EU concludes “sufficient progress” in Brexit negotiation. Now comes the hard part.

Last Monday, as British Prime Minister Theresa May and European Commission President Jean-Claude Juncker were about to announce at a press conference in Brussels that the EU and UK negotiators had made “sufficient progress” in the first phase of the Brexitnegotiation, May received a phone call from Arlene Foster of the Northern Ireland Democratic Unionist Party, which since the June election has supported the Conservative minority government in the House of Commons.

Foster said the DUP objected to a paragraph in the negotiators’ 15-page Joint Report that said there would be a “regulatory alignment” of Northern Ireland and the republic in regard to trade and commerce after Brexit. That implied there could be a regulatory divergence between Northern Ireland and the rest of the UK, which would harm businesses in Northern Ireland and could even cause it to drift away from the UK and toward the republic.

After four days of further negotiation and the insertion of some new language in the Joint Report, May flew back to Brussels Friday for an early morning press conference with Juncker at which he announced what he had intended to announce on Monday – that the UK and EU had made “sufficient progress” in the first phase of the Brexit negotiation. Later that day, the European Council announced it will decide at its meeting this Friday whether it agrees and, on the assumption that it will, issued draft guidelines for the next phase of the negotiation.

Article 50 of the Treaty on European Union, the article that governs the negotiation, stipulates that after a member state notifies the European Council of its intention to withdraw from the EU, the Union will negotiate, in light of guidelines provided by the European Council, an agreement setting out the arrangements for its withdrawal, taking account of the framework for the state’s future relationship with the Union. Last April, after May delivered the UK’s notification of its intention to withdraw, the European Council adopted guidelines that separated the negotiation into two phases – the first to clarify the immediate effects of the UK’s withdrawal and disentangle it from all obligations and commitments to the EU, the second to identify an overall understanding of the framework for the UK’s future relationship with the EU. It said that, while a future relationship between the EU and UK could only be finalized and concluded after the UK had left the EU, it would engage in preliminary and preparatory discussions on the future relationship as soon as it decided “sufficient progress” had been made in the first phase of the negotiation.

While the European Council’s guidelines identified a number of issues that would have to be addressed in the first phase of the negotiation, three stood out as most important – the continuing rights under EU law of EU citizens living in the UK and UK citizens living in the EU after Brexit; the UK’s settlement of the financial commitments and obligations it has undertaken as a member of the EU; and the UK’s continued support of the Good Friday or Belfast agreement of 1998 and the peace process on the island of Ireland, including the avoidance of a hard border between Northern Ireland and the republic.

Although legally complicated, the rights issue turned out to be the least difficult of the three and the negotiators made good progress on it over the summer and fall. The other two, however, turned out to be difficult. Much of the attention in recent months has been focused on the financial settlement, especially after various estimates suggested that, taking into account all of the UK’s financial commitments, including not only its commitments under the 2014-20 budget but its share of development and infrastructure investments, pension obligations, loan guarantees and contingent liabilities, the UK could conceivably owe the EU more than €60 billion. Foreign Secretary Boris Johnson spoke for many Brexiters when he said, “The sums they propose seem to be extortionate and I think ‘go whistle’ is an entirely appropriate expression.” In Florence in September, May put forward an estimate of roughly €20 billion, covering primarily the UK’s net contribution to the budget over the remaining years of the 2014-20 budget.

Mindful that Article 50 stipulates that the Treaties shall cease to apply to a withdrawing state from the date of entry into force of the withdrawal agreement or, failing that, two years after notification of its intention to withdraw – in the UK’s case, March 29, 2019 – and mindful, also, of the difficulties the EU and UK are likely to encounter in completing the withdrawal agreement and agreeing on a framework for the future relationship and the need to allow sufficient time for the 27 member states and the European Parliament to review and consent to the agreement and framework prior to March 29, 2019, the EU had hoped the European Council would be able to conclude at its October meeting that “sufficient progress” had been made in the first phase of the negotiation. But that didn’t happen, increasing the pressure on the negotiators to meet that benchmark by this Friday’s meeting.

For the EU, the financial issue has never been about a specific amount but, rather, about the methodology for calculating how much the UK will owe when it exits. The methodology doesn’t specify a precise amount the UK will owe; it simply assumes the UK will pay its share of all financial commitments and obligations undertaken by the EU while it was a member. At the October meeting of the European Council, French President Emmanuel Macron, noting the divergence between €20 billion and €60 billion and the fact that a portion of the latter consists of loan guarantees and contingent liabilities that may not have to be paid, suggested the EU and UK accept a figure in the range of €40 billion. In November, the UK accepted the EU’s methodology and agreed it will pay, in euros, its share of the EU’s financial commitments as they come due in the years following its exit. The UK estimates it will pay in the range of €40-45 billion, although it may have to pay more if it has to pay its share of any loan guarantees or contingent liabilities.

While the financial settlement was difficult, the most difficult issue concerned the border, and more generally the relationship, between Northern Ireland and the republic – the issue that gave rise to the embarrassing moment for May in Brussels last Monday. The amended Joint Report makes it clear that, while the UK is committed to maintaining and protecting in all its parts the 1998 Good Friday or Belfast Agreement and avoiding a hard border, including any physical infrastructure or related checks and controls, between Northern Ireland and the republic, and while it respects Ireland’s place in the EU’s Internal Market and Customs Union, it also fully supports Northern Ireland’s position as an integral part of the UK, is committed to preserving the integrity of its internal market and Northern Ireland’s place within it, will ensure that no new regulatory barriers develop between Northern Ireland and the rest of the UK, and will ensure the same unfettered access for Northern Ireland’s businesses to the UK market that they now enjoy.

In the paragraph to which the DUP objected last week, the UK committed itself to a “regulatory alignment” of Northern Ireland and the republic in regard to the rules concerning trade – an improvement, it thought, on language in a prior draft that committed it to “no regulatory divergence” between Northern Ireland and the republic. But “regulatory alignment,” like “no regularity divergence,” raised the possibility, the DUP thought, of a “regulatory divergence” between Northern Ireland and the rest of the UK. Hence Arlene Foster’s “no deal” last Monday. In the amended paragraph of the Joint Report announced on Friday, the UK agreed that if it is not possible to protect North-South cooperation and avoid a hard border through the overall EU-UK relationship it will propose specific solutions to address the unique circumstance of the island. And it agreed that if there is no agreed solution with the EU, it “will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all-island economy and the protection of the 1998 Agreement.”  

At Friday’s meeting, the European Council will welcome the progress achieved during the first phase of the negotiation and decide it is sufficient to move to the second phase which, according to the draft guidelines, will involve completion of work on the issues addressed in the first phase and preliminary and preparatory discussions aimed at identifying an “overall understanding of the framework for the future relationship.” That understanding will require additional European Council guidelines and will be elaborated in a political declaration accompanying the Withdrawal Agreement. While an agreement on the future relationship can only be concluded after the UK has left the EU, the guidelines make it clear the EU will stand ready to engage in those preliminary and preparatory discussions in the second phase. Toward that end, they call upon the UK to “provide further clarity on its position on the framework for the future relationship” – something the UK has said very little about other than its desire for a “bespoke” trade agreement.

An important new element in the guidelines, compared with those issued last April, is the EU’s recognition and acceptance of the UK’s proposal that there be a transition period of around two years during which the UK, after exiting the EU, will remain a member of the Single Market and Customs Union. The guidelines stipulate that the transitional arrangements must be in the interest of the Union, clearly defined and limited in time. Any changes in the EU’s rules and regulations during the transition period will apply to the UK despite the fact that it will no longer be a member state. During the transition period, all existing EU regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures will apply to the UK, it will continue to adhere to the EU’s “four freedoms,” including free movement, will continue to apply and collect EU customs tariffs, and will ensure that all EU checks are performed on the border with respect to non-EU countries.

The roughly two-year transition period after March 2019 will no doubt relieve the anxieties of many in business and finance who have feared the UK will go over the cliff-edge into the chasm of a hard Brexit at midnight on March 29, 2019. For them, and indeed for anyone who can spell “trade,” the best outcome would be a transition period that never ends or morphs into an arrangement in which the UK remains in the EU’s Single Market and Customs Union. But the transition period is time-limited and, in any event, the UK has already made it clear that it does not wish to remain in the Single Market and Customs Union.

The challenge in the second phase of the negotiation and continuing into the transition period, therefore, will be to not only conduct the “preliminary and preparatory discussions” that aim to identify “an overall understanding of the framework for the future relationship” between the UK and EU but to negotiate a comprehensive free trade agreement that can take effect at the end of the transition period. Otherwise, the transition period will only delay by a couple of years the UK’s approach to the cliff-edge of a hard exit.

But negotiating a comprehensive free trade agreement in roughly three years will be exceptionally difficult. After all, it took seven years, from 2009 to 2016, for the EU and Canada to negotiate the Comprehensive Economic and Trade Agreement (CETA) and it took four years, from 2013 to last week, for the EU and Japan to negotiate a free trade agreement. And those agreements didn’t include services, which constitute 80 percent of the UK’s economy.

While last Friday’s announcement and the European Council’s expected decision this Friday mark the completion of an important first step in the UK’s withdrawal from the EU, there can be no doubt: The hard part of the Brexit negotiation lies ahead.

David R. Cameron is a professor of political science and director of the Program in European Union Studies at the MacMillan Center.