Economics

Brexit vote two years on: are we heading for a hard Brexit?

Economist Azad Zangana looks at the significant events in the two years since the UK set out on the road to Brexit and what might come next.

22 June 2018

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

Two years on and none the wiser

Two years have passed since the UK’s historic referendum on leaving the European Union, yet the big questions over the future relationship with the UK’s biggest trading partner remain unanswered. Will the UK remain in the EU’s customs union? Will it be a member of the single market? Will the UK face tariffs on its exports?

The only near-certainty the government can provide is that in 280 days the UK will cease to be a full member of the EU, on 29 March 2019.

Some progress was made at the end of 2017, with an agreement on the rights of individuals, and on the Brexit divorce bill. However, progress on trade and other areas of co-operation have stalled due to the Irish conundrum: how to re-introduce borders and keep the Irish peace deal alive? This remains a major obstacle to progressing talks, but a more fundamental problem has been the lack of clarity from the UK government on what it wants. Clearly, “Brexit means Brexit”, and “no deal is better than a bad deal”, but these are nothing more than worthless sound bites.

Divisions raise risk of hard Brexit

The government is divided on how best to proceed with regards to major issues such as the customs union and trade. Hard-line Brexit supporters are pushing for a quick exit with few ties, while more moderate members and those that campaigned against Brexit support ongoing collaboration. The latter object to a “hard-Brexit”, but are willing to give the prime minister a chance to deliver on her promises of a Brexit that satisfies everyone, regardless of whether this is realistic. 

Meanwhile, the government’s bruising encounters in recent weeks with the rest of parliament, specifically the House of Lords – the UK’s upper house – has shown that it cannot ignore the views of members in charting its course. The risk of a “hard-Brexit” is significant, and opposition members are keen to stop the government opting to walk away from negotiations.

Transition

Earlier this year, the EU and UK agreed a transition period, which will last from April 2019 to December 2020. The terms of the transition period have not been confirmed, but we assume that full membership in all but name will continue, including the UK’s contribution to the EU’s budget and free movement of labour to the ire of Brexit supporters. This period will help businesses adjust to the new proposed relationship, and enable governments to prepare their infrastructure. However, a destination for this transition is required, and this remains missing.

It appears that Prime Minister Theresa May is pushing for ongoing membership of a customs union in order to satisfy the Irish peace deal, but only until a permanent solution can be found. However, the risk of this temporary arrangement becoming permanent has prompted Secretary of State for Exiting the EU, David Davis, to push for a deadline being included of December 2021.

Tick-tock

Time is running out. Recent reports of deadlock suggest that a Brexit deal may not be in place for the October European summit, and that it may take a few more months. This leaves little time for parliaments to ratify the deal domestically so that Brexit can proceed in March 2019.

The complex nature of negotiations, the divisions in the government and opposition in parliament all highlight the immensely difficult and potentially impossible task Prime Minister May faces in keeping all sides happy. This was made crucial following her decision to call a general election in 2017, which resulted in her losing the government’s majority. Her precarious position greatly increases the chances of a collapse in her government, and potentially a “hard-Brexit”.

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