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07 November 2021

A toxic relationship

A year ago, I advocated for the EU and UK reaching a friendly agreement not to strike a trade deal, opting instead for minimal trade facilitation, with transition periods. And then starting all over. That would have taken much longer. But it would have led to an agreement that could have put the EU/UK relationship on a sound footing.

The agreement that was hastily put together just before Christmas last year may soon be cancelled by the EU, in case the UK goes ahead and triggers Art. 16 of the withdrawal agreement's Northern Ireland protocol. The British cabinet could this week formally discuss Art. 16 for the first time. The threat of a trigger has been here for a while. Downing Street is briefing heavily that it is likely. The EU could, in theory, respond to mechanisms foreseen in the withdrawal agreement, or choose the nuclear option by giving notice to end the EU-UK trade and cooperation agreement, also known as TCA. It has to give one years' notice. This would mean the introduction of tariffs between the UK and the EU, starting in early 2023.

Axing the TCA would undoubtedly bring a significant degree of friction. It is trivially true that the smaller country has more to lose than the larger country. But this bird’s eye macro view hides an awful lot of friction on the EU side as well. If the EU cancels the TCA, it also cancels fishing rights that the agreement granted to EU members, including France. The EU runs a very large trade surplus with the UK. The imposition of tariffs would thus constitute a tax on EU exports, and a financial flow from the EU to the UK.

I struggle to side with any of the two parties in this dispute. Theresa May negotiated in good faith, but got stuck in an impasse as her parliament did not back her strategy. Johnson mischievously resolved the deadlock by accepting the current arrangements for Northern Ireland, in the full expectation that they would not be sustainable.

The EU made a huge error by aligning itself with parliamentary backbenchers against the May government. Prime minister Johnson is a creation of EU political miscalculation. The EU abused the possibility of a technical Brexit deadline extension for political purposes, in the hope of extending the process beyond a hypothetical second referendum. That was the point of no return in the EU-UK relationship.

There is no easy way back now. As the Irish say, do not start from here. We are now deep into plan B and C territory. I think the least bad outcome would be to end both deals: the Northern Ireland protocol, and the TCA. Then let things settle for a few years, and start again after the Johnson premiership ends, and a new Commission is in place with no fingerprints on this debacle, whenever that is.

The prime minister had a bad week last week, not related to the EU, but because of his inability to handle a minor sleaze scandal. If he ever falls, then I suspect it will be because of something like this. From his perspective, the EU is the political gift that keeps on giving. I noted the surprise from some commentators at his apparent decision to fight the next election once again on a Brexit theme. To me, it makes complete sense. In 2019, the focus was on getting Brexit done. In 2024, it will be on making Brexit work. The Labour opposition is split over Brexit, and desperate to move on. If the EU cancels the TCA, it would give Johnson the best conceivable campaign platform.

The EU has to bear in mind that by cancelling the TCA, the UK is more likely to choose a disruptive regulatory environment for goods and services. And it should prepare for a debate on fish in the European Council. There will be losers who demand compensation.

This is why I am not ruling out a compromise. There are interests at stake that are currently not being heard in the briefings wars. This time last year, both sides briefed heavily that a no-deal Brexit was likely. Then they cut a deal at the last minute. But back then, the gap was easier to bridge than it is today. There are no obvious technological solutions to the Northern Ireland problem in sight. The EU’s recent proposal to reduce border checks between the UK and Northern Ireland was, in my view, a genuine attempt of a compromise. But the UK government believes that it will only make a marginal difference on the ground. In the substance of the debate, we are moving in circles. There are only so many things you can do to keep a region in two separate custom unions.

A trigger of Art. 16 is therefore indeed a plausible scenario. And so is a TCA cancellation by the EU. As bad as it sounds, this may not be the worst outcome.

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