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.

View comments
Read about event

Upcoming Event

Sep
9
08:30

China-EU investment relations: Exploring competition and industrial policies

This is a closed-door workshop jointly organised by MERICS and Bruegel looking at China-EU investment relations.

Speakers: Alicia García-Herrero Topic: Finance & Financial Regulation, Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More by this author

Opinion

The Coming Clash Between Climate and Trade

The new leaders of the European Union, who have relentlessly championed open markets, will, ironically, likely trigger a conflict between climate preservation and free trade. But this clash is unavoidable, and how Europe and the world manage it will help to determine the fate of globalisation, if not that of the climate.

By: Jean Pisani-Ferry Topic: Energy & Climate, Global Economics & Governance Date: August 1, 2019
Read article More on this topic More by this author

External Publication

La Banca centrale europea

This external publication delves into the new responsibility given to the European Central Bank: supervision on banks in the euro-area. It tells its history and illustrates its functions, structure and responsibilities and the exceptional answers to respond to the "perfect storm" of the crisis.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: July 31, 2019
Read about event More on this topic

Upcoming Event

Oct
29
08:30

Bank resolution: its impact in the EU

Closed-door workshop on various aspects of bank resolution.

Speakers: Jon Cunliffe, Martin J. Gruenberg and Elke König Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic

Blog Post

European champion-ships: industrial champions and competition policy

This blog post investigates the debate on whether European competition rules should foster European industrial champions, or allow national champions to grow to a European scale. It explores the criteria that one would intuitively ascribe to industrial champions, illustrating the difficulties in defining either ‘European’ or ‘Champion’. It then conducts a brief look into whether EU Merger decisions have impeded the formation of ‘European Champions’.

By: Mathew Heim and Catarina Midoes Topic: Innovation & Competition Policy Date: July 26, 2019
Read article More on this topic More by this author

Opinion

A reflection on the Mercosur agreement

The EU accepts the deal because it is worried about the catastrophic scenario of a world without the WTO.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: July 26, 2019
Read article More on this topic More by this author

Blog Post

The consequences of Switzerland’s lost equivalence status

Due to a spat between the European Commission and the government of Switzerland over the negotiation of an institutional framework agreement, equity securities that are listed on Swiss exchanges are banned from being traded on stock exchanges in the European Union. This blog post reviews the background of this incident and assesses the consequences for companies listed in Switzerland as well as EU investors investing in Swiss equity securities.

By: Michael Baltensperger Topic: European Macroeconomics & Governance Date: July 25, 2019
Read article More on this topic More by this author

Blog Post

Modernising European Competition Policy: A Brief Review of Member States’ Proposals

French, German and Polish governments have jointly proposed options for modernising EU competition policy. The debate to recalibrate European competition rules was already well underway. So, it is not surprising that proposals are consistent with other statements made by France and Germany. Yet, proposals do not address current issues weighing on the international competition community, such as conglomerate effects theory or algorithmic collusion.

By: Mathew Heim Topic: Innovation & Competition Policy Date: July 24, 2019
Read article More on this topic

Opinion

EU policy recommendations: A stronger legal framework is not enough to foster national compliance

In 2011, the EU introduced stricter rules to monitor the implementation of country-specific policy recommendations. Using a new dataset, this column investigates whether these new laws have increased national compliance. There is no evidence that these stricter processes matter for implementation rates, whereas macroeconomic fundamentals and market pressure are important determinants of implementation progress. These results suggest ways to improve the effectiveness of European policy coordination that go beyond stronger legal processes.

By: Konstantinos Efstathiou and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: July 23, 2019
Read article More on this topic More by this author

Opinion

The EU needs a bold climate strategy

Scientists report that global temperature increases must be limited to below 1.5 degrees Celsius. With global greenhouse gas emissions continuing to increase and rising temperatures driving up the frequency of extreme weather events, the world needs a greater commitment to climate policy.

By: Guntram B. Wolff Topic: Energy & Climate Date: July 19, 2019
Read article More on this topic More by this author

Opinion

Von der Leyen’s Green Deal isn’t just a plan for the environment

Ursula von der Leyen's proposal of a European Green Deal is ambitious and urgent. Not only does it aim to reduce the continent's emissions, but it also has the potential to grow the EU's economy and transform the bloc's politics.

By: Simone Tagliapietra Topic: Energy & Climate Date: July 18, 2019
Read article More on this topic

Blog Post

Talking about Europe: Die Zeit and Der Spiegel 1940s-2010s

An on-going research project is seeking to quantify and analyse printed media discourses about Europe over the decades since the end of the Second World War. A first snapshot screened more than 2.8 million articles in Le Monde between 1944 and 2018. In this second instalment we carry out an analogous exercise on a dataset of more the 500 thousand articles from two German weekly magazines: Die Zeit and Der Spiegel. We also report on the on-going work to refine the quantitative methodology.

By: Enrico Bergamini, Emmanuel Mourlon-Druol, Francesco Papadia and Giuseppe Porcaro Topic: European Macroeconomics & Governance Date: July 18, 2019
Load more posts