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Author Mark Richards
Today Theresa May will formally notify the European Union of Britain’s intention to leave
British Prime Minister Theresa May will today formally trigger Article 50 of the Lisbon Treaty, beginning two years of negotiations that – in theory – will see the United Kingdom leave the European Union on March 29th, 2019.
If you want to organise a street party – or a wake – it is a Friday…
There will undoubtedly be many twists and turns over the next two years: we are now embarking on the most complicated divorce in history. But let us take a look at what is likely to happen – both in the UK and in Europe – what shape the negotiations with Europe may take and the possible impact on the UK economy.
What is the formal process of leaving the EU?
That actual process of leaving will begin with Theresa May sending a letter to the EU, triggering the two-year negotiation period. She described the letter as “one of the most important documents in our government’s recent history” – to most observers, a significant understatement.
The EU will respond to the letter within 48 hours: but with Easter – and the EU wanting ‘time to prepare’ – it is unlikely that serious negotiations will begin until May. In theory, the two-year negotiation period can be extended – although this will require the agreement of all the 27 remaining members of the EU. At this stage, there seems to be a desire on all sides to complete the negotiations within the two-year time-frame.
Could UK politics de-rail Brexit?
Right now, it would seem unlikely. There have been suggestions that Theresa May might use the Brexit negotiations as a chance to seek her own mandate and go to the country while the opposition parties are at such a low ebb. Both May 2017 and May 2018 have been mentioned as possible dates. But Theresa May is nothing if not cautious: expect her to see how the negotiations are progressing before there is any serious possibility of a General Election.
…And then there’s Scotland. No-one, not even the most isolated hermit, can have failed to hear the calls for a second Scottish referendum on independence. Nicola Sturgeon has demanded the referendum: Theresa May has – for now – rejected those demands. The simple fact is, as the Spectator recently pointed out, that had Scotland become independent two years ago it would now be bankrupt. Oil revenues are now 99% lower than those estimated in the SNP’s manifesto: to quote the Spectator,
“America has mastered fracking now and doesn’t need to import so much oil, pushing the price down from $110 a barrel to $45.”
If there is to be a second referendum on Scottish independence then it is likely to be after Brexit, not before it. But yes, over the next two years there will be – to quote Shakespeare’s Macbeth – a great deal of ‘sound and fury’ coming from north of the border.
Could elections in Europe affect Brexit?
2017 had the potential to be a pivotal year for Europe, with elections in Holland, France and Germany. We already know the result of the poll in Holland: the People’s Party, led by Prime Minister Mark Rutte, remained the largest party with 33 seats, ahead of the far-right Freedom Party which gained 20 seats. The result was greeted with sighs of relief through European corridors of power and attention now turns to the French Presidential elections, where the first round of voting is due at the end of April.
The French election is likely to end in a run-off between the independent (but very much establishment) candidate Emmanuel Macron and Marine le Pen, leader of the Front National. It is currently expected that this second round of voting will see Macron win comfortably – which may be good news for the UK’s negotiations. A win for Marine le Pen would see the euro fall sharply in value (as the pound did after Brexit) and there would be a more inward-looking, nationalist France to negotiate with.
So two down, one to go, and while Angela Merkel will undoubtedly be under pressure in September’s poll as she seeks her fourth term as German Chancellor most experts expect her to be re-elected – and to remain de facto leader of Europe.
What are the early issues of Brexit likely to be?
One of the most contentious issues – certainly the one which will generate the most headlines – will be the question of whether Britain should pay an ‘exit penalty’ to the EU. Nick Clegg, pro-EU former leader of the Liberal Democrats said recently that “when you run up a bill at the bar you pay before you leave.” There are suggestions that the EU think the bar bill is £50bn: many right wing commentators see no reason why the UK should pay anything at all, suggesting “we’ve been overcharged at the bar for years.”
There have also been suggestions that this issue needs to be resolved before the EU will discuss anything else: the so-called ‘divorce first, talk later’ approach. But as has been pointed in this morning’s Telegraph, the EU’s negotiating position is perhaps not that strong and – just like in any divorce – it seems much more likely that the ‘separation’ and the ‘ongoing relationship’ talks will proceed simultaneously – even if some of those talks are unofficial.
There will, for example, almost certainly need to be a transitional deal to cover the period between Britain leaving the EU and agreeing to a new, long-term trade deal with Europe, which could take up to five years to finalise.
…And it is now nine months since Britain voted to leave the EU: inevitably there will have been informal talks with the EU during that time and there are suggestions that a series of early deals might be announced after Article 50 is triggered. Informal talks are clearly at odds with the EU’s official line, but there is optimism in Whitehall that Germany – behind the scenes at least – wants to work constructively.
Examples of early deals being considered might include deals over migrants, and defence arrangements in Eastern Europe. Clearly ‘reciprocity’ will be the word: for example, Britain may be given early permission to negotiate trade deals with non-EU countries in return for some olive branch to Berlin and Brussels, perhaps over migrants’ rights – something Theresa May has said that she wants to address early on.
What does all this mean for the UK economy and for trade?
When Philp Hammond delivered his first Budget speech he opened with very positive news on the economy, with both the Office for Budget Responsibility and the Bank of England increasing their growth forecast for this year to 2% as “the UK economy continued to confound the doubters with robust growth.”
The manufacturing sector, in particular, has benefitted from the fall in sterling since the vote to leave the EU – but clearly what’s good news for manufacturing may not be good news for food prices, with the latest inflation figures showing a rise to 2.3% in February.
If – as we have suggested above – one of the early ‘wins’ will be the freedom to negotiate deals with non-EU countries then Britain is going to find Donald Trump a willing listener. You would also expect our trade negotiators to be booking flights to India and China fairly quickly.
Company news has been mostly good since the vote to leave the EU, with Apple boss Tim Cook recently telling the Prime Minister he thought the UK would do “just fine” outside the EU.
The FTSE 100 index of leading shares has continued to hit record highs, and unemployment has recently fallen to its lowest level since 1975. But these are very early days: no one should draw any firm conclusions from the events of a few months. Yes, some companies will remain in – or be attracted to – the UK because of the looser regulation and lower tax it may offer outside the EU. No doubt other companies will move in the opposite direction, deciding that they want to retain access to the single market under the present rules.
So it looks like Brexit is going to happen…
Theresa May moved into 10 Downing Street famously declaring that “Brexit means Brexit.” She has today started the formal process and the overwhelming odds are that Brexit will happen. What shape it takes will take some time to determine. There will be plenty of claims and counter-claims – and your perception of how the negotiations are proceeding may well depend on which newspaper you read or TV channel you watch. We also need to remember that Brexit is not the only game in town.
There is also the wider world economy to deal with: the continuing possibility of a slowdown in China, and the uncertainties over the President Trump’s economic policies.
Last Sunday the Observer declared that triggering Article 50 would be a “disaster” for Britain. Entrepreneur and inventor James Dyson has called it a “fantastic opportunity.” Whichever way your sympathies lie, the next two years will be anything but dull…