Brexit: deal or no deal Contents

Summary of conclusions and recommendations

No deal

The impact of ‘no deal’

1.A complete ‘no deal’ outcome would be deeply damaging for the UK. It would bring UK-EU cooperation on matters vital to the national interest, such as counter-terrorism, police, justice and security matters, nuclear safeguards, data exchange and aviation, to a sudden halt. It would place the status of UK nationals in the EU, and EU nationals in the UK, in jeopardy, and would necessarily lead to the imposition of controls at the Irish land border. (Paragraph 48)

2.The wider economic impact of an abrupt departure from the EU single market and customs union, and the adoption of WTO conditions for trade, would be felt across a range of sectors, including financial services, the agri-food sector, and aviation. It would have a particularly disruptive impact on cross-border supply chains. The short-term impact on trade in goods would also be grave: the UK’s ports would be overwhelmed by the requirement for customs and other checks. There is simply not enough time to provide the necessary capacity, IT systems, human resource and expertise to deal with such an outcome. (Paragraph 49)

3.While the evidence we received focused on the impact on the UK, no deal would also have a damaging impact on the EU. It too would feel the negative effects of a loss of trade with a major trading partner, and restrictions on the movement of goods and services, new customs checks and the breakdown of aviation arrangements would be mirrored on the EU side. In addition, the EU would feel the loss of police and security cooperation, scientific and research collaboration, and of access to the City of London as a motor of the EU’s financial services industry, and to the City’s capital markets. (Paragraph 50)

The prospects for a ‘bare bones’ deal

4.The Secretary of State for Exiting the EU has argued that a complete ‘no deal’ outcome is “very, very, very improbable”. He has also said that, in the “unlikely” event that a trade deal cannot be reached, it will be possible to agree a ‘bare-bones’ deal covering fundamental issues of shared concern. We are concerned that a ‘bare-bones’ deal would, in the words of the CBI, still be a “very bad deal”. (Paragraph 51)

5.The Secretary of State’s confidence that at least a ‘bare-bones’ deal could be agreed skates over the potential obstacles, including the technical and legal complexity of such a deal, as well as its timing. We were also concerned by his lack of clarity in outlining the “fundamental issues” that a ‘bare-bones’ agreement would cover. (Paragraph 52)

6.Furthermore, Mr Davis did not specify whether, in the event of a ‘bare-bones’ deal, the UK and EU would also have reached agreement on core withdrawal issues, such as the financial settlement, citizens’ rights, and the Irish border. As our report on Brexit: UK-Irish relations concluded, the imposition of a hard border on the island of Ireland could have serious economic, social and political repercussions, and must be avoided. In the absence of agreement on these issues, there can be no guarantee that even a ‘bare-bones’ deal will be agreed by the EU. (Paragraph 53)

7.We urge the Government therefore to clarify, as a matter of urgency, the relationship between a hypothetical ‘bare-bones’ deal and the Article 50 withdrawal agreement, and also to set out which “fundamental issues” it believes should, of necessity, be included in a ‘bare-bones’ deal. (Paragraph 54)

8.In addition, we reiterate the call in our 2016 report on Brexit: acquired rights for the Government to offer a unilateral guarantee to EU citizens resident in the UK outlining how their position will be protected, whatever the outcome of negotiations. It would then be for the EU and its 27 remaining Member States to respond in kind. (Paragraph 55)

Is no deal better than a bad deal?

9.Given the overwhelming evidence of the destructive effect of ‘no deal’, the Government’s assertion that “no deal is better than a bad deal” was not helpful. If the two sides were negotiating a free trade agreement from scratch, failure to reach agreement would simply mean a continuation of the status quo—but that is not an option in the case of Brexit, where ‘no deal’ would mean the abrupt cessation of over 40 years of economic, political and legal partnership. It is difficult, if not impossible, to envisage a worse outcome for the United Kingdom. (Paragraph 56)

10.The Secretary of State told us that “we need no deal as an option literally right up to the moment of signing”. This approach only ratchets up the pressure on the negotiations and the political rhetoric that surrounds them on both sides. It also risks becoming a self-fulfilling prophecy by leading to a breakdown of trust, making an unintended ‘no deal’ more likely. (Paragraph 57)

11.The way in which both sides are now treating ‘no deal’ as a realistic possibility illustrates the point. While it is sensible for them to undertake contingency planning for ‘no deal’, both the UK and the EU must ensure that the very act of such preparations does not increase the likelihood of this outcome.(Paragraph 58)

The time factor

12.It is clear that the later ‘no deal’ emerges as the outcome of the negotiations, the more damaging its effects will be. To hold out the prospect of a ‘no deal’ outcome until the eleventh hour, and even to suggest that the clock could be ‘stopped’ to allow negotiations to continue beyond that point, even when there is no obvious legal mechanism to do so, would be irresponsible. For one thing, it guarantees that uncertainty for business and citizens will continue, and even increase, as ‘Brexit day’ approaches. (Paragraph 59)

13.At the same time, we urge the EU to show flexibility in its negotiating stance, to ensure that the UK is not driven to a position where it sees ‘no deal’ as the only realistic option. Both sides must work to find ways to allow discussions to move on as soon as possible to considering the future relationship between the UK and the EU. In particular, the breadth and depth of the issues to be discussed between the parties mean that in our view the parties should commence at least scoping discussions as a matter of urgency. The longer that discussions on the future relationship are delayed, the more likely ‘no deal’ becomes. (Paragraph 60)

14.The key factor adding to the risk of ‘no deal’ is the lack of time—as Michel Barnier has said, the clock is ticking. The rigidity of the Article 50 deadline of 29 March 2019 in itself makes a no deal outcome more likely. But the Article 50 deadline could, in an emergency (for instance, if negotiations were unfinished, but close to completion) be extended, by unanimous agreement of the European Council. For the Government to compound the rigidity of Article 50 by enshrining the same deadline in domestic law would not, we believe, be in the national interest. (Paragraph 61)

Transition

The Government’s proposed timetable

15.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. (Paragraph 119)

16.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. (Paragraph 120)

‘Nothing is agreed until everything is agreed’

17.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. (Paragraph 121)

18.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. (Paragraph 122)

19.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. (Paragraph 123)

A phased approach?

20.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. (Paragraph 124)

21.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. (Paragraph 125)

22.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. (Paragraph 126)

23.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. (Paragraph 127)

The purpose and legal basis of transition

24.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. (Paragraph 128)

25.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. (Paragraph 129)

26.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. (Paragraph 130)

27.These 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. (Paragraph 131)

28.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.(Paragraph 132)

29.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. (Paragraph 133)

The ticking clock

30. 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. (Paragraph 134)

31.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. (Paragraph 135)

32.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. (Paragraph 136)

33.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. (Paragraph 137)

34.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’. (Paragraph 138)

35.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. (Paragraph 139)

36.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. (Paragraph 140)

37.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. (Paragraph 141)

38.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. (Paragraph 142)





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