The UK and EU have provisionally agreed on a divorce deal, enabling the two sides to move on to the second phase of talks, on the transition and future relationship. The details are laid out in a joint 'progress report', which applies on the basis that 'nothing is agreed until everything is agreed', i.e. it will remain provisional until a full deal under Article 50 is reached.
As part of this deal, the UK has agreed to liabilities estimated by the UK government to amount to around EUR40-45bn (in net terms). The exact figure will not be known for decades, but chief EU negotiator Michel Barnier said the UK will not pay more, or earlier, than it would have done as a continued EU member.
On citizens' rights, the two sides have agreed to provide reciprocal protection, enabling EU and UK citizens to continue to enjoy EU-derived rights, as long as they move before the withdrawal date (29 March 2019).
Regarding Northern Ireland, the parties have found agreement on common language but not necessarily a lasting resolution.
The EU has also released a list of objectives for the second phase of talks. In the document, the EU agrees to negotiate a transition phase, during which the UK will no longer participate in, nominate or elect members of European institutions. The EU wants the UK to remain a full member of the single market and customs union during this time, continue to abide by the four freedoms, and implement any changes to EU law to apply to the UK during this period.
The EU reaffirms that any trade deal can only be completed once the UK is a third country, but agrees to 'engage in preliminary and preparatory discussions with the aim of identifying an overall understanding of the framework for the future relationship'.
The EU's chief negotiator Michel Barnier has reiterated that there must be a draft deal ready for October 2018, to be presented for approval by the European Council and European Parliament. The UK parliament also needs to approve the final deal. At this point, it does not appear that individual EU-27 parliaments will need to give their approval – just a qualified majority of the members of the European council. Until a deal is approved by those bodies, our understanding is that it remains provisional and nonbinding – and hence of only limited comfort for businesses trying to plan for the years ahead.
What and when:
- On 8 December 2017 the UK and EU provisionally agreed upon a divorce deal
- Estimated UK liabilities of EUR40-50bn
- Reciprocal protection on citizens’ rights
- Some common language regarding Northern Ireland
- Transition phase will be negotiated
- Agreement to engage in ‘preliminary and preparatory’ trade discussions
- Slightly higher chance of a ‘soft Brexit’
- Slightly decreased risk of a ‘cliff-edge Brexit’
- Political uncertainty continues to weigh on UK 2018 growth
The cabinet has still not discussed its joint 'vision' for the final status of the UK post-Brexit but this will happen before Christmas according to a spokesperson for the prime minister. At the margin, we think the detail of the agreement increases the chances of a soft Brexit and decreases the chances of a 'cliff-edge' Brexit.
Let us take each of these in turn. First, 'soft Brexit'. Point 49 of the joint text essentially says: unless the UK comes up with a better idea, it will stay in the single market and customs union to the extent necessary to avoid a hard border. In reality, it is likely to be hard to disaggregate the rules of the single market and customs union, and, given the scarcity of better ideas thus far, this does suggest the UK could drift into a soft Brexit. While staying in the single market and customs union would likely please businesses looking for clarity and stability, this would need to be the UK's stated position – not buried conditionally in point 49 of a progress report. Perhaps the pre-Christmas cabinet meeting will shed some more light on this.
We also think there is a slightly decreased risk of a 'cliff-edge Brexit'. This provisional deal makes the prospect of a ‘no deal’ outcome, due to the negotiations running out of time, slightly less likely. That said, there is still a risk that a ‘soft Brexit’ deal is struck and that members of parliament (MPs) vote against it. We assume that this wouldn’t happen if the alternative was a no deal and a return to World Trade Organisation rules, given that the majority of the MPs voted to remain in the EU. But, there is always a risk of a miscalculation, or that party politics intervenes. Overall though we still think that it is in both the UK’s and EU’s interests to avoid the cliff edge.
The UK has cleared the first hurdle, albeit a couple of months later than many had hoped initially. But there remains a lot to be done over the next 10 months. The UK is clearly still hoping for a better idea on the Northern Ireland border issue, and there is also the future relationship to be discussed – the terms of the transition, the implications for airlines, banks, manufacturers and numerous other businesses in the UK. Against this backdrop, we see little reason to change our fundamental view on the UK: that it will significantly underperform the rest of the EU and US in terms of growth next year – we forecast just 1.5% – as political uncertainty continues to weigh heavily.