Theresa May’s mo­ment to soften her Brexit stance

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Twenty months af­ter the Brexit ref­er­en­dum, the Bri­tish gov­ern­ment is inch­ing to­wards work­ing out what to ask for in its fu­ture re­la­tion­ship with the EU. So far, Theresa May, the prime min­is­ter, has pri­ori­tised main­tain­ing the un­easy truce between the fac­tions in the Con­ser­va­tive party and in­deed the cabinet.

But the time has ar­rived for her to adapt her po­si­tion to one that is more likely to re­sult in a deal ac­cept­able to the EU and the UK. This means Mrs May will have to soften her “red lines.”

Mrs May and her min­is­ters agreed that they wanted a be­spoke trade deal, based on the prin­ci­ple of man­aged regulatory di­ver­gence. In many ar­eas, in­clud­ing much man­u­fac­tur­ing, the UK would start off aligned with EU rules but would have the right to di­verge. In other ar­eas, such as some services, there would be mutual recog­ni­tion or no align­ment at all.

It seems in­ge­nious. But a prob­lem arises: the EU will re­ject these ideas. Frus­trated with the pre­var­i­ca­tion in London, any clar­ity that emerges from the speech that Mrs May is due to give will be wel­comed. But both the 27 other mem­ber states and the Euro­pean Com­mis­sion see the sin­gle mar­ket as an in­te­grated whole. The UK has con­sis­tently been warned that “cherry pick­ing” the EU rules that suit it, while re­ject­ing other parts, will not be al­lowed. Con­cerns re­main that any ar­bi­tra­tion mech­a­nism en­vis­aged by the Bri­tish will be too weak to pre­vent un­der­cut­ting EU stan­dards.

Fur­ther­more, mem­ber states know that their pri­or­i­ties and in­ter­ests dif­fer. They worry about their abil­ity to agree on the ar­eas where the UK should be aligned. While all say they do not wish to pun­ish the UK, some EU lead­ers fear that a be­spoke model leav­ing the Bri­tish half in­side the sin­gle mar­ket would en­able the UK to thrive — and so en­cour­age other mem­bers to think of quit­ting.

Michel Barnier, the com­mis­sion’s chief ne­go­tia­tor, has long ar­gued that Mrs May’s red lines leave only one vi­able model for the fu­ture re­la­tion­ship. If Britain re­jects free move­ment, bud­getary payments, the Euro­pean Court of Jus­tice (ECJ), EU rules and the cus­toms union, it has to ac­cept some­thing like the EU-Canada free trade agree­ment. That would pro­vide tar­iff-free trade in goods but only lim­ited ac­cess to Euro­pean mar­kets for UK services.

A majority of the mem­ber states, in­clud­ing Ger­many and France, sup­port Mr Barnier’s plan. But sev­eral are con­cerned that this lim­ited deal could re­strict trade with the UK too much. Britain sees Swe­den, Bel­gium, Cyprus, the Czech Repub­lic, Den­mark, Hun­gary, Ireland, Italy, Lux­em­bourg, Malta, the Nether­lands, Poland, Por­tu­gal and Slo­vakia as po­ten­tial “friends”, and hopes they will soften the com­mis­sion’s ap­proach.

How­ever, none of them likes the UK’s ideas on regulatory di­ver­gence. They want a softer ap­proach for dif­fer­ent rea­sons and in dif­fer­ent ways and the group lack a nat­u­ral leader. The UK will find it hard to shift the line set by France, Ger­many, the com­mis­sion and the Euro­pean Par­lia­ment.

Mrs May could as­pire to “Canada plus” — more pro­vi­sions on services

and some in­dus­trial sec­tors end­ing up close to the sin­gle mar­ket. It would help if she ac­knowl­edged that painful trade-offs can­not be avoided, of­fered as­sur­ances that the UK would not un­der­cut EU stan­dards, and ac­cepted strin­gent penalties if Britain moved out of align­ment. Most im­por­tant of all (and this is the po­lit­i­cally dif­fi­cult de­ci­sion) she would need to soften her red lines.

The EU cares most about the UK ac­cept­ing its rules and the author­ity of the ECJ. In ask­ing for man­u­fac­tur­ing to be closely aligned with EU rules, the UK has per­haps im­plic­itly soft­ened those two lines. Mrs May should also soften two other red lines. If she chooses mod­est re­stric­tions on im­mi­gra­tion from the EU, and gives pref­er­en­tial ac­cess to its cit­i­zens, she will earn much good­will. She could gain even more by dan­gling con­tri­bu­tions to fu­ture EU bud­gets. The EU has not asked for cash but may do so when it pon­ders how to fill the an­nual €12bn hole in its bud­get left by Brexit.

One red line that Mrs May seems de­ter­mined to re­tain — de­spite pres­sure from businesses — is the de­ci­sion to leave the cus­toms union. If she asked for a cus­toms union with the EU it would con­strain the UK’s abil­ity to strike free trade deals with other countries, alien­at­ing the Con­ser­va­tive right. But the op­po­si­tion Labour party is mov­ing to­wards a policy of a UKEU cus­toms union and could join Tory Re­mainer rebels in par­lia­ment to force Mrs May’s hand.

The EU would wel­come a Bri­tish de­ci­sion to ask for a cus­toms union — which would re­duce trade fric­tion between the EU and the UK, and help to elim­i­nate a hard bor­der for North­ern Ireland. Brus­sels could be open to of­fer­ing the UK a bet­ter deal than Turkey has in its cus­toms union with the EU. But these terms — the best the UK can hope for — will only be at­tain­able if Mrs May starts to move.

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