Moving on to the next phase of Brexit talks is a positive step, but now things are going to get really difficult

By Conor Lambe, Economist at Danske Bank

Almost nine months have passed since the Prime Minister triggered Article 50 and, after a lengthy negotiation, sufficient progress has now been reached on the main separation issues relating to the UK’s withdrawal from the European Union. At last week’s European Council, the EU’s political leaders accepted the European Commission’s recommendation to conclude the first phase of the Brexit negotiations and move on to the next stage of the talks.

The joint report published by the UK and EU negotiators included an agreement for EU citizens in the UK (and UK citizens in the EU) to be granted a status maintaining many of their existing residency rights. This is a good outcome. Individuals from other countries in the European Economic Area (EEA) make up around 7 per cent of total UK employment. These people make a valuable contribution to the UK economy and to wider society and so it is only right that Brexit should not disrupt the lives they have built for themselves. It is also good news for the businesses who rely on these workers, whether they are high-skilled or low-skilled, to provide goods and services to their customers.

As part of the deal, the UK Government agreed to settle its financial accounts with the EU. We don’t know how much the UK will pay in total, and it will likely be many years before we do, but most estimates would suggest it will be somewhere in the region of €40 – €60 billion. As I argued in my last Economy Watch article, it is important to consider this sum in terms of the bigger picture, including the size of the UK economy and the amount of trade we currently do, and hope to do in future, with the EU. From a purely economic standpoint, agreeing to make this payment as part of the deal to move on to the next stage of the negotiations made perfect sense.

The third major element of the agreement related to the border between Northern Ireland and the Republic of Ireland. The joint report reaffirmed the desire of all parties to avoid a hard border and included a fall back option to avoid such a hard border in the event of this not being achieved by other methods in the next phase of the talks. The agreement implies that, if no other solution is found, the UK will maintain ‘full alignment’ with the regulations of the EU Single Market and Customs Union which support ties between Northern Ireland and the Republic of Ireland.

Data published by the Northern Ireland Statistics and Research Agency shows that in 2016 local businesses sold £14 billion worth of goods and services to Great Britain and made sales to the Republic of Ireland valued at £3.4 billion. This emphasises the importance of the commitment in the joint report to ensuring that businesses in Northern Ireland will maintain full access to the UK market.

It was encouraging to see some movement on the complex issue of the border, but there is a lot of work still to do before the challenge is resolved. Regarding the aims of protecting North-South cooperation and avoiding a hard border, the joint report states that: “The United Kingdom’s intention is to achieve these objectives through the overall EU-UK relationship.” This suggests the UK Government still believes that the border issue can be solved as part of a wider trade deal. The report says that if that does not occur, then the UK will put forward alternative arrangements to try to avoid a hard border. It is only if that fails that the fall back discussed above would be relied upon. The report also contains a commitment to have a “distinct strand” of talks related to issues pertaining to Northern Ireland and Ireland as part of the next stage of the negotiations. Despite sufficient progress now being reached, it seems there is still considerable uncertainty around future border arrangements and much work still needs to be done on this important issue.

So, as we prepare to head into 2018, what are the next big milestones to look out for in the Brexit process?

The first is when, or indeed if, an agreement is reached regarding a transition period that will begin once the UK leaves the EU at the end of March 2019. It is assumed that this period would see UK businesses maintaining their access to the EU Single Market and Customs Union for a limited period of time. For the transition to deliver the maximum benefit, it needs to be agreed within the first quarter of 2018. If this doesn’t happen, some businesses, finding themselves only twelve months away from Brexit, may begin to implement their contingency plans.

The second key milestone will be the beginning of negotiations on the long-term trade relationship between the UK and the EU. This is not expected to begin until around March of next year. However, the task for the UK Government now is to decide what type of trade agreement it wants to strike. Most of the public discussion has revolved around a Norway-style agreement that would maintain very close links to Europe, or a Canada-style agreement which is a much looser arrangement based mainly on facilitating goods trade. Reaching agreement on a desired Brexit end point will not be an easy task for the UK Government due to the conflicting views in the Cabinet. But given we are now 18 months on from the referendum, it’s time for the Government to clarify its position on this issue.

Last week’s decision by the European Council to confirm that sufficient progress has been reached on the separation issues and to move talks on to the next stage, is a significant and welcome step in the Brexit process. However, trade deals are extremely complex and difficult to negotiate and there is a plethora of other economic and non-economic arrangements that exist between the UK and EU that will need to be replaced due to Brexit. Many decisions still need to be made and implemented.

The easy part of the Brexit process is over. Now things are about to get really tough.

This article was published in The Belfast Telegraph on 19th December 2017.​​​

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