Summer is over: now Brexit gets serious

Throughout my seven years at senior school, we had the same headmaster. Every September he made the same speech on the first day of term. Half of the year’s work, he said, was done in the autumn term, between September and Christmas. We should put the lazy days of summer behind us. It was back-to-reality and hard work from now on.

I have long believed that something similar happens in business. This is the time of year when things get back to normal after the summer and there is a flurry of activity in the months before Christmas. After New Year people start sloping off on skiing holidays. That then shades into spring breaks and before you know it, it’s summer again. In the autumn, though, fewer people go away and the run up to Christmas is when a lot of the concentrated work gets done.

This autumn is also Brexit crunch time for a lot of firms. What might have seemed like an interesting intellectual exercise a few months ago is now starting to look a lot more real. At the end of September we will be 18 months away from leaving the EU. And as anyone who has ever run a major project knows, 18 months isn’t very long.

According to KPMG’s Brexit Navigator, the first decision-making deadlines are due this month. Any organisation that wants to set up an EU subsidiary, move people abroad or apply for EU regulatory licences needs to make those decisions this month if they are to have everything in place by 29 March 2019. It’s not only banks that will need to relocate staff. Pharmaceutical firms, airlines, media companies and the UK’s much celebrated games industry expect to move at least some of their people to the EU. Next July and August will probably be the Brexodus months. Many people will want to move at the turn of the school year. To be in place by March 2019 means moving next summer. That is less than a year away. Companies therefore need to start making decisions about relocation now.

August was a transition month for Brexit says Jill Rutter of the Institute for Government, the point at which both the government and the Labour Party acknowledged the need for some sort of transitional period after March 2019. The ticking clock has concentrated minds:

Why all this talk on transition now? On the Government side, it seems to reflect the increased power in the Cabinet of the Brexit pragmatists, most notably Hammond. He will be only too aware of the time needed for adjustment to cope with new processes at pinch-point ports – and will have heard the calls from the CBI and the Institute of Directors among others for early clarity on transition. Businesses are already warning that they need certainty about post-Brexit arrangements in the next few months.

Transition, not the final deal, is now the priority:

The Government also knows that the sooner a transition can be agreed, the less risk to business and the less it will incur nugatory spending on putting the mattresses at the foot of the cliff. Agreement on transition now is hugely more valuable than a last minute deal.

Therefore an off-the-shelf transition is looking more attractive as it can be done more quickly:

The other emerging recognition is that, whatever its demerits, a transition that mirrors (the other word of the summer) the status quo means one adjustment – not two – for business. The sheer complexity of negotiating a new deal for the transition and then a longer-term future partnership is just not worth the hassle. So, a time-limited period outside the EU’s political institutions but inside the economic ones offers an “off-the-shelf” answer.

Charles Grant, director of the Centre for European Reform, thinks that, despite all the posturing from hardliners, we will end up with the UK staying in the customs union and single market during the transition period. In other words, pretty much what we have now except with no vote. There simply isn’t time to negotiate and agree a bespoke settlement.

This would, he says, also get us over the money problem:

If the UK asked for a three-year transition and agreed to pay €10bn a year (roughly what it pays today), that would cover a large part of its share of unspent EU budgetary commitments. That would also ensure no hole in the EU budget in 2019 and 2020, the last two years of the current seven-year budget cycle – which would be a great relief to the European Commission.

An off-the-shelf transitional arrangement would certainly take the pressure off companies.  If trading rules are going to remain as they are for a few more years after 2019 there is less urgency. The trouble is, such a deal is far from certain and might yet take months to agree. This leaves businesses with a dilemma. Do they make arrangements for leaving the single market and customs union in 2019 or do they hang fire in the hope that something will be agreed?

As Faisal Islam said in his excellent summary of where we are at with Brexit, we are getting close to the point where companies will have to make a call:

[T]he clock is running down in another way too. The Government has been told by business leaders that they too will not wait around until Christmas before making decisions.

In the next three months, board meetings will occur where finance directors will put forward plans for the fiscal year 2018-2019. These plans will have to include an assessment of exactly what the legal position will be with the EU on 30 March 2019. If still unclear, many of these boards will have a responsibility to shareholders to activate ‘No Deal’ contingency plans that were prepared over the past year. This is most apparent in financial services, but is relevant across the economy.

Most organisations will do some sort of risk and impact assessment to determine how long they can afford to wait before making a decision. The longer we go without clarity on the transition phase, the more likely it is that companies will assume the worst and cut their losses. The clock is ticking and for many organisations the decision deadlines are getting dangerously close. As my old headmaster used to tell us, the autumn term is when the work gets serious.

 

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14 Responses to Summer is over: now Brexit gets serious

  1. blissex says:

    The difficulty is that there are 3 possible transition arrangements and that the transition of 2-3 years would end just before the 2022 elections:

    * A bespoke “have your cake and eat it” arrangement tailored to the electoral needs of the Conservative party in the 2022. This is ridiculously unlikely as it would take a long time to negotiate plus ratification by all EFTA+EU countries, as it would be a new set of treaties.
    * A transition into EFTA+EEA membership for 2-3 years, and this would be the “Norway” option, but while negotiations could take very little time, most likely Norway would veto it, and anyhow still requires ratification by all EFTA+EU countries, as it would be a change in treaties.
    * An extension of the TEU article 50 notice period, with continuing full membership of the EU. This would be quite easier, because it requires just the unanimous agreement of the European Council. But this would thoroughly unacceptable to the Conservative party.

    The question is really: any of these would represent a big concession from the EU27 to the Conservative government, and in inter-government negotiations big concessions are not given for free. What is the Conservative party prepared to offer in exchange for one of those three transition arrangements?
    As the Conservative government has already given official notice to withdraw, all that the EU27 need to do is to wait until March 2019 to be rid of the brexit problem, which is not an electoral issue in their own countries.

    • Mark Easton says:

      The only realistic option is your third- and it may break the Conservative Party. The alternative really is a hard crash out.

    • gunnerbear says:

      Any deal that does not chop immigration will see the Blue and Red MPs booted out of their seats…..it’s as simple as that, A big chunk o’ the electorate made that crystal clear.

  2. blissex says:

    What seems obvious to me is that the Conservatives cannot afford to fight the 2022 elections with England still in some way or another in the EEA or the EU with full freedom of movement still in effect. If they did that at best their “Leave” voters would not be motivated to vote, or would go back to voting UKIP as a protest vote, giving a landslide to Corbyn’s Labour.

    • gunnerbear says:

      And a huge chunk of Red Leavers won’t vote for the Red Remainac back-sliders either….Brexit is an issue that crosses party boundaries and that is something that keeps Blue Leader and Red Leader awake at night,

  3. P Hearn says:

    Serious companies have already made their decisions. It’s way too late to be thinking about it now.

    Those that are moving staff have those programmes in place and leases are being finalised. To move someone from, say, London to Frankfurt is a non-trivial task. To move a few hundred is a major undertaking, not least because additional accommodation is required. For starters, you have to identify those that are willing to move, have the language skills or are prepared to learn, and will trade their current known environment with family and friends for another some distance away.

    So, with all due respect to your headmaster, that’s why he was a headmaster and not a captain of industry or finance.

    Worrying about who’ll take 4E for Maths next week is one thing, relocating your staff next summer will have to have been considered last summer at the same time you engaged property agents to find new offices and get the legals through.

    God bless your old head: sure he was a fine fellow, with his recycled speeches and cod philosophy about work being done September to December.

  4. ChrisWeston says:

    There is another option, which would be for the UK to formally request an extension of the A50 process and for the EU to accept it. It would make sense for the EU to suggest it, to give May/Davis an option to extend for 12 months, which would also take everyone to the end of the budget cycle. Yes, politically that might be tough, I suspect A50 was triggered when it was to avoid the Conservatives having to put up candidates in the next EU elections, but surely it’s better than being bound by the EU with no votes?

    • Unanimity from the EU27 is required in order for an A50 extension to be enabled. I can think of at least one close neighbour, the one with the only land border with the UK, that might want to extract a high price for their vote.

      https://www.irishtimes.com/opinion/fintan-o-toole-brexiteers-foolishness-gives-ireland-control-1.3179299

    • gunnerbear says:

      Any party that asked to stay in the EU a bit longer would be shredded at the polls…we Leavers aren’t going away and MPs in Leave areas know that. The local MP in the area I live has shifted from ‘Soft Remain’ to ‘Out’ because the MP can see the voting figures….over 65% of the area voted Out.

      • Guano says:

        The Sun and the Daily Mail and the internet trolls are obviously not going to go away, and are going to make a lot of noise for policies that will do a lot of damage to the country. That makes rational debate difficult. That makes the life of MPs difficult, which means that they tend to make contradictory statements.

        It is quite possible that the UK will leave the EU and the Single Market, and do a lot of damage to its economy, because it fails to recognise that much of what is said about the impact of immigration is myth (and because the country as a whole fails to stand up to noisy newspapers and internet trolls who perpetuate those myths). Or it may recognise that it needs to move slowly so as to get a better grip on the real options. As yet, nobody knows.

    • blissex says:

      «It would make sense for the EU to suggest it, to give May/Davis an option to extend for 12 months»

      That’s not long enough to wrap everything up, and anyhow the EU27 governments will never suggest it. Their line, which is correct, is that the government of Little England gave notice, they have merely received it, and it is up to that government to get ready in time.

      «Yes, politically that might be tough»

      That has been ruled out already by the Conservative party. It would be perceived by “Leavers” as a national humiliation. And what could the government of Little England offer to the EU27 to get such a favour? I guess that an extra 10 billion euros is really inconsequential.

  5. Person_XYZ says:

    I’m looking forward to Jacob Rees-Mogg becoming PM, so that he and his nanny can administer the punishment the nation deserves.

  6. Dipper says:

    Leavers are more pragmatic and long-term than they let on. We all understand this is a negotiation and that you don’t get everything you want in a negotiation, but I think provided there is light at the end of the tunnel in terms of power and accountability ending up back in the UK parliament then transitional arrangements will be accepted even with fees included, albeit with some grumbling.

    And a point about the divorce bill. The issue is not whether we pay something on leaving, it is whether what we pay counts for anything in the negotiations.The EU case is that we pay a large chunk of money because that is the exit bill and we start the negotiations with a blank sheet of paper. The UK case is that we are legally liable to pay nothing, so when we offer to pay a few tens of billions of Euros this is part of the negotiation and we expect something in return.

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