Deal or No Deal?

How a classic Anglo-French flare-up marks the prelude to a UK-EU trade deal

The European Council meeting which took place at the end of last week was widely seen as the deadline for an agreement between the UK and the EU on a trade deal. With the end of the transition period fast approaching (31st December), and the need for a period of time for both sides to either (a) finalise preparations for a no-trade deal Brexit or (b) ratify the finalised agreement, the European Council was seen as a natural deadline for the negotiations, after which we would slip into no-deal territory. And this was certainly the impression given in the weekend papers with Daniel Hannan in the Sunday Telegraph proving to be particularly pessimistic about the chances of a deal, but characteristically optimistic about the opportunities that presented.

When the European Council ended, the joint communiqué did not mandate Michel Barnier, the EU’s negotiator, to “intensify talks” as had been suggested earlier in the week. Instead, it simply authorised him to “continue negotiations in the coming weeks” and called on the UK “to make the necessary moves to make an agreement possible”. This came on the back of a declaration by President Macron that “on no account will our fishermen be sacrificed for Brexit”, and a warning that, “We are ready for a no deal.” And following the Council’s statement, the Prime Minister “concluded” that Britain should prepare for a no-trade deal outcome or, as Boris Johnson puts it, an “Australian-style” trade deal with the EU.

Should we therefore be preparing for a no-trade deal Brexit at the end of the year? Reading the runes of any EU negotiation from media reports is like trying to decipher smoke signals in a hurricane. But having spoken to a number of well-informed people, in London, Brussels and Paris, I am significantly more optimistic than most commentators that a deal will be agreed over the next couple of weeks. I think it is significant that Commission President Ursula von der Leyen tweeted that Michel Barnier would be in London this week “to intensify these negotiations” – exactly the language that No10 was looking for, indicating that the negotiations were entering “the tunnel” of the final stage. But in order for there to be a deal, resolution needs to be found on the three key sticking points of fishing, state aid and protecting the internal market.

Fishing is, of course, a highly political issue, much more than its contribution to the economy would initially suggest, especially in Scotland where, remarkably given the actual performance of the Scottish Government on Covid-19, ‘Nicola’ is having a good pandemic. Only last week, we saw the re-emergence of the scallop wars in the Channel, when French trawlers confronted British fishermen by firing flares and throwing frying pans (let’s hope they were not Le Creuset ones). In the UK, the decimation of our fishing industry from joining the Common Market created wounds that run deep. From the French perspective, any change to the current arrangements would be a significant impingement on their fishing industry; French fishermen are known for their militancy, the next Presidential election is in 2022, and Macron is not faring well in the polls. Is there a solution to this seemingly inextricable problem? My understanding is that a transition period of something like five years is being discussed, which would satisfy all but the most hard-line Brexiteers, whilst giving French fishermen (and Macron) some breathing space.

State aid is not an issue which many anticipated coming up in the negotiations. Few would have predicted that a newly elected Conservative Government would seek to make state aid rules a point of contention in the negotiations. But Boris Johnson’s government is very different to previous administrations: it is more interventionist, more willing to use the financial muscle of the state to support UK plc (the gradual nationalisation of the railways and the £400m investment in OneWeb are cases in point). So where might the compromise be? For many months, the Government has held back from publishing the UK’s post-Brexit state aid rules, giving them greater leverage in the negotiations. But as part of the recent UK-Japan trade deal, they agreed what would and would not be acceptable in terms of state aid. And since the EU also has a trade deal with Japan, the basic ground rules for state aid are essentially consistent. So aside from some tinkering, there is a sensible way forward on state aid.

Finally, there’s the question about protecting the internal market. Both sides are hoping to agree a zero-tariff, zero-quota trade agreement, but this leaves a question for the EU about whether the UK’s regulatory regime going forward will undermine the integrity of the single market, and vice versa. To ensure this doesn’t happen, both sides have been discussing a dispute mechanism to govern the trade deal. The EU’s starting point was that perceived infringements would have to be adjudicated by the European Court of Justice but, understandably, this was anathema to the UK Government. Both sides now agree that the dispute mechanism should be independent, but where should appeals be heard? If they can be taken to both the ECJ and the (UK) Supreme Court, this poses no threat to the UK’s sovereignty and it would cut the umbilical cord of the UK to the EU legal system.

If a landing ground for compromise is emerging, why the theatrics? Why the war of words at the European Council? We will have to wait for the various memoirs to properly answer this question, but I sense that the fracas was the prelude to a deal, rather than a green light for no-deal preparations. Just as the meetings between Boris Johnson and Leo Varadkar in locked down Wirral were key to unlocking the Withdrawal Agreement last year, I see the strong personal relationship between Johnson and Macron as being key to unlocking the EU-UK trade agreement. It would be an immense failure of statecraft if the deal fell through when there are sensible compromises on all the key issues. Despite the classic Anglo-French bust-up over fish, I am therefore expecting a deal in November.

And if I am wrong, and a trade deal isn’t agreed before Christmas, the political fallout is likely to be bigger than the economic one. The impact on the business community would be minor in comparison to the logistical problems encountered with the Covid crisis. The political terrain would, however, be trickier. The spotlight would quickly shift back to Northern Ireland, the border and the Belfast Agreement. The SNP would receive a boost in its campaign for Scottish Independence. And with a Biden Presidency looking exceptionally likely, his views would play heavily into the situation. And on the European Union side, a no-trade deal Brexit might be of less immediate political concern, but it undoubtedly adds a curveball into an already complex situation as they grapple with Covid with the UK being a key trading partner.

So, whilst the public statements and media narrative might be about the negotiations breaking down, if Michel Barnier comes to London on Monday “to intensify these negotiations”, that’s a positive sign. Trying to decipher smoke signals in a hurricane is difficult, but I’m optimistic there will be a UK-EU trade deal by the end of the year.

Matthew Elliott tweets @matthew_elliott.