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Stephen Booth is Head of the Britain in the World Project at Policy Exchange.
The Prime Minster set today as the deadline for the UK-EU negotiations to bear fruit. However, as EU leaders gather in Brussels, a trade deal remains elusive. A path to a deal is within sight but there is a risk that the remaining moving parts do not fall into place in time or that small, yet politically combustible, differences could yet blow the talks apart. In recent days, there have been growing signs of optimism in London, so it would be a surprise if the UK were to call time on negotiations at this stage, so long as today’s EU summit suggests there is still a credible path towards an agreement.
It is also fair to say that the EU side is more circumspect about how close to a deal we might be. Michael Roth, the German EU Affairs Minister, this week urged the UK to make greater moves on the well-worn issues of state aid, fishing and governance that continue to stand in the way of a deal. However, it is also increasingly clear that the EU has to resolve internal differences between the member states over the point at which Brussels should be prepared to settle on the key issues.
Going into today’s summit, the draft statement prepared for EU leaders does not suggest a decisive breakthrough is imminent. The draft summit conclusions merely call on the EU and UK chief negotiators Michel Barnier and David Frost to “intensify” negotiations and for the EU to continue to “work on preparedness” for no deal.
After months of the EU calling on the UK to show its hand on state aid, it has started to do so. Frost recently told the House of Lords EU Committee that the UK was willing to begin discussing commitments on state aid policy that would “go further than you normally do in a free trade agreement”. He noted that this might involve high-level principles such as how state subsidies must correct market failures, be transparent and not have negative effects on trade and investment.
The issue of state aid is bound up with the broader governance arrangements of an agreement. The row over the Northern Ireland Protocol and the Internal Market Bill has strengthened the EU’s resolve to insist on mechanisms that would enable it to enforce various commitments. This includes the right for either side to take “interim” and “autonomous” countermeasures – such as imposing tariffs – against a perceived breach, even before a dispute settlement panel has ruled.
It is notable that Frost has accepted the UK could benefit from a robust dispute-resolution mechanism on state subsidies, where once the UK had ruled out such a tool applying at all. “I can see us being ready to use them just as much as the EU in future,” he said. “Other EU countries subsidise quite often more than we do and that could definitely have an impact on us.” However, the UK will be keen to limit the EU’s ability to use any enforcement mechanisms to “cross-retaliate” against different sectors of the UK economy for political leverage.
The progress on state aid has amplified the remaining differences – between London and Brussels and between the EU members themselves – over fishing rights. All eyes will be on Emmanuel Macron this week, since France has been most prepared to play hardball. Over recent days, despite internal EU calls for compromise, senior French ministers have warned Barnier to show “no weakness” over demands that European fishermen keep the same fishing rights in British waters after the end of the transition period.
The fact that fishing is still in play presents a tactical victory for UK negotiators. The UK’s leverage here is pretty strong, since no agreement could mean EU fleets losing their access to British waters altogether. Therefore, a compromise solution ought to be possible. However, the French belief appears to be that, ultimately, the wider costs of no trade agreement will fall more heavily on the UK than the EU, so it can afford to hold out for now.
Angela Merkel is more concerned about no deal than Macron. “We are going to continue to stand together in these withdrawal talks,” she said this week. “But we also have to take into account the reality: an agreement has to be in the interests of both parties, in British interests as well as the interests of the 27-member EU.” She also noted that a deal was “particularly urgent from the Irish perspective”.
Ultimately, what happens next all rests on a series of fine political judgment calls, in London, Paris and Berlin. Whatever the outcome over the next few weeks, the consequences of Brexit for the UK-EU relationship – held in suspension by the transition period – are starting to crystallise.
In London, it is clear, just from the Government’s preparations for our borders and customs arrangements, that UK-EU trade faces a period of disruption and adjustment, deal or no deal. The UK has already left the EU but no deal would mean a further period of political and economic uncertainty as the UK and the EU would spend more months haggling over mini-deals. A deal would provide tariff-free trade and grant a degree of closure that would enable the Government to focus its attention on other pressing matters – both domestic and international.
Macron is going to have to face the domestic political consequences of fewer fishing rights one way or another, but a deal, if presented as a hard-won compromise, would ensure a better outcome than the alternative. Brussels’ ability to influence the way the UK economy competes with the EU – a preoccupation for France above all others – will be reduced on January 1 come what may. But it will be all the more limited without a deal and a cooperative relationship. If anything, the row over the Internal Market Bill, has underlined this point.
Germany is more concerned about the geopolitical consequences of a major rupture with Britain. Charles Michel, the European Council president, recently suggested Brexit was contributing to an “arc of instability” – including Russia, Turkey and the South-Eastern Mediterranean – surrounding the EU. If this is the genuine fear in Brussels and Berlin, it is difficult to see how a no deal departure would improve the situation.
Meanwhile, the EU is just as preoccupied as the UK is with Covid-19. However, there are plans to launch a “conference on the Future of Europe” in the coming months when an easing of the crisis allows.
On balance, these conditions point towards a deal, since it would better enable both sides to move on and build their respective post-Brexit futures.