Still seeking Brexit certainty

With just a year to go, there is one thing on which all sides of the fractious Brexit debate can agree: the number of questions still to be answered about what leaving the European Union means in practice is as large as ever. It’s a number that has not really come down since the morning after the UK voted to leave in the referendum of June 2016. That uncertainty matters.

That uncertainty matters. While the gloomiest predictions about the economic impact of Brexit have not materialised, 2017 was hardly a boom year for Britain, with growth lagging both the US and the eurozone. Most analysts, including the Bank of England and the International Monetary Fund, expect that underperformance to continue in 2018 and 2019. The single biggest factor in this underperformance, they argue, is that business investment is unusually low. Organisations such as the Confederation of British Industry and the British Chambers of Commerce agree: they warn companies of all sizes are reluctant to invest for future growth until they know more about the market conditions in which they will have to operate.

Towards a transitional deal It’s not all bad news. With both the UK and the EU accepting it will not be possible to put a final deal on Brexit in place before 29 March 2019, the day the UK is due to leave, agreement on a transitional arrangement is within reach.

EU ministers agreed their position on a transitional deal in January. They want this deal to apply until 31 December 2020; it would effectively preserve the status quo, guaranteeing the UK continuing access to the single market, but with all EU rules and regulations, including free movement of EU
citizens into the UK, continuing to apply.

For businesses, this represents a good outcome, since it would give them almost two extra years to plan for life after full-scale Brexit while continuing to trade on the same terms as today. Without such an arrangement, businesses face the so-called ‘cliff edge’ scenario, in which the UK simply leaves the EU in March 2019 with no process in place. That would mean a default to the terms of international trade set out by the World Trade Organisation, including potentially punitive tariffs of imports and exports.

However, the UK Government isn’t entirely happy with the EU’s proposals, which means businesses cannot yet depend on this version of a transitional deal. One sticking point is that the EU insists the UK would have to abide by any changes made to its rules and regulations during the transitional period – but that it would not be entitled to take part in discussions about those changes. Ministers in the UK are arguing to have some say.

Another problem area is trade with countries outside the EU. The EU says the UK is free to negotiate new trade treaties with countries around the world but that it will not be able to implement them until the end of the transition period; the UK will effectively remain part of the EU Customs Union until the end of 2020.

Some UK government ministers find that unpalatable but the bigger worry for business concerns international sales. Customs Union membership guarantees tariff-free and frictionless trade with EU member countries, which is good news, but the rest of the world accounts for just over half of all UK exports. Since the UK will technically have left the EU in March 2019, there is no guarantee businesses can depend on the EU’s trade agreements when accessing other countries’ markets, even though the transitional deal means abiding by these agreements when it comes to imports. The UK Government says it will resolve this problem with bilateral agreements with countries outside the UK, but these will require sign-off from the EU. The bottom line is that while a transitional deal is in sight, providing crucial reassurance to businesses about the short term at least, there are no certainties yet. All the more sogiven the biggest uncertainty of all – the EU has said that without agreement on a final deal before March 2019, it won’t implement the transitional arrangement.

Beginning of the end?
This is where we stand right now then. With luck, a final transitional deal can be agreed by the end of this month [March], paving the way for six months of negotiations on future relations between the UK and the EU. This would give both sides time to ratify an agreement before next March, at which stage the transitional agreement kicks in.

However, this is an optimistic timetable given that uncertainty about the final deal is even greater than for the transitional arrangement. The UK Government is only just beginning to set out its bargaining position, as it seeks to balance businesses’ desire to have continued unfettered access to the
markets of the European Union with its desire to have more control over international trade agreements, regulation and immigration policy. The decision of the Labour Party, backed by a group of rebel Conservative MPs, to back a less aggressive version of Brexit, including maintenance of
some form of customs union, throws a spanner in the works.

In any case, the arguments about the position the UK should take may be irrelevant if the EU sticks to its insistence that no cherry-picking will be allowed. In Brussels, EU leaders continue to maintain that the UK will not get tariff-free and frictionless access to the EU’s single market unless it agrees to abide by all its rules – including freedom of movement and regulatory alignment.

Moreover, underlying these big-picture questions, the outlook for individual industries and businesses is even more uncertain. For example, the government has angered financial services companies by refusing to publish its own position paper on its detailed priorities for trade goals for the
sector. Businesses complain they do not even know what ministers hope to negotiate on their behalf.

Uncertainty, in other words, persists. We may now know more about what the In Brussels, EU leaders continue to maintain that the UK will not get tariff-free and frictionless access to the EU’s single market unless it agrees to abide by all its rules

transitional deal is likely to mean, but we don’t know whether it will actually come into force in a year’s time. Without a full agreement on life after the transition – about which there is still complete confusion – the UK faces the prospect of the cliff-edge. Against this backdrop, many businesses will
remain nervous about making investments. There is also some evidence that banks are becoming more anxious about lending to businesses: lending to small and mediumsized enterprises fell sharply during 2017 – partly because fewer SMEs applied for loans or overdrafts, but also because approval rates slipped back.

Businesses will now hope that deadlines start to concentrate minds. With time running out to secure a deal, they need more answers to those basic Brexit questions. Those answers may not always be palatable, but they will at least provide some certainty.