The negotiations over Brexit have entered a crucial stage. Although there are just eight months to go, the United Kingdom and the European Union have yet to work out an agreement for the March 29 British exit from the trade bloc. To make things more complicated, British Prime Minister Theresa May is wrestling with domestic difficulties; her Conservative Party is internally divided and struggling to draft a coherent plan acceptable at home and abroad. While a "no deal" scenario come next spring is a possibility, both sides would likely continue to negotiate to shorten any disruption to trade.
In its third-quarter forecast, Stratfor said the political situation in the United Kingdom would become increasingly toxic, as divisions within the government made it hard for London to produce a coherent Brexit policy. With only eight months to go before the United Kingdom leaves the European Union in March 2019, the disputes are only intensifying. An EU-U.K. agreement is still possible, but the British government is running out of time.
The Pros and Cons of the Exit Plan
In early July, the British government issued a white paper presenting a list of proposals for the future of Britain's relations with the European Union. The document proposes the creation of a free trade area for goods, and it calls for the United Kingdom and the bloc to share a "common rulebook" on regulations and standards for goods and food. It also proposes a "Facilitated Customs Agreement" that permits the United Kingdom to collect tariffs on goods on behalf of the European Union. Goods that end up in the United Kingdom would be subject to British tariffs, while those that end up in the European Union would pay European tariffs. On July 16, the British House of Commons introduced changes to this plan, saying the United Kingdom should only collect tariffs on behalf of the European Union if the bloc does the same for the kingdom.
According to May's government, these proposals would solve many Brexit-related problems. To begin with, they would prevent the introduction of border controls between Northern Ireland and the Republic of Ireland. They would supposedly also permit the United Kingdom to pursue an independent trade policy, because London would be free to introduce its own tariffs on imported goods.
But not everybody is happy with the white paper. Conservative hard-liners argue that sharing a common rulebook with the European Union would make it difficult for the United Kingdom to negotiate free trade agreements with other countries because London would have to accept standards and regulations imposed by Brussels (the greatest obstacles to trade often are not tariffs but rules and regulations). May's proposal also implies keeping the United Kingdom in the EU single market for goods alone, but Brussels is likely to oppose that idea. From the EU perspective, the single market – which allows the free movement of goods, people, services and capital – is indivisible. The bloc is also likely to resist the proposal to collect tariffs on behalf of the United Kingdom, which would be a nonmember state.
And then there's the question of services, which represent the largest chunk of the British economy. The white paper calls for special arrangements for legal, business and digital services. As for the crucial issue of financial services, the report admits that the United Kingdom will be prohibited from retaining so-called passporting rights, which permit companies in the United Kingdom's financial sector to sell their products anywhere in the EU single market without requiring authorization in every country. In place of that blanket authorization, the white paper calls for ad hoc arrangements. But because the United Kingdom is so efficient in the financial services sector, EU member states will be wary of signing such agreements. Moreover, several countries, including France and Germany, are interested in attracting some of the financial activities that will have to leave the United Kingdom.
The white paper's different approaches to goods and services explain why the Confederation of British Industry described May's proposals as "a massive step forward" in the negotiations, but the City of London Corporation, which represents the city's powerful financial sector, described the report as a disappointment. British manufacturers stand to gain much if the European Union accepts the terms of the white paper, and financial services could be one of the biggest losers.
The British prime minister will spend the coming weeks defending her plans on Brexit, as well as her political future, at home and abroad.
Domestic and Foreign Sniping
The British prime minister will spend the coming weeks defending her plans, as well as her political future, at home and abroad. In the United Kingdom, May will have to deal with a Conservative Party divided between soft-liners, who want to keep close ties with the European Union, and hard-liners, who want a hard exit. The divisions are so deep that lawmakers from both camps have presented amendments to her proposals and voted against the government in the House of Commons. So far, she has averted significant defeats in Parliament by compromising with both groups. But Parliament will get a final vote on whatever deal London reaches with Brussels, meaning May's team will have to negotiate an agreement that is politically acceptable to an increasingly rebellious legislative body.
Some of the hard-liners have even threatened to replace her as leader of the Conservatives, and therefore as prime minister (in the United Kingdom, the prime minister is the leader of the governing party). A challenge to May's leadership would need the support of just 48 Conservative members of Parliament, a number that the anti-May camp could easily attain. But ousting her would require the backing of at least 159 Conservative members of Parliament – a figure that would be harder to find. Even if May were replaced, her successor would still have to deal with a divided party and a defiant Parliament. At this point, most Conservative lawmakers want to avoid an early election and its unpredictable results. Still, the parliamentary deadlock will continue, and an early election may be the only way to break it.
And that domestic squabbling is just half the problem for the prime minister, because she will also have to deal with a united European Union. While Brexit negotiations have been chaotic in the United Kingdom, the bloc has remained remarkably coherent since the start, claiming that London cannot obtain an ad hoc deal but must accept one of the pre-existing options for trade, such as membership in the customs union, membership in the single market or a Canada-style free trade agreement. In addition, the problem of the Irish border remains unsolved. In March, London and Brussels agreed that, if no better solution is found, Northern Ireland would remain in the customs union to prevent a hard border after Brexit. But on July 16, the House of Commons voted against any special status for Northern Ireland, thereby reopening an issue that the European Union thought was settled.
Rejection, Complications and a Ticking Clock
The European Union is likely to reject May's policy proposals, at least in their current form. This refusal will limit the United Kingdom's options. London is unlikely to decide to remain in the single market, because most members of both the Conservative and Labour parties are against the idea. Should Parliament's soft-liners take control of the process, the chances of a British request to remain in the customs union would increase. And should the hard-liners take control, Britain would opt to negotiate a comprehensive free trade agreement.
But the time for reaching a deal is running out. In October, the 28 members of the European Union will discuss Brexit. Ideally, the meeting would produce an agreement, but considering the complexity of the situation, the summit may prove inconclusive. In such a case, London would have another chance for a deal during the European Council meeting in December. At the same time, an emergency summit between the October and December meetings cannot be ruled out.
If the two sides reach a deal, the British Parliament would have to ratify it sometime between the final weeks of 2018 or the first weeks of 2019. The exact manner of the vote in Parliament, however, is a matter of debate: While the government wants Parliament to approve or reject the deal as is, lawmakers want the power to amend it and force the government to return to the negotiating table. If the legislature ratifies the deal, a transition period would occur between March 2019 and December 2020, during which time the United Kingdom will remain in the single market while London and Brussels complete negotiations regarding their future trade relationship.
Dealing With a No-Deal Scenario
But if no agreement is reached by early 2019, several things could happen. In the absence of any deal or transitional period, the United Kingdom and the European Union would have to introduce tariffs and customs checks at their borders after March 2019 under the terms established by the World Trade Organization. The British government would probably collapse, and an early election would take place. While this situation would heavily disrupt trade between the two, the disorder would probably be only temporary. In the face of such chaos, London and Brussels would likely redouble their efforts to reach a trade deal.
In another option, the United Kingdom could request an extension of the negotiation period to avoid a no-deal scenario. Article 50 of the Treaty on European Union permits an extension to the two-year negotiation period for an exit – so long as EU member states offer their unanimous support. This option would likely involve Britain making concessions to its EU partners to persuade them to extend the talks. In late June, a House of Commons committee said that even in the most optimistic scenario (a Brexit deal in October), withdrawal negotiations under Article 50 should be extended in order to give Parliament enough time to debate and vote on the deal. And on July 6, Austrian Chancellor Sebastian Kurz also said such a continuation may be necessary.
Considering the current disorder in the United Kingdom, several British politicians have suggested holding a second referendum on Brexit. Some argue that voters should be given the chance to decide whether they still want to leave the trade bloc. Others propose a referendum on the final EU-U.K. agreement. Another referendum, however, is unlikely. Most political parties have spoken against a second vote, while opinion polls show that the public is as divided on Brexit now as it was during the first vote in 2016. Time is also a problem, because a new referendum would have to be approved by Parliament. The referendum of 2016 took roughly seven months to approve, and then there was a long electoral campaign before the vote. With eight months to go before Brexit, time would be against Parliament if it chose to make such a dramatic course change now.