"Clear As Mud" Brexit Negotiations Officially Begin: Here's What To Expect
Monday, 19 June 2017 Today Britain and the EU officially begin the first day of formal Brexit negotiations, "aiming for a constructive, orderly launch that avoids a noisy clash on the big policy differences over Britain’s exit", according to the FT although the sellside reaction was decidedly less optimistic, as summarized by SocGen's Kit Juckes who in previewing today's events said that he *expects "nothing because the UK position is as clear as mud' beyond growing signs that the UK wants free trade without being part of the customs union or conceding grounds on borer controls.*"
To be sure, no breakthroughs are expected on Monday, or indeed for some weeks and possibly months to come. The idea is for the EU and UK sides to meet, exchange views, plan practicalities and set agendas, all ahead of more detailed talks in coming weeks. “*This is about building trust, nothing more*,” said one senior EU diplomat quoted by the FT.
Looking at today's main political event, DB's Jim Reid writes that the Chancellor of the Exchequer Phillip Hammond suggested yesterday in a TV interview that a gentle departure from the EU should be targeted. The Chancellor indicated that “transactional structures” would be needed to help smooth the process and that “we need to get there via a slope, not via a cliff edge” - suggesting a softer tone in negotiations. In contrast to the PM, Hammond also rejected the mantra “no deal is better than a bad deal”. Hammond also said that his position was one of a “jobs first” Brexit which is also a slight shift in tone compared to the PM. Separately, *Hammond said that the UK government had “heard a message last week in the general election” and that ways to soften austerity were being looked at with voters seemingly growing “weary” of it*.
Hammond did however also say that he will still look to balance the budget by the middle of the next decade and that the UK had to “live within our means”. It’s worth noting that Hammond is due to deliver his Mansion House speech tomorrow after it was delayed from last week.
*On the same day there seems to be momentum building for a "day of rage" against the Government with marches and protests planned*. Those on the left of the political spectrum have really been emboldened over the last few weeks. Wednesday could be an interesting day in the UK. As we've been saying a lot over the last year we think the Brexit and Trump vote will be seen in years to come as an inflexion point across the world where Governments had to spend more to appease the bottom half of the population on the income scale or risk getting voted out. The recent political developments in the UK make me more convinced of this. Europe is not immune from this but as discussed above populism is seeing a slight retracement as growth edges towards the upper end of the post financial crisis range. If and when growth fades Europe will again likely face these issues.
Previously, Barclays laid out its own scenarios for a *soft, hard *and *crash *Brexit
From a high level, Brexit negotiations lead to a continuum of possible outcomes ranging from some form of status quo to the UK crashing out of the EU without any type of agreement. A first categorisation relies on the orderly or disorderly nature of Brexit:
· *Orderly Brexit: *Under orderly Brexit scenarios, the UK and the EU would agree on rules and governance ensuring that Brexit follows the rule of the law. An orderly Brexit would likely lead to further trade talks once the UK leaves the EU with the objective agreeing a long-term UK-EU partnership. Despite its negotiated nature, an orderly Brexit could still have a substantially negative impact on the economy, depending on the final terms of the partnership. We distinguish between a hard and a soft version of such an outcome:
· *Soft Brexit: *The UK leaves the single market but is able to establish an enhanced partnership with the EU. One possibility would be it stays in the single market (best case from an economic perspective, in our view) or at the very least within the Customs Union. The deviation from the status quo would be small and the economic impact, though still negative, would likely be largely contained.
*Hard Brexit: *The UK leaves the single market and likely also every other form of existing European trade arrangement. It is not able to establish any strong partnership with the EU in the short term. The negative impact is magnified by the fact that value chain adjustments to business operations take place over a short period of time while the reestablishment of hard borders leads to disruptions.
In case of an orderly Brexit, the UK and the EU would also likely agree on a transition period starting in April 2019 and lasting for a maximum of three years (according to the EU parliament). During the transition, existing arrangements could be upheld (under some conditions) and some long-term features, if already agreed upon, could be phased in. As the UK exits the EU, it will also be allowed to formally conduct trade negotiations with the rest of the world in order to offset its exit from the EU-RoW trade agreements.
*Disorderly Brexit: *Disorderly Brexit may occur either because talks collapse at some point during the coming 18 months, or because parliaments fail to approve the final agreement. The establishment of hard borders will inevitably generate disruptions, and the negative economic consequences would be maximal for business and citizens. Only dramatically innovative solutions could help address specific issue in selected area (WTO tariff waiver for instance for trade in goods and services).
In terms of the timing, we believe risks are the highest in the first months of discussion, and at the end of the process.
· *Early Crash: *Talks could collapse at the start if one of the parties walks out on negotiations. The UK and the EU might then use the remaining time until April 2019 to prepare for the April 2019 “cliff edge”. We believe that the results of the UK’s 2017 general election have, generally speaking, weakened her “no deal is better than a bad deal” stance and, accordingly, reduced the likelihood of the UK government walking away early from Brexit talks.
· *Late crash: *Even though talks could finish on time, failure to secure parliamentary approval could precipitate a no-deal Brexit. In the UK, a hung parliament makes it more likely that a small group of MPs blocks the approval of the final agreement by April 2019. In continental Europe, parts of the final deal will most likely require member state parliamentary or referendum ratification, which is a risky process.
Once the UK leaves the EU, all existing treaties and agreements that the UK enjoyed as part of the EU cease. If no transition is in place, the UK will face a legal vacuum regarding all cross-border trades and travel. Hence, it will have to hold emergency talks with international organisations and bilateral counterparties in order to reestablish trade and travel arrangements. While final agreements might not be in place in April 2019, the UK could request waivers to address some aspects of the transition.
*Extension: *If UK and EU fail to reach an agreement by April 2019, the EU27 can decide by a unanimous vote of the Council and with the approval of the UK, to extend the negotiations beyond the two years foreseen by the Article 50 of the Treaty of the EU. Such an extension could be used to iron out last minute roadblocks (positive scenario) or to avoid a cliff edge if the deal is rejected by one of the involved parties (emergency solution). Fundamentally, however, an extension can only be conceived as a short-term fix and will likely have to be renewed after a relatively short period of time if needed.
* * *
And while embattled Theresa May is still deciding if she, and the UK, want a "hard", "soft", or "scrambled" Brexit, the timeline remains quite challenging, expecting to unwind 70 years of integration in as short a period as 2 years.
In terms of today's events, David Davis, Britain’s Brexit secretary, will see Michel Barnier, the EU’s chief negotiator, in Brussels for the debut round of a complex negotiating process that is expected to stretch to November 2018 with ever increasing pace and intensity. Barnier has already made public the EU’s positions on Brexit withdrawal issues, including citizen rights and Britain’s financial obligations. But in a bid to avoid the opening of talks being marred by a dispute over policy, *Davis has pushed back plans to issue a “generous” offer on the 3 million migrants resident in Britain for later in the month, *the FT reported*.*
As the FT adds, Theresa May will follow through on the first one-day encounter with an explanation to EU leaders at a summit dinner on Thursday night about what Britain’s inconclusive election means for her exit plans. While she will be listened to over coffee, diplomats are adamant the summit room will not be a forum for talks. As the EU treaties suggest, *once she has spoken Mrs May will be escorted out of the room so the other 27 EU leaders can confer in private.*
British officials say they will be going into talks with their “head held high”. Ahead of the talks, Mr Davis said he was looking forward to discussing a “new future”. “While there is a long road ahead, our destination is clear — a deep and special partnership between the UK and the EU. A deal like no other in history.”
However, in light of the recent disappointing general election which has eliminated much of May's leverage, "one of the most telling aspects of the first exchanges appears to be a desire to avoid confrontation."
Some in London had contemplated making a big offer on citizen rights this week, in an attempt to dramatically kick-start negotiations, with Mrs May trying to drive home a deal at the summit. With the election result, that plan was ditched.
Mr Davis, too, promised the “row of the summer” would be over sequencing — the European Commission’s insistence that trade talks only start once Britain gives assurances on a gross Brexit bill of up to €100bn and settles questions over the rights of 4m migrants caught out by Brexit.
Continuing the day's event, after a first session between officials on Monday, and lunch between Mr Barnier and Mr Davis, senior officials will break into the “working groups” for talks. These four- to six-member mini-negotiations will do the technical heavy lifting on divorce: citizen rights, a financial settlement, outstanding legal issues, border questions such as Northern Ireland, and civil-nuclear matters.
Then, after taking stock at the end of the afternoon, Barnier and Davis will conclude the day by holding a press conference, formally marking the start of Brexit negotiations some 82 days after Britain’s Article 50 exit letter and just 500 days before Mr Barnier’s November 2018 deadline for an informal deal.
While we wait, here are some charts from Barclays laying out the current situation.
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