The shape of Brexit

By 5 minute read

In June 2016, the United Kingdom voted in a referendum to leave the European Union. It officially notified the President of the European Council or its decision on March 29, 2017. This implies a deadline of March 29, 2019 for the UK and the EU to reach a withdrawal agreement. If no agreement is reached before that deadline, trade between the United Kingdom and the internal market of the EU will be conducted according to World Trade Organization (WTO) regulations.

A Hard or a Soft Brexit

After the results of the referendum, the discussion quickly gravitated towards the different types of Brexit that were possible. The main distinction is verbalized by the terms Hard Brexit and Soft Brexit.

One of the main accomplishments of the European Union, which is clearly stated in the EU treaties, was the creation of the internal market regarding goods, persons, services and capital. As a result, Member States are prohibited from levying customs duties on imports and exports.

In a Hard Brexit scenario, the United Kingdom leaves the European internal market and the customs union. As a result, customs procedures and import and export quotas will likely be applied.

The soft Brexit scenario implies that the UK will remain part of the European internal market. An example of such a construct would be the "Norway model". Norway is not an EU member but is a member of the European Economic Area (EEA), which also includes all EU Member States. The key is that all those EEA members have the right and the obligation of honoring the four freedoms: those for goods, persons, services and capital. The caveat though is that in order to join the EEA, one should also join the European Free Trade Association (EFTA). The advantage of the Norway model would be that the UK keeps full access to the EU's single market. However, it would hold far less power in influencing its rules than it has as an EU member. Skeptics of this model refer to it as "pay with no say". Furthermore, an important driver of many voters' desire to leave was to regain full control over immigration.

Despite strong words from both sides, it remains likely that an exit deal outlining the withdrawal agreement will be reached. The UK's withdrawal letter clearly stated an intention to remain a committed partner and ally with all European Union Member States. On the EU side, European Commission President Juncker has been quoted as saying that they "want a deal", emphasizing that a no-deal would mean considerable difficulties.

The Netherlands and Brexit

At the opening if the parliamentary year in the Netherlands on September 18, 2018, Dutch King Willem-Alexander emphasized the importance for the Netherlands of cooperation between the Member States of the European Union and referred to the uncertainty regarding the outcome of the Brexit, in light of the upcoming deadline in March 2019.

In line with this sentiment, the Dutch government has reserved €92 million in its budget for 2019 to prepare the Netherlands for Brexit. Among other things, these funds will be used for additional capacity at the Dutch Customs and the Dutch Food and Consumer Product Safety Authority. A special information desk has also been set up as well to help companies and entrepreneurs with their questions regarding Brexit.

Recent developments

On July 12, 2018, the UK government issued the so-called Chequers plan, which can be considered to be tilting more towards a Soft Brexit scenario than the harder, original Brexit blueprint that was set out by Prime Minister Theresa May in 2017. At that time, reference was made to opting out of the customs union, single market and the jurisdiction of the European Court of Justice.

After the recent Conservative party conference in Birmingham, British and European officials are undertaking a new round of intense discussions to resolve the remaining points in the exit deal. Two key issues still need to be resolved: first, the overall shape regarding the future trade arrangements between the United Kingdom and the European Union and second, the so-called backstop guarantee to avoid a hard border between Northern Ireland and the Republic of Ireland.

The timetable for Brexit is shown below and offers several opportunities for further negotiations. In the coming months, we will continue to closely monitor the negotiation process and will publish updates on how it develops.

Tim Sterk

About Tim Sterk

Investment strategist