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Calls for a transition extension: a Remainer plot or just political kite flying?

a trade deal shutterstock 1121376818
Written by Catherine McBride

According to BBC reports, some unnamed UK civil servants and EU businesses want the UK to extend the transition period due to the Covid-19 crisis.

This is the very last thing the UK and British business need, and in no way is it practically required.  Why spend another year paying the EU roughly £1 billion net each month while obeying all EU regulations with no representation? Why give up Britain’s negotiating advantage?  If the bickering EU wants a trade deal it should agree one.

Admittedly, it was April 1st when journalist Lewis Goodall unexpectedly claimed on Newsnight that Covid-19 would necessitate an extension to the UK transition period, but 11pm is a bit late for an April Fools’ Day joke. Goodall then followed up with several tweets claiming that:

‘Senior civil servants in a number of departments are in the process of impressing upon their respective ministers the difficulties that no Brexit transition extension would generate.’

It is hard to read that without thinking of Sir Humphrey Appleby. What exactly is ‘the process of impressing’? It sounds sinister but either way it is distasteful to think that some obsessive Remainers see this virus as an opportunity to yet again extend the UK’s vassalage to the EU.

My own research assures me that not only is the UK civil service capable of dealing with more than two things at once, but that the civil service has prepared to leave the EU and trade on WTO terms several times already: first in March, then in April, and again in October last year and again on January 31st this year and is now prepared to finally leave on December 31st this year. This preparation has included roadshows and seminars for importers and exporters as well as explanatory websites and online training. So any company that isn’t also prepared to leave the EU by now probably never will be. But with a definite, legally immobile date, they have 8 months to get organised. Another extension would make all of this preparation more wasted effort.

Besides, extending the transition period would not be business as usual: for a start there would be the issue of how much the UK should contribute to the EU’s new, larger budget and a requirement for the UK to enforce new EU VAT and environmental taxes as well as the continuation of the Common Fisheries Policy to consider. It is more likely that Goodall is kite flying to see if the population which voted overwhelmingly in December to ‘get Brexit done’ would now be interested in prolonging the Brexit process instead.

During Friday’s Radio 4 Today program another BBC journalist, Katya Adler, tried a different angle on the necessity for an extension: the need to protect EU businesses. Adler attempted to paint a glossy picture of the EU’s Covid cooperation while in reality the virus has caused a retreat to nationalistic self-preservation by most EU member states. At the beginning of the crisis Germany banned the export of protective medical equipment so both Spain and Italy had to ask NATO’s Disaster Response Coordination Centre for help. Embarrassingly for the EU, the protective equipment arrived from NATO member, Turkey, a country that the EU has been tormenting with the hope of EU membership for 20 years. Then there was the massive row about Eurozone debt sharing between the wealthy, northern EU countries and the virus stricken, poorer, southern EU countries, as well as fights about the setting up of an EU wide unemployment insurance scheme and even a fight about the Dutch Prime Minister’s suggestion that the EU should give, rather than lend, Italy and Spain 20 billion Euros to pay for medical expenses. No wonder some Italians are burning EU flags.

But despite all of this unmentioned chaos, Adler went on to suggest that the EU expects the UK to extend the transition period by a year because “if we start trading with the EU on WTO terms at the end of the year that will be another big hit” [for EU businesses]. Admittedly, this suggestion is more absurd than Machiavellian or even kite flying. If EU businesses want to avoid “another big hit” there is an obvious solution: lobby the EU to agree a trade deal.

Luckily there is a major obstacle to any proposal to extend the transition period: legally the UK has left the EU and UK law mandates that the transition period must end by the 31st December 2020. The UK could leave earlier than December but there would have to be a change in the law to extend the transition period.

The transition period was only invented for accounting convenience – there was nothing to actually transition to. The EU believed that the UK was obliged to pay its share of the present EU budget that ends in December 2020 although the UK was due to leave the EU 19 months earlier, in March 2019. Theresa May’s negotiators agreed to pay the UK’s share of the budget, provided that the UK continued to get all of the trading advantages of the block. Consequently, the EU insisted that if the UK were to get all of the trading advantages, then they would have to obey all of the rules. In a nutshell that is why there is a transition period and that is also why there is no reason to extend it. The UK has had no involvement in, nor does the UK have any obligation for, the next EU budget that starts in January 2021.

But now, if these BBC reporters are to be believed, some unnamed UK civil servants and some unnamed EU businesses want the UK Government to extend the transition period. This is both underhanded and disingenuous. The EU put a clause into the Withdrawal Agreement that an extension must be requested by the end of June 2020 believing that they could then delay the talks and force the UK to remain a vassal state for another two years. Now this is backfiring on the EU. The UK enshrined the 31st December leaving date into law so unexpectedly, the June time limit for an extension is putting the EU under pressure to agree a deal. The UK would immediately lose its negotiating advantage and squander the pressure of a deadline if it were to request an extension now.

As the UK legally left the EU in January, if there is really not enough time to do a trade deal by December then there are only two options:

  • Trade on WTO terms from January 2021

Or

  • Agree to continue trade talks and use Article 24 of the GATT agreement to maintain the present zero tariff, zero quota arrangements while the details are finalised.

If the EU wants to do a trade deal they will agree to using Article 24 of the GATT. If they don’t agree to this, then they obviously don’t want a trade deal so we must revert to option one. These are the only two choices.

Without an extension, we will know by June if the EU has chosen option one, giving the UK six months to finalise any border and custom processes needed to trade with the EU on WTO terms as the UK does with many other trading partners. Luckily the panic buying at the beginning of the Covid-19 crisis has allowed UK retailers to identify their supply bottlenecks and some essential products that had been outsourced to EU manufacturers are being on-shored in order to improve supplies.

Also this week Professor Tim Bale asked his Twitter followers to explain in 240 characters why the UK should not extend the transition period beyond 2020. Here is a possible reply in 238:

It would be ludicrous for the UK to extend the transition period and spend yet another year paying the EU roughly £1 billion net each month while obeying all EU regulations with no representation or ability to influence those regulations.

I could also add that it would lock the UK into another year of the Common Fisheries Policy at a time when we need to be providing more of our own food, not less.

Although an extension might appeal to EU businesses, it should make no sense to UK MP’s who have a duty of care to the UK electorate. The UK has its own healthcare issues to deal with and will have its own debts to manage after the economy has been stalled for four months. But unlike the EU where many Eurozone countries went into lockdown still carrying massive debt and high unemployment from the financial crisis ten years ago, the UK started its lockdown with record low unemployment, relatively lower debt and most importantly its own currency. Outside the EU, the UK can initiate whatever fiscal or monetary policy it believes is necessary without being constrained by EU regulations or restrictions.

So it is now time for the EU to decide: Does it want Option 1 or Option 2?

 

Catherine McBride is an economist with long experience in the financial derivative markets.

About the author

Catherine McBride