Waugh Zone Special: What Are The Next Steps On The Road To Brexit?

Phase I is over. But it's just the end of the beginning.

Theresa May was applauded by fellow EU leaders at the summit dinner last night, after telling them she was “on course to deliver Brexit”. With Phase 1 of the process now signed off, the PM said she will approach the next steps with “ambition and creativity” to secure “a deep and special partnership” between the UK and the EU27.

German Chancellor Angela Merkel led the applause, and others took her cue. Commission President Jean-Claude Juncker explained later that “she is our colleague, Britain is a member state and so we are … polite and friendly people”. But of course, once May ceases to be a colleague and the UK ceases to be a member state, will the EU be as friendly as it is polite? Brexiteers are instinctively suspicious whenever Brussels praises May, fearing either she’s sold out in some way or that the EU must have got the upper hand.

In his tweet confirming the formal shift from Phase I to Phase 2, EU Council President Donald Tusk sent his ‘congratulations’ to May. Many EU leaders (like the British public) are just relieved to be getting past the very first bit of his long process, with Britain having agreed progress on the ‘divorce bill’, EU citizens’ rights and the Irish border. Aware of her problems back home, European leaders think May is their best hope of cracking on with the next, tougher steps and are allergic to further delays that would be caused if she were somehow ousted as PM.

Yet the EU27 head into the next phase of the process thinking they are in a very strong position indeed. One Brussels source says the UK’s ‘position papers’ on various elements of Brexit are ‘stuffed full of contradictions’. And as for May’s plea for a ‘deep and special’ relationship, the EU believes ‘negotiation by adjective’ is no substitute for actual substance. Brexit is not a pizza delivery order, as one insider puts it. Even Brit-friendly Dutch PM Mark Rutte said last night: “I think we need from her to understand how she sees this future relationship with the EU.” And Merkel put it more tartly: “Many tasks still need to be solved, and time is pressing”. The good news is phase one is over, the bad news is things may get harder not easier from now on. And the clock is ticking.

After her very own ‘annus horribilis’ of a botched snap election, conference nightmare and Cabinet resignations, May will just be pleased to get to Christmas still in No.10. That may be why she wants no further headaches next week and is considering a fresh compromise to avoid another Commons defeat on the fixed ‘Exit Date’. She will also want to unite her party as it heads off for the break after some vicious in-fighting. Yesterday morning, I’m told that when Dominic Grieve sat down in the Commons Tea Room for his usual early breakfast, every other Tory nearby promptly got up and walked out. May wants to smooth over such divisions to give herself space to use 2018 for the bigger task ahead.

The PM will also both buy some time and seek unity by finally staging a series of detailed Cabinet discussions of the Brexit ’end state, the first of which takes place next Tuesday. The Sun reports she will try to get some kind of agreement by February, when she is set to deliver her third Big Speech on Brexit (after Lancaster House and Florence, what iconic location will she choose?). Each of the Cabinet’s 28 members will be asked their view on Tuesday, yet some will wonder how feasible it is that they will come to a common position within just a few weeks. Will May herself reveal which kind of Brexit she wants next week (many are still in the dark as to her true intentions), or hang back until the New Year? Will any minister quit if they don’t like the option agreed?

One thing the Cabinet has at least agreed is a two-year ‘transition’ period after the UK formally leaves the EU in March 2019. The PM prefers to call this the ‘implementation’ phase and it’s not just a semantic difference: she really wants the period to be used to hammer out a trading deal. Yet while she’s separately trying to sort trade, the transition may upset many Brexiteers if the EU gets its way. And some Tory MPs may be left looking politically naked if what Brussels calls the ‘full monty’ transition goes ahead: the UK still signed up to all EU rules, including new ones, and its court jurisdiction, plus continued free movement of migrants, without any say in decision-making. Today’s ‘guidelines’ accompanying the Phase 1 agreement make all that clear once again.

As for the length of the transition, Brussels is dead against the idea of making it ‘open-ended’ or indefinite. For one thing, WTO rules forbid any sweetheart trade deals with one nation at the exclusion of others. The WTO uses the “most-favoured nation” (MFN) principle of equal treatment, which means South Korea, Russia or Brazil could take legal action if they think the EU is giving Britain a special deal outside a formal trade agreement. This is why the flexibility for divergence many Brexiteers really want in a transition is seen as legally impossible in Brussels.

With today’s Phase 1 agreed, Brussels’ own timetable for Brexit is roughly this: the next three months will be spent turning the deal on money, citizens rights and other things into a legally binding, internationally recognised ‘Withdrawal Agreement’; talks on the transition will start in February with an agreement ‘as early as possible in 2018’; at the same talks will start on the all-important ‘framework’ for a future UK-EU trade deal.

Britain wants the transition to be sorted pretty swiftly, and Philip Hammond pointed out to MPs recently that the whole idea of giving a period of certainty to business was a ‘wasting asset’ the longer it took to agree one. One document by EU chief negotiator Michel Barnier said last month the transition may not be formally agreed until October 2018’s EU summit, at the same time as a trade framework. In a nutshell, both sides have just ten months to sort both the transition and outline of a trade deal. The EU thinks this will be straightforward if we agree a ‘full monty’ transition, and if the UK says soon what kind of trade it wants. Neither is guaranteed.

Under Article 50, the legal process for Brexit, negotiators must take into account the “framework of a future relationship.” Yet while Britain is focused on “future relationship”, Brussels is sticking to the fact that this is just a “framework”, not a trade deal itself. I understand that the Commission thinks this can be agreed by the summer of 2020, possibly coming into force by January 2021.

And the hard fact remains that legally the actual trade talks cannot begin until after we’ve left the EU. Which brings us to an inherent weakness in the UK’s position. By the time we leave in March 2019, we will have given away our strongest negotiating asset of hard cash. That’s why getting the right ‘framework’ on trade before we leave matters so much. But Brussels insists it’s just a framework.

The binary choice of David Cameron’s ‘in-out’ referendum was summed up by this Barnsley Brexiteer on Question Time last night: “I know you say we’re thick up North, but I remember voting on my ballot paper and it said ‘Leave or Remain’. It didn’t say when I put my [vote] in Leave: ’Now turn to question two - do you want the soft Brexit or the hard Brexit?’” As it happens, Theresa May often says the same thing as she rejects the ‘hard/soft’ language.

Yet given how much ministers have been telling the EU that trade talks are their big prize, and given it is now 18 months since the historic referendum, it’s extraordinary how little we know of exactly what kind of trade deal each Cabinet minister really favours. During the EU referendum, we knew what Vote Leave didn’t want (the status quo). It was difficult to get any straight answer on what model they did want (answers included Canada, Norway, Switzerland, even Albania at one point). Often, we were told that a ‘bespoke’ deal was needed because no country had left the EU before. That has indeed become the official Government line, but as the Cabinet moves on to the ‘end state’ discussion, the debate over what that bespoke item looks like is only just starting.

Some Brexiteers suggest that the ideal Brexit is like great art, hard to define but ‘you know it when you see it’. They know that won’t wash in 2018 and already David Davis has been hinting that he wants a ‘Canada plus, plus, plus’ model. This would keep us out of the single market and customs union, but somehow give us more than a basic, free trade agreement that took Canada seven years to negotiate with the EU. Some in Cabinet think the Davis idea amounts to magical thinking and prefer the security of a Norway-style model where we sign up to the single market and customs union. The option of joining EFTA or the EEA (which allow us to may yet be the way that Labour heads too.

The PM herself may well back the Canada-plus idea. Her former aide Nick Timothy wrote a Telegraph piece yesterday making plain she rejects the ‘soft/hard’ Brexit choice. Language and definition are key here. It may be the PM sees the Norway option as ‘soft’, and a ‘no deal’ or WTO-only rules as ‘hard’. The place in between, her ‘smooth’ Brexit, could be Davis’s position. The only problem with all that, as Hammond and others may argue in coming weeks, is that anything resembling a Canada-EU trade deal without the pluses (‘Canada Dry’ as some call it) could really harm UK business. Brussels certainly sees no demand among UK firms for two sets of market regulations, or any ‘divergence’ that could leave big firms in trouble and small business exporters overwhelmed with new red tape.

Way back in the Europe wars of the 1990s, leading Eurosceptic John Redwood was dubbed ‘the Vulcan’ for his unemotional demeanour. Fast forward to today and it’s Brussels which is fixated on how ‘illogical’ some Brexiteers’ ambitions are. Michel Barnier made clear last month in a key speech just how ‘impossible’ some British demands were. It’s worth recalling his words: “It is not possible to be half in and half out of the single market. It is not possible to end the free movement of persons, while retaining the free movement of goods, services or capital by means of a generalised system of equivalences. It is not possible to leave the single market and continue to set the rules. It is not possible to leave the customs union but expect to enjoy frictionless trade with the EU.”

Catherine Barnard, a Cambridge expert on EU law, declared this week at a meeting of her think tank ‘UK in a Changing Europe’: “There is no such thing as Canada plus, plus, plus”. And Brussels certainly thinks that David Davis’s preferred model, like his fabled Brexit impact assessments, simply does not exist. Most importantly, it believes it cannot exist under EU law. A stripped-down trade access arrangement with certain sectors recognised (a bit like the Japan-EU trade deal is described as ‘cars-for-cheese’) is possible, but nothing else outside the single market. Crucially, the UK depends on services for our wealth, not just trade in goods. And the EU can’t offer the UK a deal on services without having to offer similar terms to other countries, it says. No matter how ‘creative’ May is, they aren’t budging.

Which brings me finally to the words of a former Brussels trade chief: “This is not a negotiation, it’s a process”. And it’s a process where the EU will rigidly protect its own interests, to avoid any unfair competition. Senior sources in Brussels say there is no posturing by them because there is no need to posture. The logic and legality of the EU’s internal market and world trade rules means it can’t offer what Davis (and maybe May) wants. “There is no bluff,” one says. Their bible is the guidelines agreed by the EU earlier this year, which make clear Barnier has little if any room for maneouvre. Some Brexiteers may conclude they really can’t have their cake and eat it, and agree with Nigel Lawson that WTO-only rules are the best option to escape the EU’s tentacles.

Brussels has moved on from talk of ‘punishing’ the UK for quitting the EU. Such talk among some in the EU came as leaders worried about anti-EU populists in France, Holland and Italy getting real power. The failures of Marine le Pen and Geert Wilders mean there’s no need to make an example of the UK to persuade remaining members of the club to stay in the club. The European Commission and EU27 think this is not a question of punishment, but more of economic ‘self-harm’ by the UK. They accept the Brexiteers’ sovereignty argument as an honourable one, though it inevitably involves paying a price. And they’ve taken to quoting that most British of British acting icons, Sir Michael Caine: “I’d rather be a poor master of my own fate, than a rich servant of someone else’s.” Just how the May Government sells that message to voters remains to be seen.

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