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January 19, 2017

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Something not quite right about the transitional deal

We got some more clarity on what the British governments wants from Brexit. David Davis, the Brexit secretary, said that a transitional phase - which he calls an implementation phase - would last only a year or two. We accept his argument that the UK would negotiate from a position of perfect convergence at the time of Brexit, and that the lack of convergence is normally one of the main sticking points in any trade negotiations. While the EU and the UK will not formally start negotiations before the actual date of Brexit, both sides can prepare lay of the groundwork so that the negotiations could proceed right away. But the idea that the EU is able to conclude a so-called mixed trade agreement - which this would be - and have it ratified by national and some regional parliaments within two years, let alone one year, seems unrealistic to us. What may be possible is provisional implementation of an agreement, but even this would take longer to enact. Davies left it open what the nature of the transitional deal would be - membership of the customs union or some other type of agreement. 

Downing Street also briefed on the two-year transitional phase after Theresa May’s speech on Tuesday, so this appears to be a broader government consensus. The only rational explanation we have is that the British government is not really seeking a transitional agreement, and would only accept it if the EU agrees to it on British terms. Politically, a transitional deal is awkward because it would push the moment of a full return of national sovereign beyond the next election, scheduled for 2020. If the EU does not, or cannot, conclude a quick FTA, Britain would then leave abruptly, while blaming the EU for the economic consequences. We are struggling to come up with any other interpretation - expect perhaps that the Tories hope to maintain the illusion of a short transition period until the elections, and admit only later that it might take a few years longer. But it is hard to see how such a lie can be credibly maintained for a long time. 

What we found very odd yesterday was Boris Johnson’s intemperate comments, which seemed to sabotage the prime minister’s more sensible diplomatic line - hard on the substance of Brexit, but soft in the language and open-minded about future co-operation or association agreements. Johnson yesterday compared President François Hollande to a Nazi administering punishment beatings. There is no point in trying to extract a deeper meaning here.

What is, however, true is that the UK is playing up a backmail threat - which is that Brexit without agreement would damage the EU as well as Britain. We have argued before that there is a logic to this argument, and that the collateral damage of a super-hard Brexit to the EU is not yet fully appreciated among the EU-27, judging by the stream of uninformed opinion especially among MEPs. There are potentially crippling financial stability issues, which have not yet been investigated seriously. It is easy enough to argue that the EU constitutes a larger proportion of British trade than vice versa. That’s the static argument. The dynamics look different. And so does the politics. A hostile Brexit would dramatically weaken the EU’s influence in any global governance forums, such as the G7 or the G20.

We are wondering how long German industry will be able to maintain its official position of support for Angela Merkel, which is that the cohesion of the EU is more important than the profits of business. We noted an interview with a senior German industry lobbyist who acknowledged that German industry had invested around €120bn in the UK, most of which will be lost on Brexit. He didn’t mention the massive trade surpluses Germany runs with the UK every year. But they still expressed readiness to support Merkel because the future of the EU was a more important matter. While we think that such an attitude is laudable in principle, it is also lacking in credibility. It is fine to say this now, in the period before Brexit is triggered. But when the EU and the British government start to negotiate concrete Brexit terms, expect German industry to descend from its high pedestal, and do what they normally do.

Our other stories

We also have stories on why the WTO is not much of an obstacle for Donald Trump; and why he is right on Europe; on Wolfgang Schäuble setting the Greeks up; on Catalonia's decisive year; and the Spanish attempts to reform its regional fiscal transfers; on tactical alliances in the Portuguese parliament; on how Brexit already makes banks want to leave the city; and on whether the internet offers better prediction tools than the polls.

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