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Why a short-term transition deal is no easy Brexit solution

The battle over Britain’s transition out of the EU has begun, as the UK cabinet splits over how to handle the immediate aftermath of Brexit.

All sides agree that the country’s departure from the EU should involve an adaptation period. Government and business need time to adjust, just as Britain had a seven-year transition when joining the then European Economic Community in 1973.

But any attempt to agree UK-EU transition terms boils down Brexit’s political dilemmas to their essence. Here, the Financial Times looks at several constraints on reaching a transition deal to smooth the country’s way out of the EU.

The EU and UK negotiating interests are at odds

Britain wants, as early as possible, maximum certainty and continuity for business, while at the same time securing the independence that comes with Brexit.

The EU is also seeking a managed UK exit. But it sees time as on its side. For Brussels, uncertainty is positive if it convinces businesses to move operations to the continent. And EU leaders are loath to offer full EU benefits to countries that shun membership obligations.

Brexit secretary David Davis, left, greets the EU’s chief negotiator Michel Barnier on Monday © EPA

To add to the tension, there are time constraints. Britain’s exit is just 19 months away. “Time flies,” said Michel Barnier, the EU’s chief negotiator. “The real transition period began on March 29 2017, the day the UK presented its notification letter.”

Many companies argue that if a transition deal is not largely settled by March 2018, it will lose much of its value, because they will have to assume a much sharper break with the EU.

Legacy problems are not all solved by the transition

A gradual transition mitigates many separation issues. It reduces Britain’s estimated exit bill. Further UK budget contributions help the EU avoid a crunch before the end of the bloc’s current long-term budget in 2020.

Citizens would have more time to settle their migration status. Contractual complications for business would be reduced. There would be less of a government rush to establish new administrative systems for customs or immigration.

But transition is no Brexit cure-all. It will still leave knotty issues.

There would still be an overhang of unpaid bills at the point the UK makes a clean EU break, whether in 2019 or 2022. The EU wants Britain to promise to honour its share.

The UK cabinet is divided over transition and its length

Philip Hammond, Britain’s chancellor of the exchequer, wants to give business “as much clarity as possible as early as possible” by, in effect, extending participation in the customs union and single market. He argues such arrangements would need to be for at least two years so Brexit Britain’s administrative systems could bed down.

But Liam Fox, international trade secretary, is pushing for a “very time-limited” transition for potentially just “a few months”. His priority is breaking free of the customs union so that the UK can realise the opportunities of a fully independent trade policy.

UK chancellor Philip Hammond argues that Britain’s adminstrative systems need at least two years to bed down © Reuters

David Davis, Brexit secretary, takes a more tactical approach. He wants an EU-UK trade deal complete by 2019 so the transition phases in new terms. His fear is being stuck “for years in a transitional arrangement [while] carrying on the negotiations”.

Downing Street is somewhere between the camps. Theresa May, prime minister, recognises that ending free movement will take time to administer.

Her preference is an “implementation period” that immediately gives Brexit Britain some liberties. That could be through reducing financial obligations, allowing trade negotiations and breaking the direct jurisdiction of European judges.

The EU side is unwilling to negotiate a ‘bespoke’ transition

EU leaders set Brexit guidelines that say the “prolongation” of the EU acquis comes with all existing governance arrangements. That means Britain accepting EU law including free movement rules, EU institutions, EU judges and EU budget payments. The real difference with the status quo would be that the UK would no longer have a vote on EU affairs.

Brussels thinks it is impossible to complete an ambitious trade deal by 2019 — but sees no need to set up a special transition arrangement just for the two or three years a final deal might take to agree. In its eyes, the existing system works just fine.

EU chief Brexit negotiator Michel Barnier (centre left) and Brexit Secretary David Davis (centre right) prepare for the talks with their teams on Monday © PA

In addition, any withdrawal agreement that compromises the EU legal order by establishing a special transition deal for the UK is likely to be challenged in court.

“There is a lot of rhetoric around the transition and some of it is delusional, as if you can fudge the issues,” said one senior EU figure directly involved in talks. “Under Article 50 [the EU treaty’s exit clause] we cannot create anything new. It is as simple as that.”

Brexiters are confident that such concerns are mere posturing. “I would not take too seriously or literally anything that the negotiators [are] saying in the public domain,” Mr Fox said.

Sectoral deals might be possible — but it is not pick and choose

Brussels has long suspected that the UK wants “sectoral” transition deals so it can tailor exit terms to its economic interests. Mr Barnier has said there will be “no cherry-picking” on transition. But the EU does not quite see all sectors the same way.

The European Common Aviation area includes countries that are not in the single market. The same goes for fisheries access, which is negotiated with Norway outside the framework of the European Economic Area.

But in areas like aviation and nuclear trade, participation would still be likely to require core EU conditions, such as EU laws and EU courts. The same goes for some forms of police co-operation and data transfer.

The EU wants to avoid setting one sector of the single market against another. It would reject, for instance, a British request to remain part of the single market for pharmaceuticals or carmaking but to stay outside for textiles or construction.

The customs union is an alternative but it has big drawbacks

From the EU’s perspective, the main alternative to a full single market transition would be a fallback to a customs union agreement. That would maintain a zero tariff area between the UK and EU, with customs facilitation to avoid certain trade barriers. It would give more time to resolve issues over the Northern Ireland border with the Republic of Ireland.

Britain would regain power to negotiate trade deals, but would still be bound by common EU tariffs on goods from outside the bloc, weakening its leverage.

Without a single market transition, it may also be immediately excluded from the EU’s existing agreements with third countries. That would leave it having to immediately renegotiate at least 759 treaties.

Trade would probably be interrupted by phyto-sanitary checks, VAT forms and transport restrictions. Britain’s services exports would also be excluded.

The uncertainty will continue for business

Both Brexiters and the EU agree on the need for a cut-off date. Any transition would need to be time-limited. Anything open-ended would be challenged as unlawful.

Even if a gradual, single market transition is agreed, without solid guarantees on trade arrangements it would simply move the date of the possible “cliff-edge”.

Senior Whitehall officials worry that this would mean companies “never have the certainty they need to invest”.

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