January 10, 2018
Yes, the choice is between Canada and Norway
We were more optimistic about the first phase of the Brexit negotiations than most other analysts. But we also have been more sceptical about the second phase, especially on trade, partly due to our knowledge of the German position on this issue. Germany wants an Article 50 deal and a transitional period. And it wants both badly. But Germany is implacably opposed to Theresa May's vision of managed divergence.
Peter Foster has a good report on this story in the Telegraph this morning, ahead of a visit by Philip Hammond and David Davis to Germany this week. They will put forward the argument that managed divergence is not an attempt to cherry-pick, but a pragmatic way to prevent damage to business on both sides of the Channel. We would like to add that these are false opposites. Both statements can be true simultaneously. The UK's idea of managed divergence is based on a neat division of policy areas into three categories or baskets: one where it wants to stay close to the EU, one where it wants to diverge, and a middle-ground category.
The German view is that there should be no bespoke agreements, at least not on trade, and that the UK should make up its mind on whether it wants to stay in the EEA or seek an ordinary third-country trade arrangement, like Canada's or South Korea's.
Foster notes correctly that there are different views within the EU, and that we are now entering a battle of ideas about the future relationship between the EU and the UK. The position attributed to Angela Merkel is shared by most of the other political parties in Germany, and is unlikely to shift irrespective of political developments.
We always believed that the UK's decision to reject the EEA even as a temporary model would necessarily imply a Canada-type trade agreement, covering traded goods only but not services.
The FT has a story this morning warning UK services companies in particular to prepare for Brexit, as they should not take market access for granted even in the event of a deal. UK-issued operating licences for airlines will no longer be valid after the transitional phase, and transport operators would also require an effective and stable presence in an EU member state if they want to continue to function as they do now. Even UK mineral water can no longer be automatically marketed in the EU because the water is extracted from the ground of a third country. Many people in the UK find this mean-spirited and small-minded, but we see this as a logical consequence of a decision to leave both the single market and the customs union.