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With the extension deadline passed and Germany taking over the EU Presidency, Brexit talks have intensified. What can we expect as the final outcome of the Brexit saga? Jannike Wachowiak and Fabian Zuleeg provide five concise scenarios for the coming months, complete with sobering betting odds.
The end-of-June deadline for agreeing on an extension to the Brexit transition period beyond 31 December 2020 has expired. In all likelihood, the EU-UK negotiations will have to conclude at the end of this year, regardless of whether a deal has been reached or not.
Recently, the mood music has improved. Alongside (inflated) UK expectations that the German Council Presidency would unlock talks, there is a sense on the UK side that EU negotiator Michel Barnier’s position is moving, thus generating new hopes for a deal. How well-founded these hopes are remains to be seen, particularly as there is still little indication for movement on the UK side. So far, progress remains extremely limited, and the new format of intensified talks has failed to generate fresh momentum.
With less than six months left to find and ratify an agreement, this Commentary discusses how different scenarios could unfold over the coming summer and autumn, as well as their likelihoods. These should be considered as our ‘guesstimates’ rather than firm predictions – they are highly dependent on political developments, particularly within the UK.
Scenario 1: A basic deal that does not protect the EU’s red lines (highly unlikely)
It is highly unlikely that the EU will change its fundamental negotiating principles substantially. While the EU has signalled readiness to consider the UK’s red lines (e.g. the role of the European Court of Justice, a noticeably different deal on fisheries) and discuss possible compromise ‘landing zones’, it will not drop its fundamental demands. The EU is willing to let the UK government claim ‘victories’ if compromises on certain details can be found, but this flexibility reaches its limits when it comes to the EU’s economic interests and political unity. A basic trade deal that is decoupled from the EU’s demands on governance and the level playing field (or does not include an agreement on fisheries) is, therefore, the least likely scenario.
Scenario 2: A basic deal by summer 2020, with EU red lines intact (5%-10% likely)
It is also unlikely that the UK government will concede any of its red lines before the summer. Despite Prime Minister Boris Johnson’s claim of wanting a deal before the end of July, it is doubtful that he is seriously seeking to finalise a deal at this point. On the contrary, the UK government appears to follow a strategy of running down the clock in the mistaken belief that this will pressure the EU into making last-minute concessions when faced with the threat of a no-deal outcome. The logic of such a strategy would deem the softening of red lines now as self-defeating. The UK can thus be expected to hold out in the hope of securing a more favourable deal later this year, even though there is no evidence to suggest that the EU will compromise its general principles later on (see Scenario 1).
Scenario 3: A basic deal by autumn 2020, with EU red lines intact (15%-20% likely)
A thin trade deal in autumn is still possible, provided that the UK starts to seriously engage with the political trade-offs between market access and divergence. While compromise is required from both sides, the balance of power in these negotiations dictates that the UK will need to concede significantly more than the EU. For this to happen, Johnson must be convinced that a deal is politically desirable enough to U-turn on his previous positions. That is far from certain (see Scenario 5).
Even if both sides want a deal, negotiating all the technical details by the end of the year remains a challenging task, particularly as there are domestic decisions within the UK that impact the EU-UK negotiations but are still pending (e.g. how the UK’s state aid regime will work). The time needed on the EU side to ratify any deal additionally reduces the time available to finalise an agreement. Importantly, ratifying the deal includes a European Parliament vote. This will limit the EU’s room for manoeuvre given the Parliament’s firm stance on the level-playing-field issue.
Scenario 4: A late extension leading to a basic deal based on UK concessions (5%-10% likely)
If Johnson realises that his brinkmanship does not pay off and that the EU is indeed serious about its affirmations to not agree to a deal at any price, he might contemplate a short extension (possibly rebranded as something else) to not face a no-deal outcome.The path for an extension under the terms of the Withdrawal Agreement elapsed at the end of June. While it is still technically possible to secure more time in autumn (most likely via a new mixed treaty or as part of a future relationship deal), a late extension request involves significant legal and political obstacles. Such a late request would require UK concessions, either on the terms of a full extension (i.e. the continued application of EU law during the agreed period, a UK financial contribution) or the fundamentals of a basic deal (i.e. the level playing field, governance, fisheries) that partially extends certain areas of the EU acquis.
Such concessions would be a difficult sell for Johnson and certainly cause an uproar within his Conservative Party. As such, it seems unlikely that he would go down this route. If he does, however, it would send a strong signal that he wants to secure a deal. Nevertheless, while a late extension would reduce the probability of no deal, it would not guarantee its avoidance.
Scenario 5: No deal by default or design (60%-75% likely)
There is a high potential for a no-deal by accident: ending up with no deal, despite this not being the desired outcome for either side. For instance, the UK’s (explicit) failure to fulfil its Withdrawal Agreement obligations would seriously undermine the prospects for a future agreement, and thus would most likely lead to no-deal. Future political events (e.g. a second COVID-19 wave this autumn) might take the spotlight away from Brexit when a political push is most needed. If the UK government holds out until the last possible moment, time might simply run out – and trying to create more time will not be straightforward (see Scenario 4).
It might well be that a deal is still Johnson’s desired outcome. With a public that is tired of Brexit and paying little attention to the actual content of the negotiations, Johnson might bank on being able to U-turn quietly and sell any deal as ‘getting Brexit done’ successfully. There is also, of course, a strong economic incentive for the UK to secure a deal to continue tariff- and quota-free trade with its largest trading partner, especially in anticipation of the severe and long-term economic impact of the COVID-19 crisis.
However, considering the resistance among Brexiteers to any form of compromise and the difficult choices Johnson faces to secure a deal, there is reasonable doubt as to Johnson’s desired outcome. The UK government’s approach to Brexit prioritises political concerns over the economic. The question, thus, is whether Johnson has politically more to gain from no deal than a thin deal that is largely on the EU’s terms.
Domestically, the blame for a no-deal Brexit could be laid at the door of an ‘intransigent’ EU and the economic consequences at least partly attributed to the fallout from COVID-19. A deal, on the other hand, necessarily involves difficult trade-offs that require justification. There is no deal that could possibly satisfy the hard-line Brexiteers in the Conservative Party. Johnson might want to avoid antagonizing this wing of his Party, on whose goodwill he might depend upon later to push through his domestic agenda of ‘levelling up’ the country post-COVID-19. Should Johnson regard a deal with the EU as politically too costly (i.e. he cannot U-turn on his red lines and simultaneously save face), or at the expense of his other domestic goals, he is likely to aim for a no-deal outcome.
U-turn or no deal?
Under all five scenarios, the chances for a comprehensive and ambitious deal as envisaged in the Political Declaration are virtually zero. A deal that does not respect the EU’s red lines is highly unlikely as the EU has no incentive to sign a deal that does not protect its long-term interests. The moment of truth will come in autumn when political attention turns to Brexit once again, and Johnson has to reveal his hand. Will he U-turn, cross his red lines, or risk a no-deal by default or design?
Overall, based on the above scenarios, we conclude that there is only a 1-in-3 chance for a thin deal (based on UK concessions). Meanwhile, the probability that Johnson’s brinkmanship will lead to a no-deal by default or design currently stands at around 2 in 3.
A deal, even a thin one, would (most likely) eliminate all tariffs and quotas and, more importantly, also constitute the basis for further political cooperation. No deal, on the other hand, would not only cause the most economic harm but also result in blame game tactics, enhanced uncertainty about the implementation of the Withdrawal Agreement and distrust. It would be the worst possible outcome for both sides, and yet looks the most likely.