The view from Brussels: What does Covid-19 mean for Brexit?

24 April 2020

DRD’s Partner in Brussels, Tamlin Vickers takes a look at the state and future of Brexit negotiations in light of the current healthcare situation.

To extend or not to extend?

Even before the Covid-19 crisis, time was short for the UK and EU to agree a deal. The general view was that the brief negotiating window would lead to a narrow and shallow deal. The Covid-19 crisis has eaten into the little time that was available: to date there have been just two rounds of negotiations (only one of which was in person) rather than the five there should have been by this point. Leaders’ attention on both sides of the Channel is understandably focused on more pressing issues, yet, to quote Michel Barnier, on Brexit the clock is ticking.

The immediate question is whether the 31 December 2020 deadline will be extended to provide more time to negotiate a deal. Under the Withdrawal Agreement, the transition period may be extended for either one or two years. Either side may request it; both sides would need to agree to it. Technically a decision must be made by 1 July, although there is growing acceptance in Brussels that should June come and go without a decision, a creative way could be found to agree an extension later in the year.

The UK government has insisted that it will not seek an extension. David Frost, the UK’s chief negotiator, has argued that the deadline should be kept in order to focus minds and an extension would only lead to more foot-dragging. He also thinks an extension would create further uncertainty for business and would prevent the UK from striking trade deals with other countries. The UK would also have to pay for an extension in the form of continued contributions to the EU’s budget.

These arguments have not been persuasive in Brussels, where it is difficult to find any official who does not support an extension. They point out that if the virus continues into the coming winter, an extension would avoid businesses having to make costly adjustments in the midst of it. New barriers to trade coming into force on 1 January 2021 risk hampering medical and food supplies reaching the UK at a critical time.

The prevailing view is that the UK government will ultimately seek an extension. There is a recognition on the EU side that this would be politically difficult for Johnson, and for this reason there is willingness to show flexibility regarding timing and choreography. Perhaps the smart money is on a joint decision to extend in late June. On the thorny issue of UK contributions to the EU budget, the EU may be willing to agree to a framework for calculating the amount rather than insisting on a specific figure, in the knowledge that the latter would be a tough sell domestically for the Prime Minister. A complicating factor is that the EU’s budget is likely to increase significantly from 1 January 2021 as the EU seeks to fold in some sort of Covid-19 recovery fund. It is unlikely the EU would expect the UK to stump up for the virus-related part but it is not a certainty.

The nature of the deal

As to Covid-19’s impact on the overall dynamics and nature of the deal, one school of thought (a minority one, particularly in Brussels) is that the crisis increases the chances of a softer, broader deal. According to this view, the significant shock to economies everywhere will persuade the UK and EU to seek a pragmatic deal to avoid inflicting further economic damage. EU state aid rules have recently been relaxed to help countries deal with the fallout from the crisis, which potentially weakens the EU’s tough negotiating stance on these matters.

A more popular school of thought is that Covid-19 in fact increases the chances of a harder, narrower deal, or no deal at all. The early weeks of this crisis have seen a rise in protectionism, even between EU member states. While the Commission has since reasserted the rules and functioning of the Single Market, it is surely likely that one lasting effect of the crisis will be a retrenchment from free and globalised trade. Influential voices in the EU are talking up the need for EU strategic autonomy and more effective screening of foreign direct investment. Thierry Breton, Commissioner for the Internal Market, recently said that ‘the Covid-19 pandemic has shown the pressing need to produce critical goods in Europe, to invest in strategic value chains and to reduce over-dependency on third countries in these areas’. This thinking would imply that the EU’s previously stated ambition for a zero-tariffs, zero-quotas FTA between the EU and the UK might be dropped in favour of more complex tariff schedules.

The expectation before the Covid-19 crisis was that a slim deal was the best that could be achieved in the short timeframe. Without a shift in the UK’s position, it looks increasingly likely that the deal may be even slimmer than feared, or absent altogether.

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