UK/EU: Kicking the can further down the road (with or without extension)

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As future relationship talks remain complicated, the immediate risk is that the UK decides by 30 June to not request an extension of the transition period beyond 31 December. As discussed since last year, by reducing the ambition of the withdrawal agreement, the most important trade-offs have been kicked forward into the future relationship talks. This is where they are now creating renewed fears of cliff-edge risk. Four broad areas appear especially tricky.

Perhaps the easiest to resolve might be money. In the case of an extension, the UK’s additional contribution to the EU budget could be lowered considerably, given that the UK would not be covered by most EU programs under the bloc’s new multi-annual financial framework envisaged to start on 1 January 2021. Monthly extensions will likely remain unacceptable to the EU, but perhaps a prolongation of under a year could be feasible. Agreement on the fisheries question might also not be required for an extension to be granted.

As such, fisheries is a more complex topic. EU chief negotiator Michel Barnier has reiterated that the bloc would not conclude a comprehensive economic partnership without a solution on fisheries. But as both sides remain unwilling to move, the question is still whether that also counts for a mere, bare-bones free trade agreement, i.e., whether a zero tariffs and quotas FTA could still be concluded despite there being no deal at all on fisheries (meaning no EU access to UK waters and no UK fish exports into the EU).

Such logic could also be helpful on the even thornier issue of governance. The UK remains opposed to the EU’s demand of an overall legal structure for the agreement. One question to watch is whether the EU would continue to insist on it even if both sides only agree to a bare-bones FTA. However, this would only push uncertainty for businesses further into the future relationship, given the EU’s demonstrated willingness to weaponize separate aspects of a broader relationship over time (as was the case, for instance, with Swiss stock exchange equivalence).

The most difficult area might be level playing field provisions, i.e., the need for the UK to commit to minimal standards on everything from taxation to the environment. Given public scrutiny for global trade, it will be very difficult for the EU to agree to any FTA that does not include respective competition safeguards. One question to watch is whether the UK could commit to broad minimal standards (most of which it already outperforms), if the overall relationship is merely an FTA and therefore considered loose enough by Brexiters.

PM Boris Johnson opted for a last-minute deal last year. While this constitutes a positive track record, it is not clear where the domestic political pressure would come from this time, given the new composition of his parliamentary party. If the UK does not demand an extension in June, the focus would likley move towards a simple FTA by year-end, rather than immediate preparations for WTO rules. In general, cliff-edge risk perceptions should be put into perspective. In any scenario, uncertainty over the future relationship will remain elevated for the better part of this decade, as the UK tries to decide how much sovereignty it is willing to sacrifice for economic proximity.

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