The Brexit grand bargain is in sight, but not yet within reach

When Boris Johnson agreed the withdrawal treaty with the EU last autumn, he first blustered, then asked for the closed-room talks, and finally backed down to concessions in private. His was a tactical play in which, to get a deal, he had to look resolute at home but show more flexibility in Brussels.

The same tactic is being used by the Prime Minister now. In September, the government sought to destabilise the trade talks with new law-breaking legislation, the Internal Market Bill. Last week, Johnson tried to pull the plug on the negotiating process completely until Brussels offered an olive branch, agreeing that negotiators can start developing the legal texts. And so, the two sides have agreed on new choreography, with the teams meeting every day to try to hammer out as much of the agreement as possible, until they run out of road.

It is a measure of how little trust there is in the talks that, after nearly eight months of negotiations, the two sides have started this critical process just now. Until last week, negotiators were stuck in a cycle of dissecting each other’s positions and red lines. It is only ten weeks before the transition period ends, and three weeks before the deal must be finalised, when they have started work on the actual agreement. Mistrust runs as high as mutual misunderstanding between Britain and the EU.

We are now finally in a phase when detail is being discussed, legal solutions explored, and joint positions formulated. Yet key disagreements between the two sides are political, not technical. Inevitably, their resolution will require the politicians to engage.

There will be a deal only if both sides can claim to have secured their main defensive interests: the EU its ask on level-playing field commitments, the UK on sovereign control of its fishing waters, while both sides require reassurance over the Northern Ireland protocol, with Brussels needing convincing that the arrangements will actually be implemented, and the UK that they will not violate its red lines on state aid or the union. For this seemingly impossible bargain to be struck, there are three pieces that have to fall into place within the coming weeks.

First, the UK must offer greater clarity to the EU on enforcement of the level-playing field. There has been good progress in this area since Britain warmed up to the idea of agreeing "common principles" on subsidies to industry. But the rules are only as good as how they are enforced in practice. Brussels now demands stronger oversight, with an independent subsidy regulator in the UK, and a dispute-resolution process that could be used if one side lowers its existing labour, environmental or climate standards.

A compromise on state aid will require further clarity from London on who will enforce subsidy rules in Britain, how government decisions will be challenged, and what retaliatory measures can be taken in future if subsidies end up distorting trade. The solution here is within reach, once the sovereignty purists inside Downing Street come to terms with the fact that an independent subsidy control regime will not prevent them from investing strategically in their domestic priorities, be it supporting R&D, "levelling up” the country or restructuring firms after the pandemic.

Meanwhile, on labour, environmental and climate standards, there remains disagreement over whether to include a “ratchet clause”—a niche provision which would mean that if the EU or UK were to tighten their future climate or other laws, these standards would become a new common floor.

There is a sensible middle ground here, in my view. When one side raises its standards, the other could be obliged to consider these changes but not bound to adopt them. If the concerned party believes that its higher standards put it at a competitive disadvantage, it should be able to ask an independent expert panel to assess the risks of being undercut. If such a risk is proven by the panel, then the other party will have an opportunity to raise its standards or offer “rebalancing measures” in the form of financial compensation.

The second condition for a deal is that the EU moves on fisheries, starting from a recognition that Britain will be an independent coastal state and that fishing quotas cannot be the same as today. Fish is just as much of a red line for the UK as the level-playing field is for the EU.

Earlier in the summer, the UK made a tactical choice that a deal must safeguard Britain’s core defensive interests—on fish and regulatory autonomy—even if it means dropping its main offensive asks, such as tariff-free trade or access to the single market for services on more favourable terms than Canada. That Brussels has now offered some perks to the UK, such as ongoing access to the EU’s energy market, in return for keeping its present fishing rights is welcome but, in the eyes of Downing Street, still not enough.

A compromise on fisheries thus rests on further movement from EU member states—with Britain likely having to accept reduced access to the single market for its key exports in return. This puts the onus on Michel Barnier and Emmanuel Macron to compromise, but they stand to gain from a long-term strategic advantage in the services sector after UK services take the hit from a thin deal.

If Barnier can walk France back from the position that quotas should remain the same as now, and if Macron can internalise the reality of his position, there can be agreement on mutual access to the waters, with a new distribution of quotas. The two sides could also agree on a method of revisiting the allocations over time, with the possibility of remedial sanctions. However, the political sensitivities around fisheries will keep us in suspense about the eventual compromise until the last minute.

The third and final condition for a deal is that the UK removes the offending clauses from the Internal Market Bill. Expect London to do this only after the rest of a deal is already on the table. The bill plans to prevent a scenario in which EU state aid rules affect future subsidies not just in Northern Ireland but also the rest of the UK. This risk will largely disappear if the government presents its own clear and enforceable rules applying to Great Britain and the EU, in turn, recognises them as such in the future agreement. In exchange, however, the government will likely ask the EU that the controversial Article 10 of the Northern Ireland Protocol—on state aid—be amended, or its meaning clarified through a decision of the Joint Committee under the withdrawal treaty.

Another concern—that tariffs could be levied on certain high-risk products moving from Great Britain to Northern Ireland—will fall away with a zero-tariff agreement. In other words, if there is a deal, there are no reasons for the prime minister to hold onto the “safety net” that he cited as justification for the controversial Internal Market legislation.

Without a doubt, these three issues require difficult compromises on both sides. The wrangling over legal text and clever drafting will not resolve the central tension between the EU’s desire to keep Britain in its orbit and the UK’s quest for control at any cost. Neither Barnier nor David Frost have the political cover to agree to the types of concession that are necessary for a deal—yet.

It will fall to the politicians. For Johnson’s part, striking a deal will mean concessions on subsidies in return for a thin and economically asymmetrical deal—a trap that the prime minister set for himself when he sacrificed his offensive negotiating asks on the altar of sovereignty. For the EU’s part, it will mean swallowing its pride and the belief that economic clout can deliver all it wants. The political cost of a grand bargain may well be too high for both sides.

Ultimately, the biggest risk to a deal is that, as the clock runs down to the moment of reckoning, intransigence leads to a miscalculation and, in turn, to an accidental no deal. This would be a failure of statecraft as well as strategy. For now, however, it is too early to discount that possibility.