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It's time for the UK to up its EU payment for the sake of talks progress

Economy Watch

By Conor Lambe, Danske Bank economist

On December 14 and 15, the EU's political leaders will get together for a European Council meeting. At their October summit, it was deemed that "sufficient progress" had not been made on the Brexit negotiations for the talks to progress to the details of a transition period and a future trade agreement. The December meeting is the next opportunity for the EU to assess if developments to date represent "sufficient progress".

Approval to move on to the next stage of negotiations at the December meeting is now of paramount importance. The longer it takes to secure a transition period, the less beneficial it becomes as some businesses may decide they can't wait any longer for clarity and instead begin implementing their contingency plans, for example, establishing a presence within an EU member state.

And given the already monumental task of trying to agree a comprehensive free trade agreement within the limited time available, it is vital that talks on the UK's future relationship with the EU begin as soon as possible.

If the Brexit process is to move on in December, then "sufficient progress" will have to be reached on three issues - the rights of nationals in each other's territories, the border between Northern Ireland and the Republic of Ireland, and the UK's financial settlement with the EU.

Citizens' rights appears to be the area where the most progress has been made. The UK Government has committed to maintaining the rights of EU citizens in the UK through a new "settled status" scheme.

The Government recently published more details around this scheme in a technical note that included, for example, a commitment to develop a new, user-friendly system through which people can apply for settled status and to ensure that the cost of doing so is not higher than that of a UK passport.

There is still some work to do on the rights of nationals, such as reaching agreement on being able to bring family members to the UK and being able to export a number of benefits. But reaching "sufficient progress| on citizens' rights in December certainly seems to be possible.

On the Northern Ireland border, there seems to have been progress with regards to the movement of people. Given that the Common Travel Area pre-dates both the UK and Ireland's membership of the EU and is compliant with EU law, as well as the statements made about it by the UK and the EU to date, it seems highly likely that it will remain fully in place after Brexit.

How trade will be managed at the border remains the more complex challenge.

The UK Government published a position paper in the summer which included a proposal for an exemption from having to comply with trade restrictions for small and medium-sized businesses.

However, the EU knocked this back due to concerns that it would seriously harm the integrity of the single market and customs union. Recently, there has been renewed discussion around Northern Ireland remaining in the single market and customs union as a way of avoiding a hard border, but the UK Government has rejected that idea.

In practice, it is unlikely a solution to managing trade at the border will be found until more detail is available on how the UK and EU will trade once Brexit occurs.

So this part of the discussion on Northern Ireland and the Republic will probably need to take place during the next phase of the negotiations. It may prove to be the case that there is no radical, single proposal or silver bullet when it comes to avoiding a hard border.

Instead, a combination of different measures that might include businesses pre-submitting customs declarations, the use of technology, random checks away from but on both sides of the border and probably some other measures may be needed to avoid the return of a hard border. Considerable political will and trust are also likely to be needed.

The biggest sticking point preventing the negotiations moving on to the future relationship between the UK and the EU is the financial settlement, the so-called Brexit bill.

This includes things such as previous EU projects that still need to be paid for, commitments the UK made as part of the EU's 2014-2020 financial planning and payments towards the pensions of former EU workers.

The Prime Minister's speech in Florence was widely interpreted to have included an offer of around €20bn from the UK. However, it is thought that the EU believes the bill comes in at closer to €60bn.

These may sound like big numbers but it is important to put them into context. At current exchange rates, €60bn is equivalent to about £53bn.

Last year, UK GDP was £1.96trn so a Brexit bill of £53bn is only equivalent to around 2.7% of the value of the UK's annual economic output. Even against other comparative measures, the Brexit bill seems relatively small. Last year, central government spending in the UK was £746bn, while the value of UK exports to the EU was £236bn.

It's also worth pointing out that the Brexit Bill is a single, one-off payment (albeit it would probably be paid to the EU in instalments or financed via government borrowing and then repaid over a number of years), whereas the other numbers all represent values for a single year.

Ultimately, the Brexit Bill will be paid for using public money and so the UK Government is right to scrutinise the amount being requested by the EU.

But the financial settlement must be considered in terms of the bigger picture, including the amount of trade we currently do with the EU and are expected to do with the bloc in the years ahead, as well as the damage that could be done to the Brexit negotiations and the spirit within which they are conducted if the separation issues aren't progressed sufficiently by December.

The impact that Brexit will have on the UK economy over the longer-term will depend on the future relationship between the UK and the EU. So it is time for the UK Government to agree to make a bigger payment than it would ideally like to in order to move the negotiations on to the transition period and the desired free trade agreement.

Belfast Telegraph

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