In summary, over the last year, the economy has performed at near the levels it has performed at since the financial crisis. There may have been a modest post-referendum slowdown driven by higher inflation in the first half of 2017, but there are encouraging signs that even that will prove temporary. Certainly, forecasts of a post-referendum recession proved unfounded. (See Figure 1.)
The potential Brexit deal
The EU negotiating position is that there are three key issues that must be cleared up initially:
- The rights of EU citizens living in the UK, and UK citizens living in the EU
- Agreeing a methodology for calculating the so-called ‘exit bill’
- Solutions to try to avoid the imposition of a hard border between Northern Ireland and the Republic of Ireland
The British view is that these three issues – and particularly that of the Northern Ireland border – are intimately linked with the future trading relationship between the UK and the EU.
Brussels expects the UK to make a contribution towards the union’s outstanding financial commitments, which would limit any disruption to its programmes from Brexit. Britain will likely have to agree to this ‘divorce bill’ to secure a new trading agreement with the EU, even though the legal obligation on the UK to do so is debatable. The EU’s case for an exit bill is primarily dependent on the union having entered into various financial commitments on the basis of continued British contributions in the current EU budget framework – multiannual financial framework – for 2014-2020.
The UK is seeking to preserve certain aspects of membership at least for a temporary period. Britain has indicated that it is open to contributions to the EU to pay for these privileges. The ground does therefore seem to exist for a potential compromise involving British payments in exchange for certain single-market or customs-union benefits for a limited period, paving the way for an eventual free trade arrangement (though this may not be concluded before March 2019). Continued British contributions for transitionary privileges would therefore be:
- A way for the UK to pay for its temporary privileges
- A way for the EU to plug the hole in its current budget
- A way to remove many of the notional liabilities – from the 2014-2020 multiannual financial framework – in the exit bill
The third party in the configuration of the final deal is the British Parliament, which now has much more influence after the 2017 general election result. If the opposition parties were able to unite on a particular issue then, together with Conservative rebels, they might be able to force the government to change tack.
At present, however, that looks unlikely, especially for any of the key ‘red line’ issues. After all, Labour still appears quite uncertain of its own position. What’s more, few Conservative MPs actually rebelled on the legislation enabling Article 50 in spite of much speculation beforehand, while there are a small number of committed pro-Brexit Labour MPs who have and could end up voting with the government – as they did at the Second Reading of the Withdrawal Bill. Overall, while amendments to forthcoming Brexit bills are likely, it still looks difficult for Parliament to force the government to make a major change in stance.
As a result, the timetable and key developments at this stage seem likely to be as follows:
- Negotiations continue for the next year and reach a conclusion in autumn 2018
- Parliamentary ratifications of the deal (EU and UK) take place over the following few months
- Britain leaves the EU, including the single market and customs union, on 29 March 2019
- Britain retains many of features of membership during a transitionary period, which runs to end of current EU budget framework, which is the end of 2020
- During transition, Britain continues to make normal contributions to the union. Retained features are likely to include customs privileges and significant single-market rights
- From the beginning of 2021, the UK enters new relationship with EU based on an extensive free trade agreement