SLOWLY GETTING REAL: THERESA MAY’S BREXIT SPEECH IN FLORENCE

Slowly, slowly, slowly, the British government is getting real about Brexit. Prime MinisterTheresa May’s Florence speech marks another modest step in that direction. After a referendum campaign in 2016 in which blatant distortions of the truth had carried the day, the United Kingdom is on the way towards acknowledging the facts of life in Europe.

The facts are simple:
• Upon leaving the European Union on 29 March 2019, the United Kingdom will have to honour the legally binding commitments it had willingly incurred as a member. That includes financial commitments.
• Any country that wants to gain or preserve privileged access to the greatest common market in the world, the EU Single Market, will have to play by the established rules of that market.
• In negotiations between a disunited UK and a fairly united EU27 with five times the economic clout of the UK, the EU will largely prevail.
• If the UK wants to avoid a cliff-edge Brexit, it will need a transition period. Negotiating the details of any future arrangement between with the EU is far too complex to be achieved by late 2018 for ratification by March 2019. And in that transition period, the UK will have to abide by EU rules.

Even more important that what Theresa May said is the implicit admission that came with her giving the speech at all: in the Brexit talks, the EU sets the agenda. Britain first has to tackle the thorny issues of divorce before it can proceed to the details of its future trade arrangements.

On substance, May moved the UK position modestly towards the inevitable: Britain will have to pay up. The offer of contributing roughly €20 billion to the EU budget during the two-year transition period marks a departure from previous prevarication on the issue. However, it only takes the UK halfway towards the €35-40 bn which the EU will almost certainly demand as a minimum to cover the UK’s legacy liabilities during a post-Brexit-transition period and beyond. On the rights of EU27 citizens in the UK, and UK citizens in the EU, May’s tone was more constructive than before. As always, the devil will be in the details, though. Unless UK chief negotiator David Davis unexpectedly presents the EU27 at the next round of negotiations next week with detailed explanations that satisfy EU27 demands, the EU will not be willing to move on towards a discussion of post-Brexit trade relations at its upcoming summit on 19-20 October 2017. Despite Florence, the clock is still ticking against the UK.

Our forecast remains: after a lot of further huffing and puffing, the UK will eventually sign a transition deal on EU27 terms. To preserve privileged access to most of the EU Single Market except for substantial parts of the financial market after the formal Brexit in March 2019, the UK will largely accept the EU rules for that market, including those for migration, and continue to pay into the EU budget like Norway and Switzerland do. As the UK has made itself a less attractive place for skilled immigrants with its Brexit vote, a further significant fall in net migration from the EU27 to the UK will help to defuse that issue somewhat over time. London may settle for some modest safeguards against any future sudden surge in migration in the end. With luck, such a transition deal may largely harden into the final settlement over time.

For her listeners on the European continent, May’s choice of venue for her speech carries a message which she may not have fully intended: like no other city, Florence stands for the renaissance of Europe after the dark ages before. Indeed, with firm economic growth outpacing that of the Brexit-stricken UK and with renewed reform momentum, the Eurozone and the EU are enjoying something like a renaissance. Partly due to the offputting examples set by Donald Trump and – less significantly – Boris Johnson, even many of the continent’s pesky protest parties such as France’s Front National or Italy’s 5 Stars are turning away from demands to break up the EU or the euro. This renaissance makes the Brexiteers look even more isolated in Europe than they were before.

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