A 'soft' Brexit transition period would be good news for businesses

By Conor Lambe, Economist at Danske Bank

Since the general election, the debate over whether the UK should pursue a ‘hard’ or ‘soft’ Brexit has sparked up again. In recent weeks, the discussion has focused on how ‘hard’ or ‘soft’ the transitional arrangement, which will occur once the UK leaves the EU in March 2019, should be.

In this context, a ‘hard’ transition period might be considered as one that only lasts a few months. A ‘soft’ arrangement would last for a number of years, with continued membership of the EU single market and customs union during that time. This would mean that free movement of labour and EU budget contributions would still be a feature during this period.

After some conflicting views, it now appears as if the UK Government recognises the need for a lengthier transition period, with some of the leading Brexit-supporting ministers recently softening their language on the subject. This transition period could be used to finalise the negotiations between the UK and the EU, but it also needs to include time to start phasing in and implementing new processes.

From an economics standpoint, there is no question that a ‘soft’ transitional arrangement represents a better outcome. There are several arguments which support this assertion.

We are already four months into the two-year Brexit timetable and there is an enormous amount of work still to do. It is obvious that significant differences remain between the UK and EU negotiators on the issue of the Brexit bill and on extending rights to citizens in both territories, particularly around which legal bodies should uphold those rights.

Agreeing international trade terms between economies is always complex and time consuming. The trade negotiations between the EU and Canada lasted for around seven years and the trade part of the Brexit talks is not expected to begin until late 2017 at the earliest.

Other issues, such as links with Euratom and other regulatory bodies, or the flights that certain airlines will be permitted to run, are still to be tackled. Given that the Article 50 talks need to conclude by autumn 2018 in order for the exit agreement to be ratified, it seems extremely unlikely that there is enough time to cover all the issues that need to be addressed as the UK and EU move towards a new relationship. A transition period would give more time to complete the trade part of the negotiations, and deal with any other lingering issues that are not fully resolved during the Article 50 process.

Businesses will need time to adjust to the changes that Brexit will result in. After the formal Brexit negotiations and the transition period conclude, businesses are likely to face a new trading environment with potential impacts on their supply chain as well as where they sell their products. They’re also likely to face changes to the pool of labour available to them and the immigration processes they need to follow to recruit certain individuals. They may even find themselves under the supervision of new regulatory bodies. Companies will be able to adapt to this new environment, but they must be given enough time to fully comprehend the changes and amend their operations and future plans accordingly.

The UK economy is experiencing a slowdown. Real GDP growth in the second quarter of 2017 was estimated at a relatively low 0.3 per cent last week, following on from growth of 0.2 per cent in the first three months of the year. The International Monetary Fund also lowered its forecast for UK economic growth in 2017 from 2 per cent to 1.7 per cent – in line with Danske Bank’s latest forecast – in its July World Economic Outlook Update.

A clear commitment to a transition period lasting a number of years and maintaining access to the single market and customs union would not completely reverse this slowdown. But it would reduce some of the uncertainty that businesses are currently facing and hopefully contribute to avoiding the sharp economic slowdown that would likely ensue in the event of the UK ‘falling off a cliff’ at the end of March 2019.

Continued membership of the single market and customs union during the transition period would also have benefits for the Northern Ireland economy as it could give time for new arrangements at the border to be phased in. Of course, much more needs to be decided on the long-term arrangements that the UK and EU will trade under before a final solution emerges around the future of the border. However, assuming that some agreement is eventually reached, sufficient time to get new processes up and running would be preferable for businesses in Northern Ireland and the Republic of Ireland. An appropriate transition period would help facilitate that.

With every day that passes, the end of March 2019 moves a little bit closer. If the UK Government was to make a commitment to a lengthier transitional arrangement with continued access to the EU single market and customs union, it could potentially help businesses avoid having to enact costly contingency plans before they know what the final Brexit arrangements will be. Such a commitment would also reassure them that they will be given sufficient time to adapt to the new commercial environment. There are, however, some important caveats. The EU would also need to agree to a transitional arrangement of this nature, and there would have to be some limitation on how long it would last.

In my view, a ‘soft’ transitional arrangement should not be viewed as a threat to Brexit. Rather it should be thought of as a policy measure to support businesses, and the economy, as the UK prepares to embark on a new relationship with the European Union.

This article was published in The Belfast Telegraph on 1st August 2017.​​​

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