Brexit Transition Deal Poses Questions for the EU

By Laurence Norman and Stephen Fidler Features Dow Jones Newswires

The British government's apparent agreement that it will seek a post-Brexit transitional deal with the European Union is aimed at easing business uncertainty. But companies still have no idea about what rules will govern the economic relationship between the EU and U.K. when Britain leaves the bloc less than 20 months from now.

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Westminster politics has ensured there is still plenty of confusion about what the government wants the transition to look like, and the waters haven't been tested on how the EU will react to any British demand, an issue that has been absent from the British debate.

In principle, EU officials have been open to the idea -- though they have insisted that "sufficient progress" should be made on the divorce terms, including a British financial settlement, before they begin discussing it.

From the outset, EU officials envisaged two possible types of transition. The first type would look more like the eventual permanent landing place for the relationship, with phasing out periods for current arrangements. The second would replicate more closely the relationship that exists now, shifting after an agreed time to the permanent arrangement.

However, with time short, negotiating a detailed transitional deal of the first type looks highly ambitious, because it would also require the shape of the permanent future ties between the EU and the U.K. to be worked out. A transition of the second type -- a temporary standstill -- would be easier and is the stated preference of many businesses.

So what is the EU position? Michel Barnier, the EU's chief negotiator, has regularly said a transition would only be plausible as a bridge toward the future trade agreement between the EU and U.K.

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That is reflected in negotiating guidelines that were agreed to by the 27 other EU governments on April 29. They said transitional arrangements should "provide for bridges towards the foreseeable framework for the future relationship" and "must be clearly defined, limited in time, and subject to effective enforcement mechanisms."

The European Parliament, which must approve the divorce deal before Britain leaves, was more specific on the length of any transition, saying it should last no more than three years.

This leaves a host of questions.

The first is whether a status-quo arrangement would meet the EU criterion of taking the two sides toward the end state of a future EU-U.K. agreement. Indeed, some EU governments are concerned that such a transition, while helpful for Britain, could merely perpetuate uncertainty for the other 27 EU nations, which are generally confident they can handle the impact of Brexit.

If they agreed in principle to a temporary standstill, what would the EU require in return? Would it demand that all EU citizens who arrived in the U.K. after Brexit should be offered the same expansive rights and benefits that it wants Britain to offer those who are already there? If so, that would push back by years the as yet undetermined cutoff point after which new arrivals would no longer be guaranteed a path to permanent residency.

Would the price of British temporary membership of the customs union and the single market be the same as it is now once the U.K. was no longer a member? Would the EU insist that Britain would have to give up its long-cherished budget rebate, which lowers its net contribution to EU coffers to around EUR10 billion annually?

To be sure, a British status-quo offer would have attractions to the EU 27. It would rid the EU of the large budget gap it will face at least for the remainder of the current 2014-20 budget period by ensuring continued British payments to Brussels in 2019 and 2020, and possibly beyond. (It might also lower the British divorce bill, easing negotiations there.)

The EU would also stand to lose from British economic turbulence -- and the loss of tariff-free export markets -- if the U.K. were to exit before it is economically ready to do so. EU officials quietly say it is an offer the bloc would carefully consider.

"It's easy to agree to keep everything as it is for two years," one senior EU diplomat said last month, saying it would be a "clever" offer from London. However, he added, "For sure, some countries would like a quite limited transition, two-three years is already pushing it."

"I don't think it would be divisive," said a second diplomat involved in the negotiations. "The main issue to consider is that everybody wants a smooth Brexit and whatever we can do to ensure that smooth Brexit is something that merits discussion."

One thing is clear, however. The EU won't offer anything until the U.K. clarifies its position and makes an official proposal. An agreement will then have to be struck on terms. The longer all this takes, the longer post-Brexit uncertainty for business will last and the less valuable a transitional deal will be.

--Valentina Pop contributed to this article.

Write to Laurence Norman at laurence.norman@wsj.com and Stephen Fidler at stephen.fidler@wsj.com

(END) Dow Jones Newswires

August 03, 2017 16:36 ET (20:36 GMT)