Prospects of agreement on the future EU-UK relationship by end 2020: Could fish and State aid sink the deal?

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White & Case LLPOver four months into the formal bilateral negotiations between the EU and the UK to reach agreement on their future relationship, is there land ahoy?  What are the realistic chances of a deal by the end of this year?

Introduction

What are the prospects of a deal between the EU and UK, following these last weeks of meetings?  Companies in the EU, UK and third countries are stuck between a rock and a hard place. Even if a “zero tariff, zero quota” deal is struck, they need to prepare for inevitable logistical/customs requirements which will in any event kick in on 1 January 2021 when the EU and the UK are no longer in a customs union and a single market.

While there are some indications that there may be compromises on certain important issues, key stumbling blocks remain: in particular access to UK fishing waters, and EU concerns that the future UK state aid regime could undermine the Level Playing Field the EU wants in return for a “0-0” Free Trade Agreement.

It is clear that the Transitional Period will end on 31 December, and agreement is required in October in light of the time required for ratification procedures, in particular in the EU – so swift progress is essential. Views are split on whether a deal is possible; at the very least it is clear than any deal will be an “FTA-light”.

No land in sight yet – no real progress since June High Level meeting

After four formal negotiating rounds led by Chief Negotiators David Frost for the UK and Michel Barnier for the EU, a long-awaited EU-UK High Level Meeting was held on 15 June 2020: UK Prime Minister Boris Johnson met European Council President Charles Michel, Commission President von der Leyen and European Parliament President David Sassoli to “take stock” of the negotiations. By that point, an earlier threat by UK Prime Minister Boris Johnson to “walk away” if insufficient progress was reached had been defused. However, any hope of an extension of the Transition Period to allow more time for the inherently complex negotiations died at that point, with both sides explicitly acknowledging and accepting in the Joint Statement that the Transition Period will end on 31 December 2020. 

The June meeting was followed by a joint commitment to new momentum by intensifying meetings in July. Since then, in addition to specialized sessions, a fifth “restricted round” was held from 29 June through 3 July, which concluded with “serious divergences remaining”, according to Barnier’s statement, and a sixth round from 20-23 July ended prematurely in view of the lack of progress. Barnier's closing press statement explicitly added pressure to the situation, noting that a trade agreement is “at this point unlikely”.  

The next formal round is set to begin on 17 August.  

Deep waters – is the gap narrowing?

PM Johnson’s three red lines remain: (a) no role for the European Court of Justice (ECJ) in any UK arrangements, (b) the right to determine future UK regulations without constraints, and (c) an agreement on fisheries that makes a “real difference” compared to the current situation. 

Barnier has repeatedly and openly said that the EU is trying to understand how these UK demands can be aligned with the Political Declaration of 17 October 2019, whose content and specific language was agreed by the UK. Senior authoritative individuals on the EU side have expressed concern that the UK has not shown the same level of engagement and readiness to find solutions to issues as the EU. 

On 24 July 2020, Barnier, in a meeting with EU Member States, reportedly said that a balanced and sustainable deal does remain possible, even if less ambitious than originally hoped - but the EU will not give up its “level playing field” red line (requiring clear UK commitments on state aids and not lowering standards), and a “long-term equitable” solution is required on fisheries. These remain two very firm EU red lines.

On fisheries, Barnier acknowledged that the EU accepts there may be some change to benefit UK fishermen, but common stocks need to be managed jointly in order to continue to meet international obligations. History shows that the UK may be prepared to compromise further here, as fishermen are a small proportion of the UK vote.

On the role of the ECJ, while the UK wants no role whatsoever, the EU is constitutionally bound to have the ECJ as the sole interpreter of EU legislation. Therefore, any FTA referring to EU legislation, such as the EU draft submitted in March, must involve the ECJ. However, the Northern Ireland Protocol to the Withdrawal Agreement is evidence that the UK has previously compromised on this red line. It seems that other solutions may be possible for the FTA, with a separate independent dispute settlement body or a 50/50 number of UK and EU judges involved in handling disputes under the FTA. This would require some re-drafting, but appears do-able per se – and could go a long way in addressing a key UK concern. 

The level playing field is potentially the real sticking point: and the current suggestion by the UK PM’s Advisor Dominic Cummings that rules on state aid should be abolished does not inspire confidence on the EU side.

A further controversy relates to governance, and the “architecture” of a future deal. The EU and UK may be finding a middle ground on a simpler structure, i.e., between the single agreement and governance structure (as the EU would like) and numerous self-standing agreements (as the UK prefers, where a breach of an obligation in one agreement would not give rise to retaliation under any other agreement).

Very little time left now to get the ship to harbour

In order for any agreement to be in place by end 2020, a final Negotiators’ text should be ready by early October 2020. This means that there is only August and September to clinch a deal. Time will then be required for legal scrubbing and translation into all official EU languages. The EU’s tentative timing is for the deal to be politically endorsed by the 15-16 October European Summit, after which the EU Council would hopefully adopt the Council Decision for signature in mid-November and the UK and EU could sign in late November. The European Parliament would then hopefully give its consent in December on the Decision to conclude the agreement. 

Given the lack of sufficient progress in the negotiations on the FTA and on fisheries, the EU is not proceeding swiftly in adopting equivalence/adequacy decisions in the area of financial services and data protection (areas officially outside the other two negotiations). Progress on the implementation of the Withdrawal Agreement (and in particular the Protocol on Ireland/Northern Ireland) by the UK also remains a significant concern for the EU side. Generally, trust is low on both sides, and rectifying this is essential in the coming weeks. 

Life jackets available? Contingency measures – when and what?

With now only five months left before the Transition Period ends, the European Commission in July published a Communication to help citizens, companies and authorities prepare for 1 January 2021, and is also updating the 102 Readiness Notices which were prepared when a no-deal Brexit scenario first emerged. The July European Summit agreed on a special Brexit Adjustment Reserve of EUR 5 billion to help Member States and sectors most affected by Brexit. These are preparations to take into account the inevitable impact of the UK leaving the customs union and single market, and not specifically to take account of a no-deal scenario.

An open question remains if or when the EU or UK will start taking contingency measures in case of no deal by the end of the year. Progress in August and September will be crucial. There will be some stocktaking by the EU in the August negotiation round and, if a deal appears unlikely, EU contingency measures may be prepared and adopted in November/December. At this point, it is totally unclear what such measures (if any) could look like, but would probably focus on means to ensure smooth flow of goods and data across borders. This may depend on how vocal businesses are in the coming months in emphasising the problems they will face in case of a no-deal start to 2021.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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