade,
compared to under 30% in the years before the UK joined the EU, the
economic case against Brexit, at least in the short run, appeared a
strong one.
As the economic ‘dust’ settles, much will depend on the kind of trade
agreements that will be reached, how resilient the UK economy is in the
short term, and on how much time the negotiations will take to complete.
The EEA (European Economic Area) scenario involves the UK leaving the
EU, but continuing as a member of the wider EEA. The EEA includes the
remaining 27 EU countries, together with the four
European Free Trade Area (EFTA)
states of Iceland, Liechtenstein, Norway and Switzerland.
EFTA was founded in 1960 as a counterbalance to the more politically
focussed European Economic Community (EEC) as it then was, and included
Austria, Denmark, Norway, Portugal, Sweden, Switzerland and the United
Kingdom. In 1973, the United Kingdom and Denmark left EFTA to join the
EC (as it had then become) and were followed by Portugal in 1986 and by
Austria, Finland and Sweden in 1995. In recent years, EFTA has
successfully concluded free trade agreements with North America and
Asia. Supporters of this option have argued that the UK could, fairly
quickly, become a fifth member of EFTA. However, in this scenario there
would still be free and uncontrolled movement of labour into the UK, and
a budget contribution to the EU, while at the same time EFTA-only
members have no influence on EU trade rules in the future. There seems a
consensus among analysts that this EU-lite option would put the UK at a
significant disadvantage in terms of influencing the direction of the EU
going forward.
This option would involve the UK negotiating a completely new free
trade agreement with the EU, similar perhaps to that enjoyed by Canada.
Clearly this would involve a lengthy negotiation period, perhaps with
the EU reluctant to fast-track this kind of agreement.
The
WTO scenario means that a country’s trade is subject only to the
rules of the WTO club. If the UK adopted this approach - as some
supporters of Brexit do - it would be subject to the Most Favoured
Nation (MFN) rules of the WTO. The main principle of this WTO rule is
that members should not be discriminated against and, in the absence of
specific free trade agreements, all members should enjoy the same
treatment as the most favoured country. Hence, if one member grants
another member a special trade advantage, the same advantage should be
conferred on all other members. Adopting this policy would, of course,
mean that the UK would not have free access to the EU, and could not
influence EU trade rules.
The unilateral free trade scenario is a variant of the WTO scenario, where UK goods and services are faced with the tariff levels agreed through the WTO, but where the UK reduces its tariff levels on imports without any reciprocal reduction by trading partners. This is widely thought to be the least likely option following Brexit, although New Zealand and Singapore have successfully adopted this kind of approach. For example, Singapore has negotiated 20 free trade agreements with its 31 main trading partners.
The models used by key forecasters in the run-up to the referendum assumed the unilateral free trade approach to be the worst-case scenario. While unilateral elimination of tariffs gives away key ‘bargaining chips’ in future trade negotiations, some economists (especially those in the Economists for Brexit group) believe that the unilateral free trade route would lead to the greatest long term gains for the UK. This view is based on the belief that any form of protectionism distorts trade patterns to the detriment of all parties. However, Economists for Brexit and other 'free traders' recognise that the UK’s agricultural and industrial sectors are likely to be severely squeezed, as the lack of a comparative advantage in these areas will be exposed by unilateral free trade.
In terms of FDI, independent analysis by the
Institute of Fiscal
Studies (IFS) prior to the referendum vote, concluded that it is
most probable that flows will fall after Brexit. This it likely to
reduce productivity (given that
productivity relies on the level of
capital investment) which will have a negative impact on
GDP. Lower FDI
will have both demand and supply-side implications for all key
macro-economic performance indicators, including growth, jobs and trade.
Given that the EU sets regulation in many areas, including the
environment, health and safety, employment and financial services, exit
from the EU is likely to lead to a reduction in the level of regulation.
However, many analysts have concluded that the effects of this may be
fairly modest given that the UK is a relatively unregulated economy
compared with many others.
It is likely that there will be two different, and contradictory,
effects of Brexit on public finances. Firstly, the positive
mechanical
effect, which means that leaving the EU will strengthen the public
finances in the short term as a result of a fall in net contributions of
the order of £8bn a year - the gross contribution of £18.8bn, less the
rebate and the return back of funds from the EU budget. However, a
second and stronger negative effect, the national income effect,
suggests that the possible fall in GDP as a result of Brexit will weaken
public finances, as tax receipts fall and spending increases. Whatever
the impact, there is likely to be a significant delay in its effect
given that the mechanical effect will only happen once the UK ceases to
make payments to the EU, which may well not be until at least 2018/19.
Research suggests that, apart from the US, web users are highly
inward looking, generating a strong home-bias in favour of local online
suppliers and internet providers, suggesting that trading in the digital
world is both less open than we might believe, but also dominated by US
based companies. While the internet should reduce ‘economic distance’
between countries, the home-bias effect may well counteract this. With
its many languages, different cultural preferences, and inward looking
approach to the digital economy, many doubt that the EU is best placed
to cope with the new realities of a digital world. Although the EU has
made some progress in liberating the digital market-place, many feel
that the UK should adopt a much more outward looking approach.
One view is that once the UK has ‘cut loose from its orbit’ around
the EU it can connect more closely to the US, which dominates the
digital economy, and where the ‘economic distance’ between the UK, US,
Canada, Australia and other English speaking nations is much smaller
than between the UK and the EU. The same may be said of the emerging
power-houses of China and India, and indeed many see Brexit as a
considerable opportunity for the UK to have a much closer relationship
with these two countries.
Perhaps the single biggest unknown is the impact of Brexit on the
UK’s financial sector. In the early days after the Brexit vote many were
claiming that the UK would suffer irreparable damage, and certainly
shares in UK banks were some of the worst to suffer - along with those
of house-builders.
The UK is a dominant player in global financial markets, and has the
largest market share of EU business in financial services - double that
of France and Germany. How Brexit negotiations unfold will be highly
significant to the UK’s financial sector.
Perhaps the most important aspect of Brexit for the UK’s financial
services is the potential loss of so called ‘passporting rights’. This
relates to the ability of banks and other financial institutions in one
EU state to conduct business in another one. As a member of the EU,
national banks and financial institutions do not need to obtain licenses
in each country. It is certainly too early to tell exactly how Brexit
will affect financial services at the global level, and in terms of the
UK and the EU.
The impact of Brexit on the UK’s farming sector is also likely to be
considerable, given that over 50% of farm income in the UK comes from
CAP support. However, until new trade deals have been negotiated, and
the UK government has made its position clear on subsidies, the overall
impact on farming remains unknown.
As well as introduce a new outward looking approach to trade policy
designed for the post-Brexit era, many see Brexit as an opportunity to
develop a whole new range of domestic policies. Many argue that the UK
has neglected its industrial base, and its infrastructure, and it is
time to develop a new industrial policy for the post-Brexit age. This
could also be said for technology policy and innovation.
China retaliates in dispute over intellectual property.
Read moreCosts and benefits of customs unions.
Read moreUK grows by 0.3% in 1st quarter of 2017.
Read moreMultiple choice papers for Paper Three.
Read moreWhat trading options are available to the UK?
Report on the growth of alternative finance.
Read moreSavings ratio falls to lowest level on record.
Read moreDouble Irish - and a Dutch Sandwich more..
The OECD presents its final package for reform of international tax rules..more
OECD - reducing income inequality will boost growth..more