On the 14th of November 2018 Theresa May returned to the UK with a draft withdrawal agreement with the EU. This 585 page deal is the crucial first step in the Brexit process and lays out the terms on which the UK will leave the European Union. Theresa May needed the support of her cabinet and after five hours of intense discussion she obtained it. This approval did not come easy. Nine of twenty-one cabinet ministers spoke out against the deal during discussions. The subsequent resignation of the Brexit Secretary Dominic Raab and work and pensions secretary Esther McVey followed. Leading Brexiter, Jacob-Rees Mogg also initiated the process to remove Theresa May as Prime Minster through calling for a vote of no-confidence. Amid all this tumult, Theresa May must now attempt to get her deal through a deeply divided Parliament. Theresa May’s initial negotiating position was heavily criticised from the outset so it is unsurprising her compromise with the EU has faced vicious political backlash. Many businesses however, have welcomed the deal as it begins to provide much needed clarity on what post-Brexit Britain will look like. This article will summarise the key terms of the deal and explore various reactions.
Transition Period: The UK will officially leave the EU but retain regulatory alignment. In practice, the idea is to give businesses time to prepare while the future trade arrangements are negotiated. The UK will still have to abide by EU laws & remain under EU court jurisdiction but it will no longer be a member of the EU. The period lasts from March 29 2019 until 31 December 2020. This period can be extended by mutual agreement but this can only happen once.
The Irish Backstop: The backstop prevents a hard border between the Republic and Northern Ireland (NI) if the UK and the EU fail to reach a long term trade deal. Northern Ireland would fall back and essentially form a temporary customs union with the EU. The customs union will remove tariffs and border checks between NI and the Republic on all goods except fishery. NI will not however, gain a competitive business advantage as it is subject to “level playing field” conditions. In this event however, there would be some form of check on goods travelling between NI and the rest of the UK. The backstop may only be exited upon the mutual consent of both the UK and EU.
Freedom of Movement: Free movement in its current form will come to end after a final deal on the future relationship has been reached.
Citizen Rights: UK citizens living in EU countries and vice versa, will retain their residency and social security rights. Citizens who become resident in another EU country during the transition period will be granted the right to stay after the period.
Divorce bill: The UK will pay the EU to settle outstanding financial obligations. The figure is not listed but it is expected to exceed £39 billion. Members agree to make financial contributions for a fixed number of years. The divorce bill is a payment to meet these obligations. This figure will include our de facto “membership” during the transition period.
Financial Services: UK financial services will be treated as entities located outside the Union. The exact relationship is not clear but UK is likely to be treated as an “equivalent” jurisdiction. This grants them the same access rights as US or Japanese financial service firms.
What does Parliament think?
On both sides of parliament there is strong criticism of the deal. Many politicians have committed to rejecting the deal in its current form. The Labour party claims the deal doesn’t meet its “six point test”. In order for Labour to accept a deal it must meet the following conditions;
1) Does it ensure a strong and collaborative future relationship with the EU? 2) Does it deliver the “exact same benefits” as we currently have as members of the Single Market and Customs Union? 3) Does it ensure the fair management of migration in the interests of the economy and communities? 4) Does it defend rights and protections and prevent a race to the bottom? 5) Does it protect national security and our capacity to tackle cross-border crime? 6) Does it deliver for all regions and nations of the UK?”
May’s deal evidently does not meet all of these points, particularly with the retention of “the exact same benefits”. Labour has proposed that the UK should enter “a” customs union with the EU in order to meet these tests. They claim that this would be a bespoke customs union, not the customs arrangement currently in place within the EU.
Conservative Brexiters, on the other hand, believe that Theresa May has rolled over to the EU. Leading Brexiter Jacob Rees-Mogg described the agreement as a “rotten deal”. In the event the UK enters a backstop arrangement, the UK can only withdraw with the mutual consent of the EU. Brexiters have strongly criticised this caveat along with many other core aspects of the deal EU. They claim this deal completely betrays the very core objective of Brexit which is “taking back control”.
The Democratic Unionist Party (DUP) has firmly stated that it would reject the deal on the basis of the backstop. They see the deal as a betrayal because the backstop treats Northern Ireland different to the rest of the UK through greater EU alignment. The DUP have a deal of supply and confidence with the Conservative government where they agree to support the government in Parliamentary votes. This arrangement of supply and confidence gives the government a working majority in the house and allows them to pass legislation through parliament. While the Conservatives will almost undoubtedly have rebels within their own party, the DUP’s overt withdrawal of support is significant. Theresa May has a huge job on her hands if she is to get her deal through Parliament.
What do businesses think?
The general consensus amongst businesses is that the deal is a positive step forward. For businesses reliant on frictionless trade the clarity is much welcome. Manufacturers have praised the transition period as it allows time to rearrange supply chains and operations. The CEO of Rolls Royce, Warren East, has spoken in support of the deal, claiming it’s better than no deal. East has urged politicians to support Theresa May’s “practical plan” for Brexit.
Many in the financial sector also concur with this sentiment. The deal sets out basic framework and confirms that full legislative provisions for financial services are still to be negotiated. Nevertheless, it provides some general clarity about the UK’s future EU relationship, and if approved, will allow businesses to prepare effectively. Catherine McGuiness, policy chairman at the City of London Corporation stated;
“The proposed framework for the future relationship provides welcome clarity and offers a foundation for financial services. In particular, the commitment to close regulatory and supervisory cooperation is a positive move….” (City A.M)
The UK’s financial regulatory framework is heavily intertwined with the EU. Leaving without a deal would leave no clarity on the relationship between UK businesses and EU business, clarity which is essential for dealings and transactions. The most important thing for businesses during this Brexit process is clarity. The legal and regulatory quagmire that would follow a no-deal Brexit would have serious detrimental implications for a number of business sectors. Consequently, in spite of any political shortcomings within Theresa May’s deal, businesses widely support the deal.
The UK Parliament and the EU 27 member states must now vote on the deal. The EU is expected to support the deal but there is serious concern that the UK Parliament may reject the deal. Theresa May has laid out the three options which MP’s must now decide between; her deal, no-deal or no-Brexit. If this deal goes through Parliament, there are still a series of equally difficult negotiations to be had. If Parliament rejects Theresa May’s deal however, there would undoubtedly be a political crisis. There is absolutely no protocol for what would happen next. With the March 2019 deadline looming the possibility of renegotiation seems slim. If Brexiters press for no-deal instead of Theresa May’s deal, this too is likely to require some form of Parliamentary approval. Within Parliament however, there is equally as strong objection to a no-deal Brexit. Despite her commendable resilience, the rejection of her deal within Parliament could force Theresa May to step down as Prime Minister. This is if she is not removed through the vote of no-confidence. With the deadline so close and in the absence of an extreme turn of events, it is appears unlikely that there will be no-Brexit all together. What will happen over the next few weeks is truly unpredictable.
Theresa May has been tasked with a near impossible job. The severe lack of parliamentary consensus on what Brexit should look like has fundamentally fuelled this problem. Parliament is deeply divided and has laid red lines at polar opposite ends of the spectrum. Labour MP’s will only vote for a deal which aligns us very closely with the EU. Brexiters will only support a deal that takes back full control, even if that deal is no deal. The EU has pushed for and now accepted something of a middle ground between the two. The European Union’s stubbornness was cited as a key motive to leave the bloc throughout the Brexit campaign. It should really come as no surprise that the EU did not budge on its red lines in negotiations. Theresa May’s deal crosses crucial political red lines for many UK MPs and this could prove costly. Economically however, the deal does act as damage limitation and provides much needed clarity for businesses. The days following the release of the draft agreement were some of the most tumultuous in UK politics since the referendum itself. As the March 2019 deadline draws closer, the challenges will inevitably intensify. Theresa May’s “strong and stable” government has hit significant turbulence. With such heavy backlash so early on, the final stages of the Brexit process could send it into a tailspin.