The UK should not commit to a transition period unless there’s the basis for a long-term deal in March 2019

The UK should not commit to a transition period unless there’s the basis for a long-term deal in March 2019

In any complex deal, where a business is being carved out of a larger group, a transitional services agreement is required. Often extremely complex, such an agreement can end up tying the carved-out business into unattractive ongoing commitments with its former owner and can delay the transformation of the carved-out business into a stand-alone, fully-functioning enterprise.

In the case of Brexit, the risks in the transition agreement are much greater still. While such an agreement offers businesses a period of certainty and allows them to delay transfer of functions and staff to the EU as the longer term arrangements are concluded, it also gives businesses time to organise themselves to make transfers into the EU and it allows EU states more time to court them. It reduces the pressure on the EU to reach a deal with the UK and gives the EU more breathing space to organise itself and to protect its interests in the event of a ‘hard’ Brexit.

So, as the focus turns to the negotiation of this transition period, our negotiators need to maintain the line they have taken throughout: nothing is agreed until everything is agreed. If we reach March 2019 without a longer term deal, the transition period should not apply. We are not transitioning to a new deal: we are just moving onto WTO rules. We know how they work.

This approach will maintain the pressure on the EU to offer a sensible deal, while still providing (just) enough comfort to businesses to discourage them from moving things for now.

If, on the contrary, the Government were to accept that a two-year transition period would operate even in the absence of a long-term deal, in the lead up to a switch to WTO rules, two consequences would flow: first, the WTO outcome would become more likely, as the EU would fear a ‘hard ‘Brexit less; and second, businesses might well use that two-year period to decamp en masse, and EU states would likely use the period to prepare themselves to accommodate financial markets and other functions within the EU.

As it is, neither they, nor us, can now possibly be completely ready for a ‘hard’ Brexit in March 2019. We may have done too little to prepare, but so have they.

So, our interests are best served by maintaining an optimistic position over the prospects of a long-term trade deal, while still ensuring that all is made conditional on the main components of that deal being agreed by March 2019. If there is no long-term deal agreed by March 2019, our position should be that there will be no money (beyond the most strict interpretation of our legal obligations) and no transition period.

I think businesses will hear what they want to hear. They will be reluctant to incur cost and create disruption so long as they judge that the most likely outcome is a long-term deal and a transitional period leading up to it. They will delay decisions for as long as possible.

So, we do not need to commit to a transition period at this stage regardless. Like the rest, it still only makes sense as part of a wider deal. So long as we can get away with that position without businesses upping sticks, we should maintain the line: nothing agreed until everything agreed.