Insights

Brexit - No End in Sight?

Firm Thought Leadership

With only 73 days until the UK leaves the EU, and Prime Minister May suffering a major defeat in her attempts to get the UK Parliament to approve the Withdrawal Agreement setting out the terms of the UK’s orderly departure from the EU (see previous briefing on the Withdrawal Agreement, there is increasing uncertainty surrounding the conditions likely to govern the UK’s exit from the EU. There are currently many possible outcomes in play – none of which are certain due to the ever more fractious UK political environment. This briefing note identifies some of the possible outcomes, including the UK leaving the EU without a deal (known as a ‘No deal Brexit’ or ‘Hard Brexit’), a circumstance which would severely disrupt cross-border trade and affect the lives of millions of citizens in each of the UK and the EU.

Is an extension to Brexit on the cards?

Mrs. May’s decision to postpone last month’s UK parliamentary vote on the Withdrawal Agreement did not make much difference in the end. She still suffered a major defeat in Parliament as many MPs from her party and members of the Northern Irish Democtratic Unionist party (on whom she relies for a working majority) voted with the opposition. The ‘Brexit backstop’ (which provides for a single EU-UK customs territory, and requires Northern Ireland, part of the UK to remain subject to certain applicable rules for the EU Single Market for goods in the event that the EU and UK fail to agree during a transition period how to avoid a hard border on the island of Ireland) proved particularly problematic.
    
Mrs. May’s government is now expected to face a vote of no confidence tabled by the opposition Labour party, but given the parliamentary arithmetic, this move is likely to be largely symbolic since the Conservative party and its Northern Irish ally are unlikely to want the current government to fall, especially as it could lead to new Parliamentary elections in the UK and possibly herald in a strongly left of centre Labour government.

There does not appear to be, however, any obvious way for a Conservative government to overcome the current Parliamentary deadlock – irrespective of whether Mrs. May is replaced as leader. Mrs. May (or a new Conservative Prime Minister) could try and seek legally binding commitments from the EU that the Brexit backstop would only be in place temporarily (if it came into existence at all) and would not result in the UK being bound indefinitely in the EU Customs Union and also effectively being required to follow EU rules without any say in their drafting. However, it is very doubtful that the EU would be prepared to reopen the text of the Withdrawal Agreement in such a dramatic fashion, and it is also questionable whether any amendments would change the UK Parliamentary dynamics given the entrenched position of many MPs.

As a consequence of this uncertainty, there is an increasing number of voices calling for the UK to seek an extension to the current timetable to avoid a Hard Brexit. Such an extension can only be granted with the unanimous agreement of the remaining EU Member States (EU-27), and, in such an event, those Member States would likely seek firm guarantees from the UK that any extension would enable an orderly Brexit.

In many cases, the desire for an extension is driven by the hope of the ‘Remainers’ that a new referendum will be held. However, any extension that lasts more than a few months may prove controversial, largely because European Parliamentary elections will occur at the end of May 2019 and arranging such elections in the UK is only likely to heighten the level of public discord. Some commentators have suggested that it may be possible to avoid holding European Parliamentary elections in the UK, but this is constitutionally questionable so long as the UK remains part of the EU, especially once the new European Parliament is in place and legislating.

Some politicians have suggested that the UK should seek a so-called ‘Norway plus’ trading arrangement with the EU. Under this model, the UK would become a member of the European Economic Area and be party to the EU Single Market, but this would require the UK to allow the free movement of people. This would be a bitter pill for the UK government to swallow (assuming it remains in Conservative hands), given that immigration concerns were a principal reason for the UK’s vote in favour of Brexit in the first place.

An ultimate fall-back option for the UK is for the government to unilaterally revoke its notification to leave the EU (this right was confirmed by the Court of Justice of the European Union before Christmas), but such a step would be politically untenable for any government (whether Conservative or Labour) without a further referendum endorsing this step.

Risk of an accidental No deal Brexit

There is strong opposition in both the UK and the EU to a Hard Brexit, but, given the UK Parliamentary deadlock and the lack of an obvious ‘Plan B’ by Mrs. May’s government, there is a risk that the UK could find itself in precisely such a scenario.

A No deal Brexit would result in the UK being outside the EU Customs Union and the EU Single Market from Brexit day and having to commence trade with the EU (and the rest of the world) thereafter on the basis of the WTO rules. The EU and the UK have stepped up their contingency planning to address such an extreme scenario, but both sides have already admitted that those measures will be insufficient to address the profound impact on national and local government, businesses and citizens of a No deal Brexit.
Baker Botts has produced a briefing explaining the implications of trading on the basis of the WTO rules for businesses potentially affected by a Hard Brexit. It can be accessed here.


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