Author Mark Richards

We are now just 17 months away from 29th March 2019 – the date when the UK is due to leave the European Union. So where are the Brexit talks up to? And with both sides now preparing for ‘no deal’ what would the implications be if an agreement with the EU could not be reached?

Last week Theresa May was in Brussels for Brexit talks with other European leaders. Or was it talks about talks? Either way, she received a fairly sympathetic hearing with both Angela Merkel and French President Emmanuel Macron going out of their way to make conciliatory noises. A cynic would say that it was in their best interests to keep May in power: better to be negotiating with a Prime Minister who voted Remain last year than an avowed Eurosceptic like David Davis or Jacob Rees-Mogg.

Sadly the warm words evaporated as soon as the summit was over with both Merkel and Macron insisting that the UK must increase its divorce payment (initial offer £20bn) before trade talks can begin. The personal animosity was not far below the surface either: Jean-Claude Juncker, President of the European Commission, described Theresa May as “begging for help and with rings under her eyes.” This was swiftly dismissed by UK team, with chief negotiator David Davis alluding to the popular Euro-gossip that Jean-Claude ‘knows where the bar is.’

Is the UK being conciliatory with the Brexit talks?

More reasoned opinion did suggest that the UK has been quite conciliatory at the Brexit talks, with May conceding ground not just on the divorce bill but also on the proposed transition period and the European Court of Justice – at some cost to her domestic political position.

Several commentators have suggested that the UK is doing its best to appear conciliatory, painting the EU as the intransigent partner. And in fairness, it must be difficult for the UK. Who are they negotiating with? Chief negotiator Michel Barnier? EU President Jean-Claude Juncker? Or the person who pays the bills, Angela Merkel? Oops, and I forgot Donald Tusk, President of the European Council.

But the EU’s position remains stark. It will not discuss trade until the divorce bill is settled and the rights of EU citizens are sorted out – and the UK’s request to move on to trade talks was swiftly squashed by Germany and France.

It is important for the EU to realise that the UK is not Greece. The Syriza government there had to accept a humiliating deal. The UK government cannot, and will ultimately walk away with no deal rather than accept a bad deal.

Could the UK become Canada?

Since the UK voted to leave the EU there have been any number of trade models suggested: we could follow the Swiss model or the Norwegian model. Now the EU’s chief negotiator, Michel Brexit talksBarnier, has said that the UK should expect a trade deal similar to that which the EU has with Canada – the Comprehensive Economic and Trade Agreement (CETA). This is Canada’s largest trade agreement outside the North American Free Trade Agreement and took the small matter of seven years to negotiate. Small wonder that Barnier spoke of such an agreement taking “several years” and being “very different” to the current position.

Theresa May was having none of that, dismissing CETA as “stark and unimaginative” and saying that it would benefit neither the EU nor the UK. Crucially, an agreement similar to Canada’s would not be beneficial to the UK’s financial services industry, which would be left without ‘passporting rights’ – the ability for UK firms to do business in the European Economic Area without being subject to further legislation.

Even the very much pro-EU Liberal Democrat leader Vince Cable has described a Canadian style deal as a poor substitute for EU membership, inevitably leading to the exodus of business. “If this is the best the UK can hope for,” he added, “We are in trouble.”

What would ‘no deal’ look like?  

Small wonder then that both sides now appear to be preparing for no deal to be reached – whether they are willing to admit to it or not. What would ‘no deal’ by March 29th, 2019 mean?

As far as money goes, there would no obligation for the UK to make a financial settlement with the EU. Could the EU sue the UK through the International Court of Justice? In theory, yes, and relations between the UK and the EU would undoubtedly be soured for some time to come.

No deal would also – in theory – mean that the right of EU nationals to stay in the UK (and UK citizens to remain in Europe) could disappear overnight, affecting 3m EU nationals and around 1m UK nationals in Europe.

As far as trade goes, ‘no deal’ would see the UK operating under World Trade Organisation rules, with tariffs imposed on goods we both export to and import from Europe. The financial services industry would be especially vulnerable, with the ‘passporting rights’ referred to above unquestionably being lost. But it is not a one-way street: ‘no deal’ would also damage EU companies wanting to operate in the UK.

Customs, aviation and even the import of pharmaceutical drugs could be affected by no deal being reached. You suspect that neither side wants ‘no deal’ but at the moment very little real progress is being made with the Brexit talks.

Meanwhile, back at the ranch…

How is the UK economy doing while the negotiations – or lack of them – rumble on?

Wednesday morning brought good news for the economy and for savers, but bad news for borrowers. Figures released by the Office for National Statistics showed that the UK economy grew by 0.4% in the third quarter of the year, compared to 0.3% in each of the first two quarters. This may be some way behind China’s 6.8% growth, but it is better than analysts expected and good news for Philip Hammond as he prepares for next month’s Budget.

It is also good news for savers and bad news for borrowers, as it means that an interest rate rise is likely – possibly as early as next week. The increase – from the current base rate of 0.25% – would be the UK first rise in interest rates since 5th July 2007.

With inflation also rising to 3%, economist Ruth Gregory of Capital Economics said that the figures “had probably sealed the deal on a rate rise next week.” Other economists are more cautious, but a rate rise appears to be a question of ‘when’ not ‘if.’ Any rate rise next week will be small – from 0.25% to 0.5% – and future rate rises will be gradual, but the Bank of England is clearly signalling that the era of very low-interest rates is gradually drawing to a close. Clearly, the Bank is worried about inflation, with average UK wages now falling in real terms.

Back to Brussels…

The next European summit is due to be held in December. Hopefully, some progress in the Brexit talks will have been made by then: if not we will be little more than 15 months away from the deadline. It has long been my view that – like nearly all EU deals – this one will be concluded at the last minute. Tellingly David Davis hinted that parliament may not even get time to approve a deal before the UK leaves the EU. My prediction is that there will be a deal, but a deal done at 11:59 pm on Thursday, March 28th, 2019.