Oversimplifying Brexit to "hard" or "soft" conceals the hard truth to citizens

The Conservative party losing its majority at the UK election seemed to suggest that Prime Minister Theresa May would be forced to “soften” her “hard” Brexit stance.

Euro and Pound banknotes are seen in front of BREXIT letters in this picture illustration taken April 28, 2017. REUTERS/Dado Ruvic/Illustration
REUTERS/Dado Ruvic/Illustration

Not so fast: firstly whether Brexit will result in a full withdrawal without a deal or a smoother phasing out of the UK membership in the EU will not just depend on the British side of the negotiation table. Secondly, a number of weighty overlooked legal and financial issues will stand in the way of even "no spirit of revenge, no punishment, no naivety either" talks, as EU Brexit negotiator Michel Barnier put it.

Experts are already saying that two years are not enough to hash out all and each of the aspects of an EU membership and broker at the same time a free trade and customs agreement.

Even before negotiators begin to discuss how to unwind for the UK the ‘four freedoms’ — of goods, services, capital and people — the EU party is asking to broker a single financial settlement for the Union budget, all EU bodies and policies funds.

The upfront gross liability for the UK upon exit could range between €54bn and €109bn according to Bruegel think tank analyst, Zsolt Darvas — to be paid in euros, not in depreciated pounds. EU countries are unlikely to accept starting negotiations about the future relationship with the U.K. “before they know what Brexit means for them until the last cent,” an EU the official said.

There you have already on the very first day of negotiations a complex issue to discuss along with the rights of EU citizens in the UK and the free movement of people – rather than goods – between Ireland, Northern Ireland and Great Britain, the UK’s only land border.

European Union officials will start negotiations based on the assumption that the UK still wants to leave the bloc completely, although some official in Brussels expect that it will take at least until September for the UK to solve its domestic political debate, or even maybe hold new elections.

"We are open to all options, including that of a 'no deal', that British leaders so often mention," said Mr. Barnier. EU negotiators are feeling pressured, because as Guy Verhofstadt, the European Parliament Brexit coordinator stated in a press conference, the EU would wish "more clarity" from London. Brexit has been debated now for three years, it crippled the EU, making it impossible to modernize and implement necessary reforms… This must stop now." Some, like the Prime Minister in Luxembourg, even believe that "Brexit will make the EU stronger."

Suggesting "that the door will always stay open for the UK" — see German foreign minister Sigmar Gabriel or finance minister, Wolfgang Schäuble, or French President Emmanuel Macron — does not imply a will to "derogate" from any EU rules. According to the London think tank Open Europe, France could turn out to be "one of the toughest EU countries on Brexit."

Constituencies are breathing down the neck of European leaders. Many big companies in Europe are withholding investments as they draft plans to channel anew complex supply chains. Corporations and SMEs that account for the 48.5% with the UK could be forced to pay tariffs before a Free Trade Agreement is struck at least 6 years from now, as experience shows.

Industries that plan to benefit from a hard Brexit also want negotiations to move swiftly. Frankfurt, "a stable and trustworthy city" is bidding to become the EU finance capital, and to headquarter the EU Bank and Pharma Control agencies.

Last week's non-belligerent decision on the relocation of the clearing houses that do a large of chunk of business in euros (out of the €1.050 billion they clear every day), can be seen both as a good omen and as a tough stance. The Commission shied away from proposing a relocation to the EU or the Eurozone (like some French politicians suggested), but insisted that that could become necessary in the future.

There only a few scenarios as of now.

The so-called Turkish model, that is exiting the customs agreement, would give the U.K. some access to the bloc’s market with the drawback that the UK won’t be able to negotiate its own trade deals, a main tenet of Brexiteers. EU courts would also continue to have oversight of UK rules and regulation. "The UK should not seek a ‘half-in, half-out’ arrangement, which would be the worst of all worlds,” wrote Open Europe, a vocal Remain think tank.

The Norway (or Swiss) model proved quite beneficial economically, but would de facto reduce the UK to EU satellite status. The preferred option in Brussels, it would require the UK to maintain freedom of movement of EU citizens into the UK — another hard-sell to Brexiteers, accept rules and standards it can no longer influence and continue its contribution to the EU budget, which would not be significantly lower than the current one (around 90%)

Then is it is hard Brexit. In other words, for the UK it would likely be easier to negotiate a comprehensive free trade agreement once it has “paid the price” of full withdrawal. EU member states unified already rejected an exit agreement based on UK "cherry picking.”

Even if the EU was willing to soften on some aspects, the UK negotiator, David Davis, cannot rely on a strong mandate neither from its own party, nor from Labour. The Shadow Chancellor John McDonnell doesn't that "think [staying in the single market is] feasible… People will interpret it as not respecting that referendum," whereas the Shadow Brexit Secretary, Keir Starmer, cast doubt on this position.

Furthermore, to allow the UK to exit with sizeable advantages would potentially encourage other members to try to split off. It is highly unlikely that EU leaders would allow this.

The clock is ticking to November 2018. EU members agreed on using the next few weeks to discuss only the rights of EU citizens in the UK, arrangements for the Northern Ireland boarder and the financial settlement. In a second phase the parties will start to discuss the future of their relations, some of which are critical to avoid major political and economic risks, both for the UK and EU, like the customs borders. Delays at border points could not only be a harsh political test for the UK government, but would also disrupt EU exporters to the UK.

What appears unlikely is that UK will legally be able to start brokering free trade agreements with other countries and even with the EU (which may require as much as 4-8 years) until it formally is a EU member. That means for the UK falling back on the WTO option for trade in the meantime.

Citizens and businesses cope badly with such long time frames.

UK consumers cut back on spending in May — the economy had relied on this for its recovery. Inflation at 2.9% is well above the BOE’s 2% target, and wage growth and productivity are tepid (the average French worker produces in a day a fifth more than a British worker, according to the Office for National Statistics. The economy’s recent strong performance was largely driven by immigration and foreign direct investment, both of which have now been thrown into doubt.

Germany became the number 3 preferred investment destination pushing back the UK to the 7th position, and the number of British citizens who applied for German citizenship more than quadruplicated in the last year, with similar numbers in Denmark and Sweden.

Law firm Baker McKenzie found that over half of skilled workers from the EU working for big firms are planning to leave the UK before negotiations are over. In the meantime, speaking of the 150,000 EU nationals working there in health and social care, Health Secretary Jeremy Hunt said that the UK, “needs, and wants them to stay,” but didn’t offer how.

Brexit will not be “soft” on the EU and the UK, no matter the final outcome.


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