Brexit: where are we now and what happens next?

The months of September and October saw a number of key developments take place in the ongoing Brexit negotiations. Domestically, the EU Withdrawal Bill began its long and potentially tumultuous journey through Parliament, while party conference season created its fair share of Brexit-related headlines. Stakeholders in Brussels and elsewhere in the EU have been closely monitoring developments on Brexit in the UK. At the same time, key players in Brussels have been refining the EU27's approach to negotiations. The key items of interest from Brussels are outlined below.

European Parliament resolution

On 3 October, the European Parliament passed a resolution by a majority of 557 votes, stating that “sufficient progress” had not been made in EU-UK negotiations, specifically in relation to citizens’ rights, Northern Ireland, and the framework for the settlement of the UK’s financial obligations. The passing of the resolution closely followed Prime Minister Theresa May’s Florence speech, which had been hailed by many as a breakthrough in the negotiations, and was well received in the capitals of EU27 member states.

Despite the strong tone of the text of the resolution, it is worth noting that the vote is not binding. Although there will be no immediate consequences to the Parliament's decision, the European Parliament will play a central role in the conclusion of a withdrawal agreement between the EU and the UK. The text of article 50 TEU states that the Parliament must give its consent (by simple majority) to the final text of the deal. This serves to highlight the fact that the Parliament holds a significant, if not direct role in negotiations and that the views of MEPs will be critical to the conclusion of the withdrawal agreement.

It was clear from the tone of the debate in the Parliament that MEPs are not satisfied with the manner in which talks are progressing, and the passing of the resolution was an attempt at pressurising the UK Government into acting quickly in order to ensure that talks progress.

Fifth round of negotiations

There is a heightened awareness in Brussels (both in the Parliament and in the Commission), that a number of EU27 governments are now anxious to move talks to the next phase, where transitional arrangements and a future trade deal with the UK can be discussed. In response, chief negotiator Michel Barnier recommended to the group that, in advance of the fifth round of negotiations in early October, they should consider allowing discussions to move on to the subject of potential transitional arrangements. However, despite a number of member states voicing their discomfort with the current impasse, a German and French-led coalition of member states rejected Barnier's recommendation.

The negotiations over the following week yielded little progress and the parties were described by Barnier as having held discussions in a “state of deadlock”. There was a lack of any real movement on the three areas relating to the first phase of “divorce” talks (Northern Ireland, citizens' rights and the UK's financial obligations).

What next?

As expected, the European Council followed the European Parliament's lead and, at its summit on 19 and 20 October, did not recognise that “sufficient progress” had been made to allow Barnier to move discussions on to the subject of transition.

The latest developments will be of concern to UK business, particularly to the financial services sector, which has been vociferous in warning of the potential consequences should a political agreement on transitional arrangements not materialise by the end of the year. The line constantly repeated by the business lobby is that, without the certainty of a transitional period, they must prepare themselves for the worst case, “cliff edge” scenario – in which the UK leaves the EU under the terms of article 50, without having first agreed on the future EU-UK relationship. Many financial services companies are making plans to move operations out of the UK to other EU jurisdictions, and are already starting to execute those plans.

We have also seen indications that other industries may follow this lead in 2018, should the current impasse continue. In late October Britain’s five biggest business lobby groups sent a joint letter to David Davis which urged the Government to agree to a transition deal as soon as possible and warned of the risk of both job and investment losses to the UK if such an agreement is not concluded.

This context places additional pressure on both sides to find momentum in discussions, ahead of the next European Council meeting in December. To prepare for that meeting, European Council President, Donald Tusk gave the green light to the EU27 to start considering internally the future relationship between the UK and the EU. This move does pave the way for at least the possibility of formal talks on the future trade relationship to begin in December, and EU leaders have expressed confidence that by this time sufficient progress would have been made.

On the ground in Brussels, many believe that a serious offer from the UK Government regarding its financial obligations would be enough to break the political deadlock and appease France and Germany in particular. Should this occur, December's European Council meeting would deliver a fresh negotiating mandate to Barnier, with talks on transition then likely to begin in January.