Brexit: scenarios for the next stage of negotiations

18 September 2018

Theresa May could get some respite from domestic pressures in Salzburg. The real challenge is getting a deal through the UK parliament.

By Michael Landesmann and Richard Grieveson

  • The UK and EU-27 may be nearing a deal on Brexit. It is likely that the focus will be on securing a withdrawal agreement, with many of the most important details about the future relationship left for later.
  • For UK Prime Minister Theresa May, dealing with the EU-27 may turn out to be the easy bit. The real challenge for Ms May will only become clear when she gets back to the UK parliament.
  • Both major parties in the UK are fragmented on Brexit, and many MPs in both are likely to be unhappy with whatever Ms May proposes.
  • As long as the deal’s wording on the long-term relationship between the UK and the EU is sufficiently vague, many Conservative hard-liners may vote in favour to make sure that the UK leaves the EU. There, the decisive role could be played by the Labour Party.
  • A rejection of the deal by parliament, leading to new elections and potentially a second referendum, remains possible.

UK Prime Minister Theresa May arrives in Salzburg this week for an informal meeting of the European Council, a key part of which will be devoted to the next stage of Brexit negotiations. Ms May has spoken of the Salzburg summit as a key “staging post” in the discussions over the UK’s exit from the EU. Most importantly, this will be the first time that she will discuss with other EU leaders her white paper on leaving the EU, which has been dubbed the “Chequers plan”.

When the leaders of the 28 sit down to talk, negotiations are likely to centre on two key issues:

  1. Long-term trade arrangements, including regulatory alignment (the “common rule book”) and supervisory/judicial mechanisms (sovereignty issues)[1];
  2. Dealing with the Northern Ireland border issue.

The current situation points towards tough negotiations between the EU-27 and the UK on the basis of Chequers. In the UK, Chequers has already led to the resignation of two senior (and some junior) government ministers, and has been strongly criticised by the group of 60-80 hard-line Conservative MPs in the Economic Research Group (ERG). Nevertheless, Chequers is still the only written document as the basis for negotiations from the UK side. The ERG, by contrast, was unable to agree on a joint comprehensive position paper, except one recently on the Northern Irish border issue, the main points of which have already been rejected by the EU-27.

The reaction by the European Commission to the UK government’s White Paper was at best mixed (it was criticised by Michel Barnier, the EU’s chief negotiator on Brexit). However, it has been taken seriously as the basis for negotiation, in part because the EU-27 want, within reason, to avoid a “no deal” outcome and support Ms May, given their fears of who she could be replaced by if she was ousted from office. It is our opinion that, with some important modifications (such as rejection of the proposal for external EU tariffs to be collected by the UK), a deal will be reached and put before the UK parliament, potentially as early as November[2]. The strength of Chequers is that it attempts to safeguard the important production chains linking UK businesses in manufacturing and food/agriculture with continental Europe (especially in cars and aerospace). It also goes quite a long way to resolve the Northern Irish border issue, will avoid long queues at British ports, and gives a limited leeway for the UK to still strike its own trade deals in areas other than goods.[3]

The sticking points

The main issues regarding (1) and (2) above is that the UK is aiming at a type of customs arrangement with full regulatory alignment (a “common rule book”) in goods (including agriculture and food) and attempting to strike different types of arrangements with respect to other sectors (finance etc.). In some of these remaining areas (e.g. air transport) the UK will try to aim towards close regulatory alignment, in others (in different segments of the financial sector) less close alignment (e.g. in the form of ‘mutual recognition’ agreements[4]). The differentiation in these areas (in the form of negotiating a complex Free Trade Agreement) would provide some limited basis for the UK to strike its own trade deals. This will serve as an important face-saving device, which Ms May will try to sell to her own party and the general public.

The opposition Labour Party’s official position is currently a comprehensive customs union with the EU comprising goods and services. They still dangle an unrealistic “carrot” before the electorate in that they aim to negotiate some joint supervisory/regulatory/judiciary mechanisms giving the UK a feeling of “partnership” rather than being a full “rule taker”. The same applies to the other (even more) sensitive areas, i.e. to come to some agreement with regard to limitations on the free movement of labour.  Here it is possible that a compromise solution will be agreed with some preferential – but not fully free - labour market access of EU nationals to the UK labour market.

Back to parliament

Negotiations on the points above will not be easy. Yet both sides have a clear interest in avoiding a “hard” Brexit, and the EU-27 is likely to be willing to make certain limited compromises to reach an agreement. As the deal outlined above is certainly worse for the UK than its current membership of the EU, the EU-27 will achieve one of its key priorities: to prevent any impression of the UK “cherry picking” parts of EU membership, and ending up with a better deal outside the bloc than it had on the inside.

In our view, it is once the negotiated package comes before the UK parliament that things will get really difficult. We see two possible scenarios for how things go from there, and within these a number of sub-scenarios.

The two overarching scenarios are:

A: Acceptance of the deal by the UK parliament (after some back and forth between the Commons and the Lords).

B: Rejection of the deal by Westminster.

There are two ways that A could happen:

A1. A sufficient number of Tory Brexiteers support the May package to get it through parliament, despite misgivings.

They do this because although they dislike the deal, they dislike more the idea of Jeremy Corbyn as Prime Minister, and don’t want to risk splitting the party and provoking new elections. This scenario would be more likely if whatever deal Ms May brings back to the UK parliament is sufficiently vaguely formulated with regard to the long-term relationship that each side can claim that its own ‘red lines’ have not been crossed.

A2. The ERG group of MPs rejects the deal (60-80 MPs), but this number is offset by a sufficient number of Labour MPs (against the general party line).

These Labour MPs would argue that they accept the basic outlines of the deal (putting country before party) as the alternative would be the no deal scenario. They would be branded ‘traitors’, as they would be keeping the Conservative Party in power for the duration of the transition period, and scuppering the opportunity of early parliamentary elections (which Labour would have a decent chance of winning).

If scenario B happens, and parliament rejects the deal, this would be seen as a vote of no confidence in the current Conservative government. Ms May would be forced to resign and there would be a new Tory leadership election. There are two possible implications of this:

B1. A new interim Tory government is in power, but would have to call for new elections in order to get a mandate.

It would go into new elections with a more hard-line position on Brexit than the current white paper outlines, and ask the EU for an extension of the March 29th 2019 withdrawal deadline, in order to have more time for negotiations. The Labour Party would likely go into these elections more or less with same position it has now (targeting a full customs union). It would also argue for an extension of the withdrawal deadline, to allow it to renegotiate a deal which it will sell to the public as being better for jobs and workers’ rights, and for long-term relations with the EU-27.

Once any of the two parties win, they would face more or less the same problems (‘impossible polygon’) that have plagued Ms May: the Irish border, the maintenance of production networks, the promise to the electorate to have some degree of control over migration from the EU, and the return of at least a certain degree of sovereignty over laws and regulations. The parties will have different positions on these points, but there are serious problems with each of the positions in the light of the first referendum result. It is likely that both major parties would lose a certain amount of support, and that UKIP would make a come-back.

B2. The fall of Teresa May is followed by parliamentary deadlock on the Brexit question.

As parliament cannot decide, it decides to hold a new referendum on Brexit. There would be a major conflict over how to pose the question. Justine Greening, a Conservative MP, has already made the most sensible suggestion. Ms Greening proposes a 2-stage procedure where in the first stage voters would be asked to vote for their two preferred options out of three:

  1. Accepting Teresa May’s negotiated package;
  2. Rejecting the package and leaving the EU nonetheless in March 2019, attempting to negotiate an FTA afterwards;
  3. Staying in the EU with current arrangements.[5]

In the second round, voters would choose between the two options with the most votes from the first round. If these options turn out to be (1) and (2), then it is between two Brexit options. If (2) and (3) then it is a repeat of the ‘in’-‘out’ options of the first referendum, but the ‘out’ option now being an initial ‘no deal’ option followed by FTA negotiations. If (1) and (3) then it is the choice between ‘soft Brexit’ and ‘Remain’.

The outcome of such a referendum is impossible to predict at this stage, as hard-line Brexiteers and the tabloid media would wage a vicious anti-EU campaign, arguing that the EU had been inflexible and unfair to the UK during the negotiations. Nonetheless, we think that options (1) or (3) would be more likely, as voters rarely like to choose the unknown. Only committed, idealistic free traders, who overestimate the continued global role of Britain, are comfortable and confident with regard to this option. However, would be unlikely to convince the majority of the electorate, especially in the light of the chaos and the deteriorating social and economic situation they have experienced since the first referendum.


[1] Arrangements with respect to mutual preferential access to each other’s labour markets of EU-27 and British citizens after Brexit will probably be dealt with at a later stage, when other aspects of a possible deal become more clear.

[2] It is important to keep in mind that the issue which has to be decided by March 2019 (and which the EU-27 hopes to conclude by November) is the withdrawal bill (i.e. the detailed conditions of leaving the EU). The details of the long-term relationship between the UK and EU-27 will be negotiated after that. This allows for only a general formulation of the long-term relationship.

[3] Of course, given that it aims towards giving up sovereign control over goods trade (the ‘common rule book’), the UK will have limited bargaining power in such bilateral trade negotiations. This is one of the important issues for the more hard-line Brexiteers in parliament, although – in our opinion – less so for the general electorate (as it sounds like a technical issue).

[4] Such “mutual recognition agreements” can be unilaterally revoked from the EU side (at relatively short notice) which is one of the points of contention in the negotiations.

[5] However, there will still be a lot of haggling over the precise wording of these options.