By Conor Lambe, Chief Economist at Danske Bank
After securing the phase one Brexit agreement in December, the UK and the EU have reached agreement again. At last Friday’s European Council meeting, the EU’s political leaders approved a transition period that will come into force once the UK formally leaves the European Union at the end of March next year.
The transition period will last until the end of 2020 and will effectively mean that the UK will remain in the single market and customs union during that period, giving UK and EU-based businesses access to each other’s markets for 21 months after Brexit day. During this period, the UK will not play a formal membership role within the EU institutions but will be consulted on certain issues, such as fishing quotas. The UK will also be able to negotiate and sign free trade agreements with other countries during the transition period but won’t be able to implement them until after it finishes, unless the EU permits it.
For businesses in the UK, this agreement on a transition period is welcome news for three reasons.
First, it provides them with some more clarity around what the commercial environment will look like after Brexit occurs next year. For some, this political agreement on a transition period will be enough for them to hold off on implementing complex and costly contingency plans, something which had been expected to happen if businesses found themselves only 12 months away from Brexit with insufficient detail on what to expect at the end of March 2019. It will also give them more time to prepare for Brexit. That could involve fully understanding their current and expected future links with the EU, considering the impacts of different scenarios on their activities and deciding how they might respond as details begin to emerge on what the long-term trading relationship between the UK and the EU will look like.
Second, this latest agreement marks another occasion when the UK Government has been willing to compromise to get a good deal. In December, the UK agreed to pay the Brexit bill in order to move talks on to areas including the transition period and future trade deal. In her Mansion House speech, the Prime Minister stated an intention to maintain regulatory standards on goods as high as those in the EU, and in some cases to continue to apply EU regulations after Brexit. She also wants to explore the possibility of associate membership of some EU agencies and is prepared to make a financial contribution in return for this membership. And to secure the transition period, compromises were made on the rights granted to people who come to the UK between the end of March 2019 and December 2020. It appears the Government is now beginning to recognise the need to make concessions to deliver a Brexit that minimises the damage to UK-based businesses.
Third, this latest agreement provides additional momentum going in to the rest of the negotiations and the trade talks. With progress now made on the phase one agreement and transition period, the chances of a ‘no deal’ Brexit seem to be diminishing if, albeit, they are not quite zero yet.
However, despite these positives there is still a need for caution.
The agreement on a transition period is a political agreement, not a legal one. Under the mantra that ‘nothing is agreed until everything is agreed’, the transition period will not be formalised until the final Brexit withdrawal agreement is ratified. So while much less of a possibility than a few weeks ago, we still can’t completely rule out a ‘cliff edge Brexit’ in March of next year. Or indeed, that the cliff edge hasn’t just moved out until the end of 2020.
The Government still has an extraordinary amount of work to do to deliver Brexit, including agreeing a future trading relationship with the EU and developing a new migration policy. If I have one gripe, it’s that the transition period will not be longer. While another 21 months of preparation time is welcome, the timeline it still extremely tight for the Government and businesses to be ready for Brexit really taking effect at the start of 2021. The draft withdrawal agreement, within which the details on the transition period are included, does not specify if the transition can be extended. So businesses can’t afford to take their foot off the gas on their Brexit preparations.
There is also no agreement yet on how to avoid a hard border in Northern Ireland. This is fast becoming the most pressing Brexit issue and finding a solution that the EU feels upholds the integrity of the single market and customs union once the UK leaves, and is also satisfactory to politicians in the UK, Northern Ireland, Ireland and Brussels is no easy task. Talks between UK and EU negotiators on Northern Ireland and Ireland specifically are ongoing with more meetings scheduled to take place over the next few weeks and all eyes will be on what progress is made during those discussions.
Since the EU referendum, businesses in the UK have faced significant Brexit-related challenges. These have ranged from a squeeze on consumers, to uncertainty about whether to go ahead with strategic investments, to struggling to plan given the lack of clarity on a Brexit end-point. This political agreement on a transition period marks a rare positive moment. As the Brexit negotiations continue, let’s hope it is not the last.
This article was published in the Belfast Telegraph on 27th March 2018