Heading into this week’s EU summit, Theresa May has made a transition deal her top Brexit priority.
But even as her fellow leaders consider the issue — and how to respond to the British prime minister’s request for the start of transition talks — problems are emerging with the very idea of keeping the status quo for two more years after Brexit in 2019.
“Transition is not what it seems,” says a senior eurozone official, who jokes that the concept almost amounts to “fool’s gold”.
A transition deal is a great prize for British negotiators because it provides business with two precious commodities: extra time and more regulatory certainty. Companies need legally binding assurances about the next 12 months.
The problem is that guarantees may be insufficiently binding to meet such needs. A UK-EU transition agreement could also cover less than proponents might hope while a two-year deal may only delay the challenges Britain confronts.
Brexit is a political negotiation, set to the two-year timeline of the Article 50 exit clause. That means any transition deal will ultimately depend on a final UK-EU exit agreement and ratification by the European Parliament. In the old Brussels mantra, nothing is agreed until everything is agreed — a moment that may come only in 2019.
This is the backdrop for one of the big battles of transition. The City of London, worried about the “residual legal risk” of non-binding assurances on transition, has called for a deal by Christmas — one immediately recognised by EU and UK regulators.
Politically, the EU will be reluctant to grant such guarantees ahead of the successful conclusion of the overall talks. In legal terms, the bar is even higher. One senior EU official called the idea of legally binding assurances in 2018 “absolute fantasy”.
The transition gap
A transition deal would govern relations between the UK and the bloc after 2019. But it would not automatically include the current terms of trade with non-EU countries.
According to FT research, Britain may need to renegotiate more than 750 international treaties agreed by the EU — some of which have territorial definitions that exclude Britain once it leaves.
In short, Britain will need the agreement of third countries to engineer a standstill transition for trade relations. That is potentially a long and complex process.
London has struck an initial deal with the EU on how to share out agricultural quotas at the World Trade Organisation. But the joint approach has already raised objections from a US-led group of countries, which argues that simply dividing up the existing level of quotas based on recent consumption is unfair.
More complex still may be hundreds of agreements outside the WTO ambit, covering aviation, nuclear power and financial regulation.
“There is no certainty” when it comes to agreements with countries outside the EU, says Pascal Lamy, a former EU commissioner and head of the WTO. “We now know that countries will use this situation to get a better deal at the WTO. That is a new element that puts even more doubt on the notion that nothing will change.”
For some businesses, a two- or even three-year standstill will be welcome but insufficient as it simply moves the cliff edge. Certainty will come with a trade deal, which could take much longer to settle.
“We will probably need as many as 10 years,” says Joachim Lang, managing director of the BDI, Germany’s chief business group. “ It’s unrealistic to expect that we could renegotiate rules within two years that evolved over the 40 years of Britain’s EU membership.”
A related problem is that transition talks could drag on, diminishing the utility of a deal.
Philip Hammond, UK chancellor, has described a transition agreement as a “wasting asset”, given that at some point businesses will have to plan instead on the basis of a no-deal scenario, adding: “As we move through 2018 its value to everybody will diminish significantly.”
That does not mean striking such a deal can be done quickly or easily.
Mrs May has been able to forge a delicate consensus in her cabinet over the need for a standstill transition, even if it involves EU law, European courts and free movement rules.
But Boris Johnson, foreign secretary, has concerns about implementing new EU laws, and Michael Gove, environment secretary, wants to leave the EU’s common fisheries policy early. “The ministerial shopping list for exceptions may be as long as it is unachievable,” warns one British official.
Even if the cabinet fully accepts EU terms, a negotiation may still be necessary for several months to settle technical issues that arise. Aviation law, for instance, includes a mix of EU rules and intergovernmental agreements — a regulatory tangle that lawyers are only beginning to think through.
Fishing quotas, set on an annual basis after all-night haggling sessions, are another potential problem. Once it leaves the EU, Britain would in theory not be at the table when quotas are set for British waters, yet would still have to abide by them. New arrangements could be agreed, but again that takes time.
Esben Sverdrup-Jensen of the Danish Pelagic Producers Organisation says there is a need to agree quotas for 100 or more shared stocks. “Setting that up by then would be a “massive challenge”, he adds.