Brexit: deal or no deal Contents

Chapter 3: Transition

Why transition?

62.There are three major reasons why both sides to the negotiations have expressed support for the idea of transition:

Semantics

63.The Prime Minister, in her Lancaster House and Florence speeches, referred to the desirability of an ‘implementation phase’, to follow the UK’s withdrawal from the EU in March 2019. The Oxford English Dictionary defines implementation as “The action of implementing; fulfilment.” Thus the term implies the existence of a prior agreement, which then needs to be fulfilled or rolled out.

64.The term transition, on the other hand, which is widely used outside Government, is more open to interpretation: “A passing or passage from one condition, action, or (rarely) place, to another; change.” This presupposes a direction of travel, and the existence of beginning and end points—transition cannot be open-ended. But in other respects the term ‘transition’ is more neutral than ‘implementation’, and, given the range of purposes to which transition can be put, it is the term we use in this report.

The Government’s policy on transition

65.The Prime Minister re-stated in her Florence speech that the UK will leave the EU on 29 March 2019. The Government’s policy on transition flows from this end-date:

66.The framework for the transition period, which the Prime Minister said was likely to last around two years, will be “the existing structure of EU rules and regulations”. The starting point will thus be a continuation of the status quo, during which UK will also continue to “honour financial commitments we have made during the period of our membership”.89

67.The Prime Minister also indicated that the Government will seek “to agree the detailed arrangements for this implementation period as early as possible”.90 The Chancellor of the Exchequer, in evidence to the Treasury Select Committee on 11 October, described a transition agreement as a “wasting asset”: its value in providing clarity and certainty to businesses would “diminish significantly” in the first quarter of 2018.91 Mr Davis told us on 31 October that the Government expected agreement on a transition period to be reached no later than March 2018: “By March next year I hope that we will have—I intend that we will have—an implementation period.”92

A ‘shadow agreement’

68.As the Prime Minister acknowledged in Florence, the Government faces a significant legal barrier in giving effect to its policy on transition. The withdrawal negotiations are being conducted under Article 50 TEU, but the future “deep and special partnership” will require a different legal base. Mr Davis has suggested this will be Article 218 TFEU, which covers agreements between the EU and third countries,93 though other legal bases are possible. It follows therefore that the EU cannot conclude, or even enter into formal negotiations on, the future relationship with the UK while the UK remains a Member State.

69.In practice, however, as we noted in our 2016 report on The process of withdrawing from the European Union, there may be some room for manoeuvre.94 Article 50 requires the two sides, in concluding a withdrawal agreement, to take account of the framework for future relations between the EU and the withdrawing state. Article 50 does not specify the level of detail embodied in this framework, but Professor Derrick Wyatt QC, giving evidence on 8 March 2016, envisaged a fully developed ‘shadow agreement’:

“[The future relationship] would be negotiated in parallel with the withdrawal agreement by analogy with the appropriate treaty base … The withdrawal agreement would come into force (bringing about withdrawal) but would take effect a few days later. In those few days, the Council and Parliament would endorse the shadow agreement that had already been agreed in draft by reference to the appropriate treaty base.”95

70.Professor Wyatt’s evidence foreshadowed what has become the Government’s approach. In the words of the Secretary of State, “Article 50 … says ‘taking account’ of the ongoing relationship. It seems to us that you cannot take something into account until it exists.”96 In fact Article 50 anticipates the withdrawal agreement taking account only of the “framework” for future relations, and this is developed in the European Council Guidelines, which state only that “an overall understanding on the framework for the future relationship should be identified during a second phase of the negotiations under Article 50 TEU”.97 Mr Davis, however, challenged the EU’s approach:

“I take the view that it has to be an agreement. It may be a political agreement at that stage, because … the European Union cannot sign the next stage agreement with us until we are a third country. That may be one second after midnight on 30 March but it should be agreed; otherwise, how will [the Lords] and the Commons decide whether or not the deal is acceptable?”98

71.Underlying the Government’s insistence upon reaching a ‘political’ or ‘shadow’ agreement on future relations alongside the withdrawal agreement is its calculation that the latter agreement, embodying as it will the UK’s financial settlement with the EU, largely benefits the EU. It follows that the Government believes that leaving open the terms of the withdrawal agreement gives the UK most leverage to secure a beneficial deal on the long-term future relationship:

“In the infamous—or famous—words of the European Union, nothing is agreed until everything is agreed … The withdrawal agreement on balance will probably favour the Union in terms of money and so on, whereas the future relationship will favour both sides … We see them as inseparable.”99

The length of the negotiations

72.While the Government’s approach is in outline similar to that described by Professor Wyatt in March 2016, there is a key practical difference: timing.

73.Professor Wyatt expected negotiations on the future relationship to be protracted. He noted that it took two years to negotiate a withdrawal agreement between the EU and Greenland, even though Greenland had a population of just 55,000 and only one major industry, fishing. He expected more complex negotiations with the UK to last significantly longer, and to continue at least “for the duration of the present Parliament”. At the time he gave evidence, the 2015 Parliament was expected to end in March 2020.100

74.The Government, in contrast, insists that a ‘shadow agreement’ on future relations will be concluded before the UK’s withdrawal from the EU on 29 March 2019. The ‘shadow agreement’ will then be formally concluded (subject to ratification by Member States) shortly after withdrawal, by which time the UK will be a ‘third country’ under EU law. The main object of transition will then be implementation of the agreement on future relations—it will be “a bridge from where we are now to where we want to be”.

75.The overwhelming weight of the evidence suggests that the Government’s proposed timetable is ambitious. Mr Davis, while he has consistently expressed confidence that the negotiations can be completed in two years, acknowledged to us in September 2016 that they were “as broad as the entire governmental front”.101 In evidence to this inquiry, Roderick Abbott told us: “I do not believe that you will get a deal by March 2019, certainly not the trade deal.”102 Lord Darling of Roulanish agreed: “We need a period of two, three or four years to reach an agreement … I cannot see how we can possibly get 40 years’ worth of stuff redone in 18 months.”103 Ruth Lea reached the same conclusion: “I cannot envisage that the new deal will be agreed by March 2019.”104 Michel Barnier, the EU’s Chief Negotiator, told the Committee in July that he envisaged negotiations on a trade agreement lasting “a few years”.105

What is transition for?

76.As we indicated at the start of this chapter, transition would serve various purposes, and these were reflected in the evidence submitted to this inquiry.

77.John Longworth, of Leave Means Leave, saw transition purely as a means to implement the ‘shadow agreement’ that will have been concluded before the date of withdrawal:

“My view is also that it is an implementation period … It implies that the deal must be done before March 2019 and that the period afterwards is for implementation, not for further negotiation.”106

78.The Government’s position is slightly more nuanced. As we have noted, the Prime Minister has consistently used the term “implementation phase”. But she has also emphasised that the framework for transition will be “the existing structure of EU rules and regulations”.107 This approach underpins the European Union (Withdrawal) Bill, one of whose aims is to ensure that “the same rules and laws will apply on the day after exit as on the day before”.108

79.Underlying the Government’s emphasis on continuity in the immediate aftermath of withdrawal is its belief that “businesses and public services should only have to plan for one set of changes in the relationship between the UK and the EU”. In other words, the aim of transition is to ensure continuity by extending the key elements of the existing UK-EU relationship until both sides are ready to implement the new relationship, without the disruption that would be caused were the relationship to default in the meantime to a third format, such as WTO rules.

80.Thus the Prime Minister’s Florence speech and subsequent statements have repeatedly sought to reassure the EU that during any transition period the UK will continue to respect existing obligations. On the EU budget, “The UK will honour commitments we have made during the period of our membership.” On free movement, “People will continue to be able to come and live and work in the UK.”109 On judicial oversight, the UK will “start off with the [CJEU] still governing the rules we are part of”.110 On trade, “access to one another’s markets should continue on current terms”. On security, the UK will “continue to take part in existing security measures”.111

81.The Government’s emphasis on continuity sits awkwardly with its insistence that the period after March 2019 will be no more than an ‘implementation phase’. But such continuity would be absolutely critical were negotiations to continue beyond that point, as almost all our witnesses believed they would. Roderick Abbott, for instance, saw the first objective of transition as buying time for the two sides to reach agreement, while giving stability and certainty to businesses, agencies and citizens and avoiding a damaging ‘cliff-edge’: “You will need to do something to bridge however long it might be until you have completed that negotiation.”112 Lord Darling also envisaged “a standstill agreement, where we reach March 2019 and do not have an agreement but agree to keep talking”.113 The American Chamber of Commerce to the EU argued that transition would:

“Negate the possibility of a ‘cliff edge’ effect, providing companies with the knowledge that they can continue to operate as normal after the UK exits, and equip the UK and the EU with the time necessary to agree on the contours of a deep and comprehensive future trade and investment relationship.”114

82.The risk, as Lord Darling acknowledged, is that a ‘standstill agreement’ would “simply move the crisis from 2019 to 2021”.115 Owen Tudor, Head of European and International Relations, TUC, agreed that the UK needed “a transition and not just a delay … We absolutely should not be sending out signals that this is just kicking the can down the road for two years.”116 John Longworth warned: “If we have a period of further negotiation, not only does it lead to a second cliff edge but it produces a situation in which business continues to have no certainty.”117

83.Miles Celic, Chief Executive of TheCityUK, who also believed that reaching agreement by March 2019 would be an “ambitious ask”, and that more time would be needed “to finalise the detail of what the comprehensive free trade agreement looks like”, therefore envisaged a structured, two-stage transition period:

“Our vision of transition is that there are two stages. First, there is a bridging period between the end of the Article 50 process and the start of the new relationship, should that be required … and then an adaptation period.”118

The legal basis for transition

84.The Prime Minister said in her Florence speech that Article 50 TEU would provide the legal basis in EU law for any transition period. Given that EU law will no longer apply in the UK following withdrawal, any transitional arrangement will also need to be enacted in domestic law. In this section we explore both elements.

EU law

85.As we noted in Chapter 2, both the European Parliament, before giving its consent to any withdrawal agreement, and any Member State, may refer the draft to the CJEU (see paragraph 32). In other words, it is vital for the UK, as well as for the EU, that any transition element within the withdrawal agreement should have a secure basis under EU law, to avoid any risk of the agreement being struck down at a late stage in the Article 50 process.

86.The Government appears to regard all aspects of transition (both a standstill phase and an implementation phase) as inherent in the Article 50 process—part of “the arrangements for [the UK’s] withdrawal”, which will be set out in any withdrawal agreement. Thus the Prime Minister said in Florence that transition “can be agreed under Article 50”. Professor Barnard agreed that Article 50 “says that here will be negotiations on the divorce with a view to a future trade deal, so it does feel as though some bridge may be needed”. She also drew an analogy with Article 49 TEU, on accession, which “also says nothing about transition, but it is customary to have transition arrangements”.119 Dr Tobias Lock, of the Edinburgh Law School, went further, arguing that “In terms of content, there would seem to be few legal limits to what can be agreed [under Article 50].”120

87.We agree with our witnesses that the reference in Article 50 to the “arrangements for withdrawal” would provide a legal basis for some key elements of transition. The withdrawal agreement could, for instance, include provisions to ensure contractual continuity for parties entering into contracts that straddle the date of withdrawal.121 But the duration of such provisions may be open to question. Professor Barnard noted that the Prime Minister had referred “very carefully” to a time-limited transition of about two years. That begged the question of “what happens if we are not done in two years”. The longer transition lasted, the more difficult it would be to justify a backward-looking legal base, rather than one relating to “a future trade deal, which actually needs to be done under the different legal regimes of Articles 217 and 218”.

88.Professor Barnard also highlighted a tension inherent in the Prime Minister’s view that the starting point for transition would be maintenance of the status quo. Professor Barnard found this “slightly odd, because transition for exiting would suggest a reduction in the content of the agreement rather than a continuation of what we have at the moment”.

89.Underlying these legal considerations is the tension between the different objectives, legal as well as political, of transition. Transition is a path from EU membership to withdrawal, but also a means of implementing a new and yet-to-be-defined relationship. As we have noted, this means that there may be two distinct phases to any transition period, a ‘standstill’ or ‘bridging’ phase (which could buy time for negotiations to continue and for any agreement to be ratified), and an implementation or adaptation phase. The latter phase too comprises two logically distinct elements:

90.It may be that no single legal basis in the EU treaties exists for these various objectives. More specifically, the Government’s acceptance that an agreement on the future UK-EU relationship would have an Article 218 TFEU legal base, may imply, as Professor Barnard suggested, an Article 218 legal base may be needed to underpin the implementation of that agreement.122

UK law

91.As for the status of transition under domestic law, Professor Barnard referred us to clause 9 of the European Union (Withdrawal) Bill.123 This clause provides that a Minister of the Crown “may by regulations make such provision as the Minister considers appropriate for the purposes of implementing the withdrawal agreement”. By referring to the withdrawal agreement, it therefore begs the same questions that we have touched on with regard to the scope of that agreement. Clause 9 was, however, superseded by the Government’s announcement, on 13 November 2017, that it would enshrine the withdrawal agreement in what Mr Davis called “the withdrawal agreement and implementation Bill”.124 As primary legislation, such a Bill would not be subject to the limitations and legal challenges that might arise in respect of secondary legislation, and it must be assumed that it would provide a secure legal framework for transition.

‘Off the shelf’ alternatives to Article 50

92.One of the practical difficulties facing both sides is the sheer technical complexity of negotiating a transitional period. If the UK’s EU membership is not extended, but Article 50 is to be the legal basis for transition, the withdrawal agreement will need to spell out clearly and unambiguously which elements of the EU acquis continue to apply to the UK, and which do not. As Professor Adam Łazowski commented, “It may be as difficult to negotiate the transitional arrangements as it is to negotiate the withdrawal itself.”125

93.Miles Celic agreed, warning that there was “no time to design a bespoke transition period”. Instead, he wanted a solution that was “off the shelf. Whether that is EEA or EFTA,126 or something along those lines, remains to be seen. During that period, we would effectively have a stand-still arrangement.”127 Among the advantages of such an approach would be the availability of existing institutions, for instance for dispute resolution, and, in the case of the EEA, a dynamic process for reflecting changes in EU law; EEA states are also not party to the EU’s common commercial policy, and are therefore free to negotiate trade deals with third countries.

94.The Law Society also suggested that, in the absence of an extension of the UK’s EU membership, “The Norwegian … and Swiss models of conducting institutional relations with the EU are worth taking into consideration as potential examples to follow during a transition period.”128 But they warned that “any transitional arrangement that would see the UK become an EEA/EFTA member state (even for a time-limited period) would involve a time-consuming and complex negotiation and ratification procedure”. The unanimous agreement of the existing EFTA states would be required.

The length of transition

95.The Prime Minister indicated in her Florence speech that she expected any transition period to be “strictly time-limited”. She did not, however, prescribe what this time-limit should be. Instead she acknowledged that it would take time to put in place the necessary infrastructure, for instance to control the UK’s borders, and concluded that “these considerations point to an implementation period of around two years”.129

96.Witnesses had mixed views on the length of transition. Ruth Lea believed that, given that the UK and the EU were starting from a position of full compliance, transition could “be done within two years”.130 The London Chamber of Commerce and Industry, on the other hand, told us that in reality “the required transition times will not be the same for every sector … Some changes may require more time to adapt to than others”. They judged the two-year period cited by the Prime Minister to be “a minimum”, and suggested a period of three to five years.131 The UK Trade Policy Observatory helpfully outlined some of the practical challenges facing the Government, public and private sectors, and concluded that “a transition period of five years” would be realistic.132 Open Britain expressed the view of many witnesses in arguing that transition “should last as long as it needs to last”, in order to reflect “the needs and wishes of businesses and of people living in the UK”.133

Extending EU membership?

97.In legal terms, the most secure way to ensure continuity after March 2019 would be to use the provision in Article 50 TEU for the European Council (as the EU 27), acting unanimously, to extend the period allowed for negotiations, presumably to a specified future date. The effect of this would be that the UK would remain an EU Member State for the duration of any extension, subject to all the obligations of membership. Professor Barnard confirmed that in legal terms an extension of the UK’s EU membership under Article 50 would be “much more secure” than the alternatives.

98.Prior to the referendum, in May 2016, in our report on The process of withdrawing from the European Union, we concluded that, given the over-riding need to secure an agreement, an extension of the Article 50 process would “almost certainly” be needed:

“It would be in the interests of the UK and its citizens, and in the interests of the remaining Member States and their citizens, to achieve a negotiated settlement. This would almost certainly necessitate extending the negotiating period beyond the two years provided for in Article 50.”134

99.Article 50 offers one other potential means of securing a transition period, which has been little commented on so far.135 In the absence of an extension of the two-year negotiating period, Article 50(3) provides that “The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification”. In other words, any date set in the withdrawal agreement would trump the two-year deadline. Such a date could fall earlier than 29 March 2019, but in principle it could fall later: in effect, a withdrawal agreement could be post-dated—the UK would continue to be an EU Member State until the date specified for the withdrawal agreement to come into force. Professor Barnard suggested that such an approach might be needed were the two sides only to reach agreement at the last moment in March 2019, in order to allow time for consideration by the European Parliament and Westminster.136

100.It is clear that in current circumstances any extension of the UK’s EU membership, by either of these means, would be highly controversial, conflicting with the Government’s policy that the UK should leave the EU in March 2019. It is also possible that the EU would not welcome an extension, which, as the Law Society pointed out, “would involve the UK taking part in the 2019 European Parliament elections”.137 Nevertheless, there are three arguments that may weigh in favour of extending the negotiating period: legal certainty, continuing regulatory alignment, and the maintenance of UK influence on EU law.

101.First, legal certainty. The Government has said that the UK will accept the existing structure of EU rules and regulations during the transition period, and maintaining such consistency is particularly vital to business. In achieving this goal, the option of using Article 50 to extend the UK’s EU membership is, as Catherine Barnard told us, “legally … much more secure” than the alternatives. Adam Łazowski, Professor of EU law at the University of Westminster, agreed that “a simple extension of the two-year period would be the best way forward”.138 ADS Group, which represents companies in the UK aerospace and defence sectors, also believed that “remaining an EU Member State during any transition period is the only way to guarantee the ‘status quo’”.139

102.An important area of potential legal uncertainty, if the UK’s EU membership is not extended, relates to agreements with third countries, to which the UK is currently party by virtue of its EU membership. John Foster, of the CBI, underlined the importance of these agreements, focusing in particular on trade: “There are something like 57 trade agreements, and it is really important that those are replicated in their entirety, otherwise there will be further barriers to trade.”140 We note, moreover, that such international agreements are not limited to trade: the Financial Times in August 2017 published a list of 759 international agreements that it said would need to be “replaced, renegotiated or remade” following Brexit.141

103.A second issue is the continuing alignment of UK and EU law. While the European Union (Withdrawal) Bill “converts EU law as it stands at the moment of exit into domestic law before the UK”,142 the status of EU law in the ensuing transition period is far less clear. Not only may EU law change, but the jurisprudence of the Supreme Court and the CJEU in interpreting existing law could diverge. John Foster argued that the continuing incorporation of changing EU rules should be “automatic and dynamic”143 during transition (which would be the case were Article 50 to be extended). In contrast, the Secretary of State, in evidence to the House of Commons Exiting the EU Committee, confirmed that any EU laws agreed and implemented post-withdrawal would not take effect automatically in the UK: “It will be something for subsequent discussion as to whether we propose to follow it or not.”144

104.Thirdly, there is the question of UK influence. Without an extension, the UK will no longer be represented in the EU’s co-legislators, the Council of Ministers and the European Parliament. It follows that if, in order to avoid regulatory divergence, the UK were to continue to incorporate EU laws adopted post-Brexit into domestic law, it would, as Miles Celic commented, do so “as a rule-taker”—something of particular concern to the City of London, as the world’s leading financial centre. Asked about this by the Commons Exiting the EU Committee, Mr Davis highlighted the time taken to agree and implement new EU laws (“it takes two to five years from inception to outcome”), and argued that any new laws coming into force in the transition period would have been negotiated prior to March 2019, and would thus “already have been agreed with us in advance”.

105.A related issue arises with respect to the jurisprudence of the CJEU, which will continue to develop following the UK’s withdrawal, potentially binding the UK during the transition period, but without either the presence of the British judges on the CJEU, or the possibility of the UK courts seeking the CJEU’s opinion on points of EU law.

The ticking clock

The Government’s view

106.As we noted at the outset, the key factor which will determine whether or not the Government can deliver a successful Brexit is time. The clock is ticking. But though time is short, the Government, at least in public, remains convinced that it can conclude both a withdrawal agreement and an agreement on the future UK-EU relationship within the two years allowed by Article 50. As Mr Davis said to the Commons Exiting the EU Committee on 25 October, “We are aiming for the conclusion of negotiations on all fronts—on the grounds that nothing is agreed until everything is agreed—by the end of March 2019”.145 Even more ambitiously, he told us that he aimed to finalise the agreements by October 2018: “Our intention is to do it early … If we hit October, nobody would be more pleased than me.”146 Yet, as we have seen, he has speculated that if negotiations are still underway in March 2019, the two sides might have to “stop the clock”, to extend negotiations beyond the deadline.147

The timing of a transition agreement

107.It is clear that businesses cannot wait until March 2019 to achieve certainty: investment decisions will be made, insurance policies issued, and contingency plans activated, at least a year before the deadline. John Foster, of the CBI, reported a survey showing that by March 2018 some 60% of businesses in the UK will have activated contingency plans for a ‘no deal’ Brexit; many are already doing so.148 The only way to prevent this is for the two sides to reach an early agreement on transition.

108.Miles Celic underlined the particular importance of a transition agreement for the financial services sector, arguing that irrespective of the sequencing of the wider negotiations, there should be “a legally binding agreement between the UK and the EU 27 that there will be a transitional period”. He wanted to see such an agreement reached “this side of Christmas, and certainly in Q1 2018”. He also stressed that a purely political declaration, such as European Council conclusions, would “not be ample … for many companies it would not even be sufficient”.149

109.On 23 October, the Prime Minister said in the House of Commons that “the point of the implementation period is to put in place the practical changes necessary to move to the future partnership, and in order to have that you need to know what that future partnership is going to be”, therefore implying that agreement on the “implementation period” could not be reached until the shape of the future relationship was known.150

110.However, the Secretary of State agreed that it would be desirable to secure agreement on transition in “the first quarter of next year”, but immediately qualified this as an agreement “in principle”. He continued: “In principle … it will be very similar to what we currently have, with a regulatory structure similar to what we currently have, and the fine detail of how it will conclude will come together with the trade deal later on.” He did not accept that a transition agreement would be binding, or that it would preclude the possibility of talks on the future relationship breaking down: “We are saying that by March [2018] I hope that we will have—I intend that we will have—an implementation period. Thereafter we intend and hope that we will get a future trade relationship, but that probably will not conclude until October or thereafter.”151 In the absence of agreement on the future relationship, it must be assumed that any agreement whose main purpose was the implementation of that future relationship would also fall.

111.As we noted above, at the heart of the Government’s thinking is the principle which Mr Davis summarised as “the infamous—or famous—words of the European Union, nothing is agreed until everything is agreed”.152 Yet Article 50 provides only for a withdrawal agreement—any final agreement on the future UK-EU relationship will require a separate legal base (most likely to be Article 218 TFEU), and the European Council guidelines confirm that such an agreement can only be concluded once the UK is no longer a Member State. Prior to 29 March 2019, the most that can be achieved is a political agreement on that future relationship.

112.The need for transition puts the issue of sequencing into sharp focus. If the purpose of transition is merely to implement agreements already entered into, then no commitment to legally binding transition (such as that sought by TheCityUK) will be possible until those agreements have been concluded—nothing will be agreed until everything is agreed. If negotiations were to continue to the last possible moment in March 2019, as Mr Davis has indicated, that is when transition would be agreed. This is the logic of the Government’s position.

113.We see little prospect, therefore, that the Government will be able to secure a comprehensive and legally secure agreement on transition by March 2018. A more credible possibility is that the Government will secure a political agreement, possibly as early as January 2018, that there should be a transition phase, at the same time agreeing a timetable for reaching final agreement. This will seek to provide reassurance to the wider economy, and to citizens, that a final agreement is indeed attainable, though the evidence we have heard suggests that it will not satisfy businesses across the economy, who may then, if they have not already done so, activate contingency plans.

114.If a legally secure agreement on transition is to be reached in early 2018, it will require greater clarity on the purpose and legal basis of transition than has yet been forthcoming. In particular, the Government will have to disentangle the standstill element of transition, which will be vital if negotiations continue beyond March 2019, from the two elements that together make up the implementation phase—the orderly shedding of the obligations of EU membership, and the establishment of the obligations and institutions that will underpin the new relationship.

115.Such an agreement may come at a price, requiring the UK to make a binding commitment to the outline of a withdrawal agreement, in effect abandoning the threat of ‘no deal’. This will not be easy, and John Foster, of the CBI, called on the Government “to acknowledge that hard choices and compromises will have to be made in order to ensure that the economics is put at the forefront of the negotiations”. He also urged the Government “to put down on paper what they want to pursue in transition”.153

The timing of agreement on future relations

116.Finally, we turn to the status of any agreement on the future relationship that might be reached in October 2018. As we have noted, the Government’s aim is to reach agreement both on withdrawal and on the future relationship together. The overwhelming weight of evidence suggests that while the withdrawal agreement will have to be agreed by this date, to allow consideration by the European Parliament (a precondition for its ratification), as well as by the UK Parliament, it will not be possible to reach a detailed agreement on the future relationship.

117.If this is the case, what is the best that the Government can hope to achieve before the date of withdrawal? John Foster envisaged “a heads of terms agreement for what the future economic relationship would look like”.154 Miles Celic also looked for agreement on “heads of terms: the broad principles under which the free trade agreement would operate and what would be included in it”.155

118.This begs the question of whether a ‘heads of terms’ agreement can be sufficiently persuasive to give certainty to businesses and citizens that both sides will see through any commitments they have entered into. The best precedent for such an agreement is the abortive ‘New Deal for the United Kingdom’, agreed by the European Council in 2016. In our report on the New Deal, we acknowledged that there could be “no guarantee” that proposals it contained would be agreed “in exactly the form proposed”. But we also concluded that the agreement entered into by the European Council was “an intergovernmental agreement which is binding under international law”.156

Conclusions

The Government’s proposed timetable

119.The Government has repeatedly stated that the UK will leave the EU on 29 March 2019, two years after the Prime Minister’s notification letter was sent.

120.The consent of the European Parliament is needed before any withdrawal agreement can be ratified, and the European Parliament may decide, before voting on the agreement, to refer questions of law to the Court of Justice of the European Union; individual Member States enjoy the same right under the Treaties. The Government has also undertaken that the withdrawal agreement will be enshrined in primary legislation. To allow time for these procedures, the Government’s deadline for withdrawal means that the withdrawal agreement will probably have to be finalised in October 2018.

Nothing is agreed until everything is agreed’

121.The Government has consistently stated that the withdrawal agreement and any agreement on the future UK-EU relationship are “inseparable”. We agree that they are linked, and in particular that arrangements for the Irish land border will depend in large part upon the future trade and customs relationship between the UK and the EU.

122.But the logic of the Government’s approach goes further. If the withdrawal agreement and the agreement on the future relationship are indeed inseparable, and if the UK is to leave the EU on 29 March 2019, the two sides will need to conclude an agreement on the future UK-EU relationship by October 2018.

123.An early and comprehensive agreement would, in our view, be the best solution for all sides, and we support the Government’s efforts to achieve this outcome. However, precedent, and the overwhelming weight of evidence, suggest that it will not be possible. Negotiations on the future relationship have yet to start, and the strong likelihood is that they will continue well beyond March 2019.

A phased approach?

124.A more feasible objective for the Government is to conclude a withdrawal agreement by October 2018, alongside a political agreement on the principles that will underpin the future UK-EU relationship, which will then be negotiated further. How binding this political agreement would be remains to be seen: the precedent of the ‘New Deal’ with the UK agreed by the European Council in February 2016 suggests that an agreement can be binding on the parties (the European Council and the United Kingdom) in international law, even if the detail of its implementation remains to be finalised. The Government would then aim to continue negotiations with the EU on the future relationship, with a view to having a comprehensive ‘shadow agreement’ in place and ready to be implemented within days of the UK’s withdrawal in March 2019.

125.But in this scenario it would be impossible, as early as October 2018, to guarantee that a comprehensive ‘shadow agreement’ would be concluded in time for the UK’s withdrawal. It follows that there will need to be a separation between the withdrawal agreement and the agreement on future relations, no later than October 2018. This will allow the process of ratifying the withdrawal agreement to proceed in an orderly manner, on the basis of a settled text and binding undertakings on both sides to adhere to the agreed terms.

126.This will require the Government to abandon its policy that ‘nothing is agreed until everything is agreed’, and the UK could lose some leverage as a result. But the alternative would be to leave open the possibility that the UK could at the last moment decline to ratify the withdrawal agreement, leading to a ‘chaotic Brexit’ in March 2019. As we have seen, this would be the most damaging possible outcome for both sides.

127.Therefore, while we understand the Government’s aim to conclude agreements both on withdrawal and on future relations by October 2018, we also conclude that if, in order to enable the UK to leave the EU on 29 March 2019, a withdrawal agreement has to be concluded in advance of an agreement on future relations, there will have to be a clear separation between the two.

The purpose and legal basis of transition

128.The Government has stated that it wishes to reach agreement on a transition or implementation period no later than March 2018. Such an agreement is vital to give reassurance to citizens and businesses both in the UK and the EU. It is also, as the Chancellor of the Exchequer has said, a ‘wasting asset’: if an agreement is not concluded in the first quarter of 2018 its value will be substantially diminished, as businesses activate contingency plans in preparation for a possible ‘cliff edge’ in March 2019.

129.The Government has not explained clearly enough what transition is intended to achieve. Instead, it has merged two aspects of transition: a ‘standstill period’, the promise of which is needed urgently to provide reassurance to businesses, and which may also (although this is not accepted by Government) buy time to finalise an agreement on the future relationship; and an implementation or adaptation period, during which the two sides will move across to the terms of the new relationship in a controlled fashion.

130.The Prime Minister has also suggested that the transition period is likely to last around two years. This may turn out to be the right length of time, but we note that most witnesses felt that more time would be needed. We call on the Government to acknowledge that the main drivers for the length of transition are the timing of any agreement on future relations and the time the UK and EU economies need to adapt to its terms.

131.The component parts of transition may need different legal bases. The Government has said that Article 50 provides a legal basis for transition, but Article 50 refers only to the “arrangements for withdrawal”. The withdrawal agreement will thus set out the arrangements for implementing the withdrawal agreement. But it is not clear whether, in the absence of an agreement on future relations, Article 50 would provide a legal basis for an open-ended ‘standstill period’ (during which the Government has said EU rules will continue to apply and the CJEU will continue to have jurisdiction). It also seems unlikely that Article 50 could provide a legal basis for the implementation of the agreement on future relations, which the Government has conceded will have a separate legal base in EU law, such as Article 218 TFEU. Any or all of these questions could fall to be determined by the CJEU, following references by the European Parliament or by a Member State, before withdrawal takes effect.

132.We therefore recommend that, as a matter of urgency, the Government should set out its views on transition, including on the bases in EU law for the various elements that make up transition. If possible, the Government should secure agreement on these issues with the EU’s Chief Negotiator.

133.We welcome the Government’s intention to embody the withdrawal agreement (and any transitional arrangements set out within that agreement) in primary legislation. This should ensure the maximum possible legal certainty in domestic law.

The ticking clock

134. At the root of the Government’s difficulties is the ‘ticking clock’ of the Article 50 deadline. While we support the Government’s efforts to complete negotiations by October 2018, in order to secure agreement both on withdrawal and on the future UK-EU relationship ahead of March 2019, the weight of the evidence suggests that this will not be possible. The consequences of a ‘no deal’ outcome would be so damaging that a fall-back position is now needed.

135.As we have noted, the Government’s first aim in transition is to secure early agreement, no later than the first quarter or 2018, that there will be a ‘standstill period’, during which the Government itself has said that EU rules will apply, the UK will pay into the EU budget, the CJEU will continue to have jurisdiction, and EU nationals will have free access to the UK. Such a standstill period will also buy time if, as seems likely, negotiations on the future relationship continue up to and beyond March 2019.

136.The second phase of transition, once the terms of the future relationship have been agreed, will be an implementation phase, to allow institutions, citizens and businesses on both sides time to adapt.

137.As we indicated above, we doubt whether the reference to the “arrangements for withdrawal” in Article 50 TEU offers a secure basis in EU law for a ‘standstill period’, and we note also that this question could fall to be determined by the CJEU in advance of any withdrawal agreement being concluded. Reliance upon this provision to provide the basis for transition is thus a high-risk strategy.

138.There are, in contrast, two secure means by which the status quo (in other words, the UK’s EU membership) could be extended under Article 50 TEU. Either the European Council (EU 27) could, by unanimous agreement, accede to a request from the UK to extend the negotiating period for a specified period; or the Article 50 withdrawal agreement could set a date later than 29 March 2019 for the UK’s withdrawal from the EU to take effect. Either of these approaches could in principle ensure a legally watertight and time-limited ‘standstill period’.

139.But the fact that both these approaches would extend the UK’s EU membership, and the legal obligations that flow from that membership, for a limited period, means that they are politically highly controversial in both the UK and the EU. We nevertheless note that a limited extension of EU membership would have the crucial advantage, for the UK and the EU, of buying more time for negotiations on the future relationship: only in the event of an extension do we see any credible prospect that the Government’s preferred approach of concluding the withdrawal and future relations agreements simultaneously can be achieved.

140.We note TheCityUK’s proposal for an ‘off-the-shelf’ solution based on temporary EEA or EFTA membership. We have not explored this proposal in detail, but note that while it may have some merit, it does not offer the certainty of a time-limited extension of EU membership, and that it may be subject to elements of risk and complexity.

141.There is still a risk of a chaotic ‘no deal’ Brexit, and for the reasons we have set out in this report, we are not confident that a legally certain and binding transition deal can be reached by March 2018, the point at which the existing uncertainty is likely to inflict more serious damage on the UK economy. While the EU as a whole may appear to have less to lose, specific sectors and regions in the EU could also pay a heavy price for this uncertainty.

142.While we reiterate our support for the Government’s goal of securing a comprehensive agreement by October 2018, the uncertainty over the feasibility of that aim means that the overriding UK and EU interest is now to secure an orderly and legally certain transition, as early as possible. To this end, we call on the Government, alongside its consideration of the legal basis for transition, to review the options for securing a time-limited extension to the UK’s EU membership that are legally available under Article 50; to open discussions on these options with the EU negotiators; and to report its conclusions to Parliament at the earliest opportunity, and at all events before the end of March 2018.


84 Rt Hon Theresa May MP, speech on ‘a new era of cooperation and partnership between the UK and the EU’, 22 September 2017: https://www.gov.uk/government/speeches/pms-florence-speech-a-new-era-of-cooperation-and-partnership-between-the-uk-and-the-eu [accessed 27 November 2017]

85 Ibid.

86 Oral evidence taken before the House of Commons Exiting the EU Committee, 25 October 2017 (Session 2017–19), 25

87 Rt Hon Theresa May MP, speech on ‘a new era of cooperation and partnership between the UK and the EU’, 22 September 2017: https://www.gov.uk/government/speeches/pms-florence-speech-a-new-era-of-cooperation-and-partnership-between-the-uk-and-the-eu [accessed 27 November 2017]

88 Ibid.

89 Ibid.

90 Ibid.

91 Oral evidence taken before the House of Commons Treasury Committee, 11 October 2017 (Session 2017–19), Q 19

93 Oral evidence taken before the House of Commons Exiting the EU Committee, 25 October 2017 (Session 2017–19), Q 28. Article 218 TFEU states that “agreements between the Union and third countries or international organisations shall be negotiated and concluded” in accordance with the specified procedures.

94 European Union Committee, The process for withdrawing from the European Union (11th Report, Session 2015–16, HL Paper 138), para 31

95 Oral evidence taken on 8 March 2016 (Session 2015–16), Q 4 (Prof Derrick Wyatt QC)

97 European Council, ‘European Council (Art. 50) guidelines following the United Kingdom’s notification under Article 50 TEU’ (April 2017): http://www.consilium.europa.eu/en/press/press-releases/2017/04/29/euco-brexit-guidelines/# [accessed 4 December 2017]

100 Oral evidence taken on 8 March 2016 (Session 2015–16), QQ 8, 1

101 Oral evidence taken on 12 September 2016 (Session 2016–17), Q 17 (David Davis MP)

105 Oral evidence taken on 12 July 2017 (Session 2017–19), Q 5 (Michel Barnier)

107 Rt Hon Theresa May MP, speech on ‘a new era of cooperation and partnership between the UK and the EU’, 22 September 2017: https://www.gov.uk/government/speeches/pms-florence-speech-a-new-era-of-cooperation-and-partnership-between-the-uk-and-the-eu [accessed 27 November 2017]

109 Rt Hon Theresa May MP, speech on ‘a new era of cooperation and partnership between the UK and the EU’, 22 September 2017: https://www.gov.uk/government/speeches/pms-florence-speech-a-new-era-of-cooperation-and-partnership-between-the-uk-and-the-eu [accessed 27 November 2017]

110 HC Deb, 9 October 2017, col. 53

111 HC Deb, 9 October 2017, col. 42

114 Written evidence from American Chamber of Commerce to the EU (DND0012)

118 QQ 22, 28 and written evidence from TheCityUK (DND0015) para 26.

120 Written evidence from Dr Tobias Lock (DND0003)

121 This point is developed in the oral evidence of Andrew Bailey, Chief Executive of the Financial Conduct Authority, taken before EU Financial Affairs Sub-Committee, 29 November 2017 (Session 2017–19), 100

124 HC Deb, 13 November 2017, col 37

125 Written evidence from Prof Adam Łazowski (DND0036)

126 The non-EU member states of the European Economic Area (EEA), which also belong to the European Free Trade Area (EFTA), are Iceland, Liechtenstein and Norway. Switzerland is a member of EFTA, but not the EEA.

128 Written evidence from The Law Society (DND0046)

129 Rt Hon Theresa May MP, speech on ‘a new era of cooperation and partnership between the UK and the EU’, 22 September 2017: https://www.gov.uk/government/speeches/pms-florence-speech-a-new-era-of-cooperation-and-partnership-between-the-uk-and-the-eu [accessed 27 November 2017]

131 Written evidence from London Chamber of Commerce and Industry (DND0017)

132 Written evidence from The UK Trade Policy Observatory (DND0033)

133 Written evidence from Open Britain (DND0030)

134 European Union Committee, The process for withdrawing from the European Union (11th Report, Session 2015–16, HL Paper 138), para 55

135 Armin Cuyvers, ‘Two Legal Tools to Avoid Hard Brexit: Delayed Exit and Decreasing Membership under Article 50 TEU’, UK Constitutional Law Association Blog (24th Nov. 2017) : https://ukconstitutionallaw.org/2017/11/24/armin-cuyvers-two-legal-tools-to-avoid-hard-brexit-delayed-exit-and-decreasing-membership-under-article-50-teu/ [accessed 4 December 2017]

136 Supplementary written evidence from Prof Catherine Barnard (DND0047)

137 Written evidence from The Law Society (DND0046). We note, however, that the withdrawal agreement, were it to come into force later than 29 March 2019, might potentially vary the terms of the UK’s membership in the intervening period, for example by waiving the requirement for the UK to participate in the 2019 European Parliament elections.

138 Written evidence from Prof Adam Łazowski (DND0036)

139 Written evidence from ADS Group (DND0027)

141 See ‘The Brexit treaty renegotiation checklist’, Financial Times (20 August 2017): https://ig.ft.com/brexit-treaty-database/ [accessed 30 November 2017]

144 Oral evidence taken before the House of Commons Exiting the EU Committee, 25 October 2017 (Session 2017–19) 89

145 Oral evidence taken before the House of Commons Exiting the EU Committee, 25 October 2017 (Session 2017–19) 20

147 Oral evidence taken before the House of Commons Exiting the EU Committee, 25 October 2017 (Session 2017–19) 90

150 HC Deb, 23 October 2017, col 30

156 European Union Committee, The EU referendum and EU reform (9th Report, Session 2015–16, HL Paper 138), paras 105–110




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