The EU Has No Brexit Plan Either

The Wall Street Journal The Wall Street Journal

Differences over how to address the U.K.’s likely demands risk deepening over time

All of Europe is awaiting the British plan.

Across the continent, there is astonishment that the Brexit leaders won the referendum without a clear plan of what to do next. There is frustration that the ensuing uncertainty has triggered an economic shock that has spread well beyond the U.K.

There is anger that this uncertainty looks likely to continue for months while the U.K. tries to find a way out of its political crisis. Everyone is eager to know how the U.K. will resolve the paradox of a Brexit campaign led by free-marketeers but won by tapping into the anger of voters “left behind” by globalization.

But Europe’s frustration at the lack of a British plan shouldn’t obscure the fact that the European Union doesn’t have a clear plan to deal with the Brexit crisis either.

The European Commission and national governments insist they don’t need one since it is up to the British to make the first move by invoking Article 50—which triggers the formal two-year negotiation of the terms of the U.K.’s exit—and to set out their position on the future relationship they see with the EU.

This united position hides wide differences over how the EU should respond to the U.K.’s likely demands—differences that risk becoming deeper over time.

As things stand, there is a vast gulf between the debate over Brexit taking place in Brussels and other European capitals and the one happening in the U.K.

In Brussels, there is a clear consensus that the Brexit process needs to start as soon as possible. This is essential not only to reduce the uncertainty that is already destabilizing the wider European economy, proponents say, but also to clear the decks of Brexit business ahead of important EU budget negotiations that must start in 2018 and the build up to new European parliament elections and the appointment of a new Commission in 2019.

The Commission has also said that the initial focus of the negotiations should be on the terms of the U.K.’s divorce, leaving the more complex negotiation over the its future relationship with the EU until after it has left.

That is far removed from British expectations of how the process will work, with all the candidates for Conservative party leader and Prime Minister signaling that invoking Article 50 could be delayed perhaps until next year.

Nor is the U.K. likely to agree to run the two negotiations consecutively; indeed, its goal will surely be to conclude them both within the two-year time frame allowed under Article 50. The U.K. may have the upper hand since only it can invoke article 50, but it is clear that there is already the potential for acrimony to enter the negotiations before they have even started.

Interactive: Trade After Brexit

The potential for acrimony could become even greater when the U.K. does put down its demands since it is already clear that these are likely to preclude a quick agreement on an existing off-the-shelf post-Brexit arrangement that would preserve as much as possible the status quo, which would be the clear preference of the rest of the EU.

There has already been considerable focus on the necessary trade-offs between a future U.K. government’s inevitable demand for curbs to the right of free movement and full access to the EU’s single market. But Brexit campaigners were also clear during the referendum that they wouldn’t accept future payments into the EU budget or the jurisdiction of the European Court of Justice.

If these red lines also find their way into the U.K. negotiating position, they would surely put any variant of the “Norway option” of European Economic Area membership beyond reach.

That suggests that the U.K. will have no option but to seek its own bespoke free-trade deal with the EU. Brexiters should be under no illusions about how difficult this will be since they spent much of the referendum campaign attacking the EU for its inability to conclude such deals.

All modern free-trade deals are mind-bogglingly complex, reflecting the intricacies of modern supply chains and the importance of non-tariff barriers such as regulation. This one will be no different.

The EU won’t seek to punish the U.K. for leaving, but each member state will want to defend its interests, particularly against a post-Brexit U.K. free to seek to gain its own competitive advantage by extricating itself from common obligations, for example through aggressive use of tax deals to provide covert state aid to investors.

Already there are signs of divisions between EU members on how much access the U.K. services sector should be allowed to the EU market, and what restrictions might be allowed on rights of free movement. Some Northern European countries have signaled some willingness to be flexible to preserve existing business while some Eastern and Southern countries more are concerned to defend core EU single market principles.

And if the EU finds it hard to agree a common position on the start of talks, recent history shows it can find it hard to ratify a deal: Ratification of the EU’s trade deal with Canada is now being held up by European parliaments. An EU trade deal with Ukraine has been cast into doubt by a referendum there.

Brexiters are fond of saying that with goodwill on all sides, all will be well. Goodwill will certainly be necessary if the U.K. is to avoid finding itself stranded after two years of negotiations with no new trade deal in place. But it is unlikely to be sufficient.