EU should save Brexit negotiations step by step

The Brexit negotiations between the United Kingdom (UK) and the EU should be concluded by the end of this year. On 29 March 2019 the UK’s EU membership will officially be terminated. Currently, the negotiations aren’t going particularly smoothly, to say the least. Most often the British political chaos and divide is blamed for this situation. The current political negotiation game is shameful and unprofessional, with potentially dramatic consequences for both the UK and EU economy. It is the EU that has to step up its efforts by proposing new solutions proactively. In doing so, aiming for an all-inclusive separation deal is no longer realistic. Moreover, that aim is the cause of tremendous uncertainty at this moment, which causes possibly useless adaptation costs. Partial agreements, reached step by step, as well as realistic plannings are what we currently need. There should be a sense of urgency for a completely different approach.

Divided Europe

On September 18 the European Council met in Vienna for a Brexit summit, obviously without the UK. Once again it turned out that opinions on Brexit differ substantially among European political leaders. The main UK trading partners - in particular, smaller EU economies like Ireland, The Netherlands, Denmark, and somewhat hesitating Belgium - call for a soft Brexit. France and Germany, on the other hand, see Brexit as an opportunity to expand their European interests and as a case to prevent other EU countries from getting similar divorce aspirations. Other countries, including the Central and Eastern European economies, never showed much interest in Brexit as they - wrongly - believe Brexit won’t hurt them. They may change their view once less EU funds end up in their budget or when their car sales in the UK fall back. Southern European countries have to cope with many other challenges, so that Brexit is definitely not the first of their concerns. Consequently, the EU27 is divided about any Brexit strategy, leaving chief negotiator Michel Barnier with a vague negotiation mandate. Barnier himself hasn’t adopted a very entrepreneurial and creative approach, as he has so far only been waiting for new British proposals before effectively and convincingly turning them down. As Michel Barnier is named as a potential candidate for the European Commission presidency or any other top position, his current approach brings him visibility and perhaps even credibility as defender of EU interests. However, no actual results are achieved in the Brexit negotiations. Hence blaming British politics for the sluggish Brexit process is definitely a bridge too far. Also the EU bears responsibility.

However, the EU, and notably the European Commission, is best equiped to design a balanced Brexit agreement. The directorates-general of the European Commission consist of the best specialists in the areas of international trade policy, international investments, internal market issues etc. In order to speed up the negotiations and to avoid the risk of a no-deal Brexit or hard Brexit, those specialists should be put in charge of reaching a deal. Such approach is by no means a violation of British sovereignty as a good and balanced arrangement is beneficial to the EU as well as to the UK.

The latter is also reflected in recent IMF statements. Once more the IMF warned against the negative impact of a no-deal scenario. According to new IMF calculations, such outcome would imply a 1.5% drop in EU growth, clearly exceeding figures in previous studies. The Bank of England estimated the growth decline in the UK around 1.5-2%. During an almost emotional speech IMF chief Christine Lagarde called upon the UK and EU to take up their historical responsibility. The latest IMF call should be praised, although the international institution’s credibility was hit several times. Previously, the IMF predicted that Brexit would never occur and that, after the referendum outcome, the British economy would suffer a lot. As a matter of fact, the UK economy performed quite well during the past two years. However, in the longer run, the IMF is definitely right. A hard Brexit will jeopardize the UK’s and EU’s growth opportunities due to reduced mutual market access, regulatory divergence, and a general lack of policy coordination.

Business as usual

European business currently appears to be the strongest advocate of a quick and clear solution, preferably a soft Brexit. Nevertheless, an increasing number of companies and sectors prepare for the worst, namely for a no-deal scenario. This realism is smart, but costly. Various adaption costs are unavoidable to guarantee a smooth value chain. As part of this preparatory process, international investments in the UK remain strong, but their average scale is smaller. This signals that European firms position themselves on the UK market in order to serve their UK customers. In particular large European firms seem to prepare, despite the many remaining uncertainties.

Unfortunately, uncertainty is never a fertile soil for economic development. Cautiousness is a wise, but costly strategy. Hence reducing uncertainty is a much better solution. Also, therefore, the EU should take the lead in the Brexit negotiations.

Step by step

So far the EU27 followed the principle that there was no Brexit deal as long as an agreement on particular issues was missing. The recent agreement on a transition period until the end of 2020 is therefore also not guaranteed, adding to the overall uncertainty. Therefore, it would be better to proceed step by step by concluding partial agreements. On a number of issues deals can be reached fast. A clear example is free trade in industrial products. Without such a deal, the most favoured nation tariffs will be applicable to British-European trade from March 2019 onwards. Although these tariffs are generally low, they imply substantial administrative costs for companies as well as logistic costs for governments as border controls have to be reinstalled. Hence, don’t let trade in industrial products become part of a strategic tit-for-tat negotiation game, but accept it as a basic principle. Moreover, such a deal would also help mitigate the Irish - Nothern Irish border issue as physical border controls would disappear.

For many other issues it is crucial to realize that the remaining negotiation time is simply too short. Rather then running against the wall, a realistic time table should be set up for the future. In the meantime, both partners should agree to continue the current situation, at least to guarantee legal protection. Said differently, conclude partial agreements as well as transitory agreements to reduce uncertainty in the medium run.

No Brexit?

While the risk of a no-deal Brexit has increased, the call for no-Brexit has advanced too, possibly via a new referendum. Though this scenario might seem attractive, one cannot neglect the democratic voice of the British people. However, one cannot exclude that the UK will rejoin the EU one day, in particular as the British society evolves too. In the referendum, some parts of the UK voted to remain in the EU (for example London and Scotland). Moreover, the younger generation is generally more in favour of EU membership too. Hence, let’s make sure the divorce deal will include a paragraph that the European door remains open for the UK.


All opinions expressed in this publication represent the personal opinions of the author(s) at the date stated therein and are subject to change without notice. KBC Groep NV makes no warranties as to the extent to which the scenarios, risks and forecasts proposed reflect market expectations, nor as to the extent to which they will actually materialise. All forecasts are indicative. The data in this publication are general and purely informative. The information cannot be considered as an offer to sell or buy financial instruments. Nor can it be considered as investment advice, investment recommendation or "investment research" within the meaning of the law and regulations on the markets in financial instruments. Save the express prior and written consent of KBC Groep NV, any transfer, sale, distribution or reproduction of the information, publication and data is prohibited, regardless of form or means. KBC Groep NV cannot be held liable for the accuracy or completeness of the information or for the direct or indirect damage that would result from the use of this document.

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