A decisive Conservative majority, at the general election on the 12th December, ensured that the Brexit deal agreed by Prime Minister Johnson in October with the EU27 was ratified by the UK Parliament. As a consequence, the UK has ceased to be an EU member state as of 31st January. Brexit talks are only moving onto the next phase, however: the UK and EU must agree the terms of a future economic relationship by the end of the status quo transition period on December 31st 2020. While we expect the next chapter in talks to generate less in the way of intraday excitement for investors, their outcome is more important for the UK's future growth prospects and asset valuations.
The UK's exit from the EU on 31st January will be accompanied by plenty of symbolism but will involve little in the way of concrete change. The UK will cease to participate in EU decision making bodies such as the Parliament, Council and Commission and cease to be legally party to its treaties. However, it will enter into an 11 month status quo transition period in which it remains subject to EU law, budgetary contributions and other obligations, while retaining access to the customs union and Single Market. The transition period is designed to provide time for talks on a new economic relationship between the UK and EU27 and provide businesses with time to adjust to this new relationship.
Under the Withdrawal Agreement, the transition period between the UK and EU is due to last until 31st December 2020, subject to a single decision extending the transition period for up to 1 or 2 years to be made before 1st July 2020.1 The UK government has stuck to its position that it intends to leave the EU transition period by the end of the year, with or without a trade deal with the EU. In recent comments, Chancellor Javid said that 'we will not be in the single market and we will not be in the customs union - and we will do this by the end of the year.
Comments from von der Leyen and other figures such as EU Trade Commissioner Hogan suggest that agreement on a bare bones deal may be possible. This would cover tariff free access for UK and EU exporters to each others markets, as well as rules on quotas and dumping. Other strategic areas of priority for the EU concern financial services, data sharing, labour mobility and fisheries. Less economically relevant aspects of an agreement include defence and intelligence cooperation, scientific and youth exchanges (such as the Erasmus program) and cooperation on climate change and the environment. A deal of this kind would come attached with EU conditions on fisheries and level playing field regulations.
As thing stand, the UK is on course for a hard Brexit. Should negotiating priorities not change, and political hurdles such as agreement on fisheries and level playing field regulations be overcome, the best case scenario for the UK is a trade deal that delivers tariff and quota free trade, regulatory equivalence for some financial services activities, data protection and fisheries by December 31st. In a worst case scenario, the UK will leave the EU transition period with no FTA and trade with the EU on WTO terms.
This is an extract from a report 'Brexit update: a short guide to the next stage in talks' published on January 28, 2020. Clients of Deutsche Bank Research can access it here
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