Brexit Agreement: What Does it Mean & Where Do We Go From Here?

Brexit Agreement

It has been two and a half years since the beginning of Brexit, and last Wednesday, November 14th, Theresa May’s cabinet decided to back the agreement that has been drafted by the European and British negotiators.

This led to a few resignations on the part of several ministers in May’s cabinet, which has sparked arguments and uncertainty around the nation.

Let’s try and understand what this “agreement” entails, and what could be the different paths Britain and the EU can take moving forward.

What is the Brexit Agreement?

The withdrawal agreement between the UK and the EU is a 585 page document detailing the terms and conditions of their eventual separation.

This agreement covers three main areas:

  • Britain’s financial settlement with the EU to meet agreed commitments.
  • The post-Brexit rights of EU citizens in the UK and British citizens on the continent.
  • A mechanism to prevent a “hard border” on the island of Ireland.

Apparently, the agreement also features a much less detailed, and non-binding, political declaration of what both parts expect of their trading relationship in the future.

The sticking point of the agreement was the third one stated above. The border between Northern Ireland and The Republic of Island will become a de facto border between the EU and the UK, after Brexit.

Because of the island’s troubled history, both sides want to avoid a hard border with customs checks that could become a source of friction.

But before diving into this, let’s quickly cover the other two points.

Brexit

Read: How Brexit Could Affect the UK Housing Market

The EU Divorce Bill

What some analysists have labeled as a “divorce” settlement. This basically boils down to how much the UK will have to pay the EU when the separation happens.

The EU is not unlike a company. It has assets and liabilities. The UK has agreed to pay for its fair share of the liabilities for the EU programmes it was subscribed to. The initial discussions have covered both contributions due under the current multiannual financial framework (EU budgets are in seven year chunks, and the current one ends in December 2020); amounts outstanding from earlier commitments but due after the end of the multiannual financial framework (so-called reste à liquider); and contributions to future liabilities of the EU – in particular, pensions to EU civil servants as well as some loans the EU has made, for example, to Ukraine.

From the assets side of the equation, the most notable asset is the European Investment Bank, which the UK owns a share off, and which the EU has requested be settled upfront in a lump sum.

The Question then is; How much is this Going to Cost us?

The simple answer is somewhere around £37.1bn to be paid up to 2064 as pension liabilities fall due.

The UK’s Office for Budget Responsibility (OBR) has assured us that this is less than what the UK would be expected to pay if we were to continue in the Union.

This calculation, though probably doesn’t factor in a couple of points.

Firstly, the UK has already agreed to step in to cover the funding that some programmes are currently receiving from the EU. For example, under the current Common Agricultural Policy,  the UK receives around 3 billion from the UK.

Furthermore, the UK has reserved the right to participate in some of the EU programmes and agencies in the future, the cost of which is yet to be determined.

The alternative would be to set up our own agencies and programmes, which would, of course, come at a hefty cost.

All in all, the transition will certainly cost us a significant amount of money, whether this is “worth it” will, of course, depend on a subjective valuation of the value of Brexit, if this value is even positive at all.

Citizen’s Rights

The withdrawal agreement seems to cover this in an unusually effective and common sense way compared to usual government standards.

There are currently around 3 million EU citizens in the UK and 1 million UK citizens living in the EU. The agreement protects these people’s rights to keep living and contributing to their communities.

Basically, during the initial transition period, up until 2020, businesses, people and administrations will be treated as if nothing had changed. The details of what will happen later are not completely clear yet.

Breaking Down the Hard Border

The issue arises due to the Prime Minister’s promises to take Britain out of the EU’s single market and the customs unions.

As stated earlier, this would pose a problem for the two Irelands as their border would have to undergo the unavoidable custom checks and extra regulations.

Before we move forward, it’s important to understand what the single market and customs union actually are

The EU’s single market is more than a free-trade area. It aims to remove not just the fiscal barriers to trade (tariffs) but the physical and technical barriers (borders and divergent product standards) too by allowing as free movement as possible of goods, capital, services and people. In essence, it is about treating the EU as a single trading territory

The European Union is a customs union. It allows free trade between countries inside it and allows imports into the area by setting common tariffs. The area does not just include EU members. For instance, Turkey is part of the customs union for manufactured goods but not services or agriculture. The single market involves deeper integration of free movement of people, goods, services and money. This means laws need to be aligned. Some countries have access to the single market without being members of the EU’s customs union.

Having said this, the problem with the Irish border should be resolved as soon the FTA (Free Trade Agreement) is signed later on.

But since this could take a while, the EU has insisted that a “backstop” be put in place to avoid a hard border until then.

Initially, the EU suggested that the Irish remain in the single market and customs union. However, the UK rejected this as it would require customs checks for goods crossing the Irish Sea and other arrangements meaning Northern Ireland was treated differently to the rest of the UK.

Conversely, the EU rejected the UK’s proposal of staying in a de facto customs unions, because the UK wanted to reserve the right to leave this union at any time and unilaterally, which, for the EU, meant it could not be considered a proper backstop.

Finally, an agreement was reached.

The EU accepted to maintain the territorial integrity of the UK and to keep it, for now, inside the customs unions.

However, Britain had to concede to the point that it will not be allowed to exit this backstop at any time and unilaterally, at least until there is a guarantee that there will be nor hard border. It must also accept special “deeper” customs arrangements, closer to the single market, for Northern Ireland, and the EU’s so-called “level playing field” conditions for the whole of the UK.

Read: Bank of England Governor Mark Carney Offers “Chilling” Warning over Hard Brexit

The Outcome of the Agreement

While it may seem like this withdrawal agreement is well thought out and fair, there are many people on all sides who disagree with this.

Of course, the Labour party has objected it, stating that this agreement will not help preserve jobs and help the economy.

The Northern Ireland unionists from the DUP fee like these “deeper customs”, involving additional checks on livestock and food crossing the Irish Sea, breach their red lines on identical treatment for Northern Ireland.

And of course, some conservatives themselves are appalled at the deal, since it concedes too much to the EU. According to them, this deal could mean that the UK would be trapped in a customs union and would have to continue to accept the EU regulations indefinitely.

Possible Outcomes

The withdrawal agreement is not final, and it could still fall through as either side still has some leeway to back out of it.

But this initial arrangement has certainly given us some more information on what either side wants and values and will shape the negotiations moving ahead.

There are many possible outcomes, but here are a few which I find could be some of the most likely. This is, in fact, a summary of a “Brexit Matrix” put forth by Markets.com

No Brexit: There is still a possibility for May to back down. There could be a revote and the whole Bexit debacle could be put behind us.

Stay in SM or endless transition period: The EU could decide it can’t break up the SM. As a result, May is left in a hard spot and has to extend the transition period until the next election.

The current agreement: The EU agrees to the chequers agreements. The UK sticks to the stated rules for goods and trade until the end of the transition when new trade deals can be made.

Norway model: Britain leaves the customs union but remains in the EEA,(European Economic Area) and possibly joins the Nordic countries in EFTA

Switzerland model: The EU offers a black and white stay/leave the customs union. May decides to stick to her guns and leaves the union and the EEA and joins EFTA.

Turkey model: With the blessing of the EU, the UK decides to stay in the customs unions but leave the single market.

Canada Model: Both the EU and UK make some concessions in order to reach an agreement. Eventually, a sort of taylor-made agreement is reached. Like CETA

No deal: Theresa May is removed and replaced by a hardline Brexiteer. The UK goes off the rails and does what it pleases, facing the resulting consequences.

It seems to me like the current agreement is not such a bad option. A Turkey like a model would also be good, but I think of as unlikely. The EU is a union after all and it can’t give the impression that it’s going to let any country decides which parts of the Union it wants to be a part of or not. This could lead to a lot of problems down the road. Especially with the current situation in Italy which I discussed here.

James Foord

Based in Barcelona - Spain, James is an Economics Graduate and Financial Advisor offering advice on Pension Plans, Insurance & Mortgages. He has been writing about economics and investments for 7 years.


james@moneycheck.com
https://www.linkedin.com/in/james-foord-7272608a/

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