RaboResearch - Economic Research

De-dramatising Salzburg

Economic Comment

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  • As expected, the EU summit in Salzburg did not bring any substantial changes to the Brexit negotiations between the EU and the UK
  • Nevertheless the gathering ended up in a drama and a hardening of the tone on both sides
  • This turn of events suggests the EU and the UK lack a good understanding of each other and that raises the odds of a ‘Hard Brexit’ by accident
  • As negotiations between the EU and the UK proceed into the last phase, tensions are likely to reach news high
  • Without sufficient progress by the time of the October EU summit talks could derail
  • The high degree of polarisation in British politics is an additional challenge and the Conservative Congress ending 3 October is an important milestone for PM May

No substantial changes were expected from Salzburg

EU leaders met during an informal summit on 19-20 September in Salzburg to amongst others discuss the progress on Brexit with PM May and the EU negotiator Barnier. Little news was expected from the gathering given the informal character and the fact that the EU commission had already stated its position with respect to the UK cabinet’s blueprint for a future relation with the EU, also known as ‘the Chequers Plan’. The tone of the EU Commission had been encouraging and both the EU and the UK seemed engaged in finding a constructive solution to maintain a frictionless border between Northern Ireland and Ireland, the main hurdle for reaching an accord on the withdrawal agreement and thereby closing a deal. Only days before the summit Barnier had expressed the intention to ‘de-dramatise’ the European proposal, the so called Irish backstop. He indicated that most necessary controls could be dispersed away from the border, except for phytosanitary checks, but those would not be new as they are already taking place on live animal imports from the UK to Northern Ireland. If any other news was to be expected, that was on negotiation delays being formalized by planning an additional Brexit EU summit in November.

So why the fuss?

Despite the little new content in Salzburg the summit ended up in a drama in the press, including claims that PM May had been humiliated in Salzburg. The tone on both sides of the channel toughened: EU president Junker’s closing speech had focused on the caveats and PM May stated that “no deal was better than a bad deal” and that negotiations are at an “impasse”. The reality is that little content exchanged in Salzburg was new. The ’Chequers’ proposal for a quasi- internal market and a quasi-customs union with the EU were well known. So was the EU’s rejection of this proposal. So why the dramatic turn of events? Reportedly the EU leaders were taken aback by PM May’s stance that her ‘chequers’ blueprint was the only viable solution and the only alternative was for the UK to leave without a deal (a ‘hard Brexit’). PM May on the other hand seems to have expected a more conciliatory response to her proposals from the EU leaders, despite earlier statements from Barnier. If anything, what we have learnt from Salzburg is that the UK and the EU do not fully understand one another, which not only frustrates the negotiation process, but also increases the chances of a ‘hard Brexit’ by accident.

Rocky road ahead

As negotiations proceed into the last phase and both sides are jockeying for position, tensions are likely to reach new highs so expect more of that in the coming month or two. The next milestone is the EU-summit on 18-19 October (Figure 1), as a lack of progress by that time could derail negotiations. The EU has made an extraordinary Brexit summit in November contingent on such progress. Given the fact that despite the recent escalation both the EU and the UK remain engaged in negotiations, we maintain our expectation that the two will reach a last minute deal on a comprehensive Free Trade Agreement starting in 2021, after the transition period. We also note that given the Labour support for a Customs Union (reiterated at their Annual Conference 22-25 September) and the role this could play in easing friction around the Irish border, this could become part of the Free Trade Agreement. However, the odds of a ‘Hard Brexit’ have increased to uncomfortable levels and will continue to do so as time lapses by. 

Figure 1: Brexit negotiations timeline
Figure 1: Brexit negotiations timelineSource: Rabobank

Mind the domestic politics

The high degree of polarisation at home further complicates the situation. PM May is facing the risk of a leadership challenge and the Conservative Party Congress from 30 September to 3 October is an important milestone for that. The turn of events in Salzburg has weakened any support she enjoyed for her ‘Chequers’ plans. This, however, may shield her from a leadership challenge. Past events illustrate that her weakness has at times been her strength, as her political rivals might find it more costly to attack her when she is weak. Particularly as her stance in Salzburg might be perceived as her standing up for the UK in front of the EU. Labour’s official support for a second referendum in case a deal is rejected by parliament and general elections cannot be triggered further complicated domestic politics. After Salzburg PM May said the UK would come with an alternative solution for preventing a hard Irish border, but this is only expected after the Conservative Party congress, leaving roughly two weeks for booking sufficient progress in the talks with the EU before the October summit.  

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Author(s)
Alexandra Dumitru
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 21 60441

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