Theresa May buys some time

The leaked dinner conversion between Theresa May and Jean-Claude Juncker, President of the European Commission, was the opening round in what will be a tough fight. Juncker said he had become “10 times more pessimistic” after the dinner, a comment best treated as tactical noise. The European Union is a formidable negotiator. Its members have agreed a common position. The EU and the UK differ on issues like the timing of the trade negotiations and money, of course. There will be no early agreement-—there never is. Both sides will need to compromise.

There is no guarantee of a deal, but the election helps. The point is not that an enhanced majority would give May more authority—nobody in the EU is buying that. Far more important is the timetable. After 8th June, May will have five years until the next election; she will need that time.

Under the previous timetable, elections would have been held in 2020, a year after Brexit formally takes effect. By that point, there is simply no way the EU and the UK would have agreed, let alone ratified, a free trade agreement. But under Britain’s reset political cycle, May will have a full five years—until 2022—to complete Brexit. This is still going to be tight, but doable. By then she will have been able to fix—or at least set the direction on—the big post-Brexit policy issues, such as a new industrial strategy.

The new five-year timetable together with an enlarged majority could also render May’s “no deal is better than a bad deal” threat more credible. Before last year’s referendum David Cameron returned from Brussels with a lousy deal because nobody in Brussels believed that he would ever campaign against EU membership. But for the commitment to be credible, the detail of “no deal” needs to be fleshed out. Will the UK in this case just revert to World Trade Organisation rules, which would include many automatic tariffs? Would the UK opt instead for unilateral free trade—maintaining zero tariffs on imported goods regardless of what others do? Will it have a new business model in place by then? This cannot be the vaunted low-tax “Singapore option”—which works in the very different setting of a tiny capitalist enclave in the South China Sea. It needs to fit plausibly with, and to develop, what May has said about a post-industrial society. In sum, “no deal” is never going to be the better option, but it needs to look good enough.

The EU, too, has much to lose if the UK were to leave without a deal. It would lose a strategic partner in the G7, the G20 and Nato. It would potentially lose a partner in the fight against terrorism. EU manufacturers operate complex supply chains across borders. A moderately soft Brexit with a transition period would allow them to unscramble the chains. They would suffer heavy losses if the UK were to crash out of the EU without an agreement on April Fools’ Day, 2019.

The EU will, of course, need to ensure that the terms of Brexit are fair. In particular, it needs to ensure that Britain will not be obviously better off as a result of Brexit. Two factors are making this possible: the first is that May has made the whole process easier with the decision to exit both the single market and the customs union. That reduces the large number of possible post-Brexit options to a single one: a free-trade agreement. With that she has defused the perennial concern about cherry-picking. The UK will be outside the single market. There will, it effectively accepts, be a relative loss of market access. That should make the talks easier.

The second factor is time. If the elections go as expected, May will have a sufficient majority for the next five years, crucial if she is to confront the issue that could otherwise derail an agreement—the row over the Brexit divorce bill. Consider this: Brexit formally takes effect on 1st April 2019. There will be a transition period that would end, say, on 31st December 2020. The EU’s budget also happens to run to the end of 2020. If the EU and the UK agree to a transitional arrangement, the UK will continue to pay into the budget until the end of the current budget period--—the end of 2020. A short transition of one year might be a little ambitious, but it would be the neatest solution. If the trade negotiations needed more time, the UK and the EU could agree to an extension. After all, the next UK elections would have to take place by May 2022. So the UK could, if needs be, make a pro-rata contribution to the EU budget for a couple more years after Brexit.

The main purpose of the transitional period is for the UK and the EU to negotiate a free trade agreement and to implement the changes that will be necessary. During the transition period, the UK will not formally be a member of the EU, but life will be much the same as before—the UK will remain a member of both the customs union and the single market, and it will respect freedom of movement. In any case, there is no way that the UK will have its own immigration system ready by 2019. The Home Office is under strain to deal with the 100,000 current applications for permanent residency by EU citizens. There are three million EU citizens in the UK. So, immigration wise, a transition period is vital.

The same argument applies to a free trade deal. It will not take 10 years to conclude as scaremongers suggest. EU negotiators will not need fact-finding missions: the UK is already compliant with EU law. Both sides could easily agree to open their borders to tariff-free access for goods and some services. But this will require agreement on regulatory compliance. The UK will have to accept EU standards in the sectors covered. Both sides will have to think hard about priorities in such an agreement. For the UK there is a trade-off between the number of sectors subject to a bilateral trade deal and the degree of regulatory sovereignty. The EU is the stronger partner in this particular game. There is not much the UK can do about it, but it should be able to get agreement on an independent dispute settlement procedure, rather than the European Court of Justice.

The election will give May the time and scope to make compromises. By leaving the customs union, she has settled for a relatively hard Brexit. With an enhanced majority she can soften it. That is a smart strategy, which stands a reasonable chance of success. Until there is success, expect a lot of noise. But what makes me optimistic is the realisation that the EU is exceedingly good at one thing—reaching impossible agreements.