Blog Post

Brexit, phase two (and beyond): The future of the EU-UK relationship

Whether it looks more like ‘CETA-plus’ or ‘EEA-minus’, the trade deal that emerges from phase two of the Brexit negotiations should not be the limit of ambition for future partnership between the EU and the UK

By: and Date: December 13, 2017 Topic: European Macroeconomics & Governance

The European Commission has recommended to the Council that sufficient progress has been made in phase one of the EU-UK negotiations. With the Council expected to endorse the recommendation this week, phase-two discussions on the future relationship can start (possibly in March).

A possible timeline of the next steps in the EU-UK relationship is shown in the diagram below:

  • a one-year period of negotiations that will take us up to October/November of 2018, at the latest. This allows for the minimum time required for the new agreement to be ratified by the EU by March 2019 – the cut-off date for the UK to leave the EU.
  • After March 2019, a two-year period is envisaged in which the UK would most likely remain a full member of the EU single market and customs union, but without any voting rights. During this period, the UK would also remain bound by decisions of the European Court of Justice and continue to pay its full share in the EU budget. This should ensure a smooth transition from EU membership to the new EU-UK framework.
  • By March 2021, the new negotiated trade agreement between the EU and the UK will come into effect.

An alternative timeline could be as follows: by October/November 2018, the two parties have agreed on the broad contours of the future trade deal, but not on the details. In this case, the ratification process which will take place between that time and March 2019 would only be about the two-year interim arrangement. During this transition period, the UK would probably remain in the EU single market and customs union, and abide by EU budget and ECJ rules, like in the timeline described above. The only difference with the previous timeline would be that negotiations on the details of the trade deal would continue during the transition period, which would need to include sufficient time for the ratification of the agreement.

What can we expect the future EU-UK relationship to look like? Ideally it should encompass both a trade component as well as a more political, strategic component.

As far as trade is concerned, Liam Fox, the UK secretary of state for international trade, has recently declared that the UK would like an agreement with the EU that would be “virtually identical” to the one it has at the moment, as an EU member.

The EU side is willing to offer the UK a trade deal that looks either like the CETA arrangement with Canada, or the EEA agreement with Norway, Iceland and Liechtenstein.

The EU side is willing to offer the UK a trade deal that looks either like the CETA arrangement with Canada, or the EEA agreement with Norway, Iceland and Liechtenstein.

A CETA-type trade deal would fall much short of what the UK is looking for, mainly because it offers relatively limited access in services, with no passporting rights for financial services – an important sector for the UK.

On the other hand, an EEA-type agreement would give the UK much of what it is looking for in trade, including passporting rights for financial services. However, the EU insists that access to its single market, which EEA countries enjoy, must mean not only free movement of goods, services and capital, but also of labour – a demand that the UK is not willing to accept.

In other words, the UK is looking for a ‘CETA-plus’ (i.e. plus services, including financial services) or an ‘EEA-minus’ (i.e. minus free movement of labour) agreement. For its part, the EU is sticking to its CETA or EEA offer, without plus or minus. Whether there is room for a compromise between the two positions and at what price – in terms of UK contributions to the EU budget and with respect of ECJ decisions – is what the negotiations of phase two will really be about.

As an aside, but an important one, it should be mentioned that CETA and the EEA are both free-trade agreements (FTAs) rather than customs unions (CUs). Neither Canada on the one hand, nor Norway, Iceland and Liechtenstein on the other, belong to the EU customs union. This implies that trade within CETA or the EEA requires rules of origin and therefore some border controls, which are absent inside the EU. In principle CETA-plus or EEA-minus could be CUs rather than FTAs, but it is unlikely that the UK would accept leaving the EU and yet remaining tied to its trade policy for longer than the transition period. As a matter of fact, among the many reciprocal preferential trade arrangements signed by the EU, all but one are FTAs. The only exception is the EU-Turkey CU that Turkey was keen to sign in 1995 as a step towards its EU candidate status, which it obtained in 1999.

Given the tight schedule of phase two, which requires a deal to be reached by October/November 2018, CETA-plus looks much more feasible than EEA-minus. For the EU, CETA plus would avoid getting into the discussion on the indivisibility of the single market’s four freedoms, which it considers sacrosanct at this stage and which EEA-minus would imply. For the UK, CETA-plus would probably require less contribution to the EU budget and less respect of ECJ decisions than EEA-minus, and therefore be easier to accept politically.

But the problem with a CETA-type agreement, even if it were upgraded to CETA-plus, is that it is an agreement designed for countries outside Europe, not for European neighbours – let alone for a neighbour with close economic and political ties, like the UK. So even if the future EU-UK trade agreement were “virtually identical” to the current trade arrangement inside the EU, it would miss the other dimensions of the EU-UK relationship.

Indeed, the discussion on the future relationship cannot stop at trade. The historical ties between the UK and continental European countries, individually and collectively, cannot be erased with EU withdrawal. Moreover, in a world of shifting economic powers and competing models for economic global engagement, nurturing natural alliances is crucial.

The EU-UK relationship is one such alliance that needs to be preserved and promoted. But for this to be ensured, the agreement reached at the end of phase two will need to allow for a certain fluidity to potentially morph it one day into a new partnership, of which trade would be just a single, albeit important, component.

To be specific, what we have in mind is for the possibility that, after the UK has left the EU and after the transition, the EU and the UK sit down again at the table of negotiations to try to reach a more ambitious agreement than the trade deal that will be the outcome of the phase-two negotiations. This agreement should, in accordance with Article 217 TFEU that defines association agreements, establish “an association involving reciprocal rights and obligations, common action and special procedures”. The areas of cooperation should be as broad as possible and cover not only economic matters, both inside and outside single market-related issues, but also internal and external security. Such agreement would create a new partnership between the EU and the UK to reflect historical alliances.

The way to ensure that the trade deal – whether it is concluded by October/November 2018 or during the two-year transition period – is only a step towards a more ambitious association agreement that allows for a genuine partnership, is to include appropriate language in the preamble of the trade agreement.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article Download PDF More on this topic
 

External Publication

EU-China trade and investment relations in challenging times

In this report, we have focused on trade and investment relations and have not attempted to define the many other policy instruments that the EU can and should pursue to increase its leverage towards China, and to protect its domestic economy while boosting domestic investment and trade.

By: Alicia García-Herrero, Guntram B. Wolff, Jianwei Xu, Niclas Poitiers, Gabriel Felbermayr, Rolf J. Langhammer, Wan-Hsin Liu and Alexander Sandkamp Topic: Global Economics & Governance Date: June 4, 2020
Read article More on this topic More by this author
 

Opinion

COVID-19 and India: economic impact and response

This piece was published the day before India imposed one of the world's strictest lockdowns in its response to the COVID-19 response. It remains relevant in assessing the government's actions in the ten weeks that have since passed.

By: Suman Bery Topic: Global Economics & Governance Date: May 27, 2020
Read article Download PDF
 

External Publication

European Parliament

A Just Transition Fund – How the EU budget can help with the transition

On 14 January 2020, the European Commission published its proposal for a Just Transition Mechanism, intended to provide support to territories facing serious socioeconomic challenges related to the transition towards climate neutrality. This report provides a comprehensive analysis of how the EU can best ensure a ‘just transition’ in all its territories and for all its citizens with the tools at its disposal. It provides an overview and a critical assessment of the Commission's proposal, and suggests possible amendments based on best practices from other just-transition initiatives.

By: Aliénor Cameron, Grégory Claeys, Catarina Midões and Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance, European Parliament Date: May 26, 2020
Read article More on this topic More by this author
 

Opinion

How will COVID-19 impact Brexit? The collision of two giant policy imperatives

The United Kingdom left the European Union on Jan. 31, 2020. Now, the U.K. must decide whether and how to extend the transition period, currently set to expire at the end of 2020.

By: Rebecca Christie Topic: European Macroeconomics & Governance Date: May 19, 2020
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live: Rebooting Europe - a framework for post COVID-19 economic recovery

Mapping out the post COVID-19 recovery.

Speakers: Maria Demertzis, Giuseppe Porcaro, Simone Tagliapietra and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 15, 2020
Read about event More on this topic
 

Past Event

Past Event

Democracy in the times of COVID-19 with Věra Jourová

How can Europe uphold its democratic values while fighting COVID-19?

Speakers: Sam Fleming, Věra Jourová and Michael Leigh Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 14, 2020
Read article Download PDF
 

Policy Brief

Rebooting Europe: a framework for a post COVID-19 economic recovery

COVID-19 has triggered a severe recession and policymakers in European Union countries are providing generous, largely indiscriminate, support to companies. As the recession gets deeper, a more comprehensive strategy is needed. This should be based on four principles: viability of supported entities, fairness, achieving societal goals, and giving society a share in future profits. The effort should be structured around equity and recovery funds with borrowing at EU level.

By: Julia Anderson, Simone Tagliapietra and Guntram B. Wolff Topic: Energy & Climate, European Macroeconomics & Governance Date: May 13, 2020
Read article Download PDF More on this topic
 

Policy Contribution

The European Union’s post-Brexit reckoning with financial markets

In the negotiations between the European Union and the United Kingdom over their future relationship, we see a high probability of a weak contractual outcome, given the dominance of politics over considerations of market efficiency.

By: Rebecca Christie and Thomas Wieser Topic: European Macroeconomics & Governance Date: May 13, 2020
Read about event More on this topic
 

Past Event

Past Event

Keeping trade open during and after Covid-19

This event examines the impact of the Covid-19 crisis on open markets and connected supply chains globally.

Speakers: Maria Demertzis, André Sapir, Senator the Hon Simon Birmingham and Rebecca Fatima Sta Maria Topic: Global Economics & Governance Date: April 30, 2020
Read article More on this topic
 

Blog Post

EU trade in medical goods: why self-sufficiency is the wrong approach

As countries are struggling with the COVID-19 pandemic, shortages in medical equipment led to EU export controls and war-time like procurement of respirators. While the crisis is still unfolding, there is a debate on whether the EU is too reliant on global value chains for medical goods. Looking at the world market of medical goods for the EU, we argue that self-sufficiency is the wrong approach. Global medical markets are to the benefits of the EU and stockpiling and preparation are more effective in preparing for emergencies.

By: Sybrand Brekelmans and Niclas Poitiers Topic: Global Economics & Governance Date: April 14, 2020
Read article More on this topic More by this author
 

Blog Post

What the EU should do and not do on trade in medical equipment

The European Union has introduced export controls on some medical supplies. This was a mistake. It should announce that it is withdrawing the measure, and call on other countries to do the same.

By: André Sapir Topic: European Macroeconomics & Governance Date: March 25, 2020
Read about event
 

Past Event

Past Event

ONLINE ROUND TABLE: Future of the EU-UK science cooperation

How do we rebuild and keep the science cooperation between the EU and the UK?

Speakers: Michael Leigh and Beth Thompson Topic: European Macroeconomics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 17, 2020
Load more posts