What May’s Brexit fudge means for business: More uncertainty

As Brexit talks edge toward a compromise, the fudged deal that’s taking shape risks bringing years of uncertainty to business. Negotiators have made progress toward a deal on the thorny issue of the Irish border. But an agreement on that specific matter has wider implications for the whole UK’s relationship with the bloc.

While it’s known as the backstop because both sides consider it a guarantee, on both sides there’s a hunch that what is agreed as just a backstop could well end up being used — and remaining in place indefinitely. The compromise in view involves keeping the whole UK within the EU’s customs regime as a temporary measure — and that would come into effect after the 21-month transition period comes to an end at the end of 2020.

The UK insists the fallback customs setup must be temporary, while the EU says any backstop has to be openended. There may be some wiggle room with the wording. Both sides say the backstop shouldn’t become a backdoor route for the UK to secure its future trading relationship with the bloc. But for business, the risk is that Prime Minister Theresa May has given up on one of her first promises to them: that they would only have to adapt to one set of changes in rules and trading regulations.

We’ve “long argued for a UK-wide element to the backstop for Northern Ireland, and applying this to customs arrangements would resolve some of our members’ anxieties,” said Allie Renison, head of Europe and trade policy at the Institute of Directors. But “the government needs to be much more open about its counter-proposals to the EU,” she said.

If the UK insists on making the customs arrangement temporary, then another set of changes will eventually come into effect once the two sides hash out their final trade deal. In an ideal world, the new trading relationship would be in place at the end of transition. But most Brexit watchers think that’s unlikely. There’s also a chance that the backstop would never come into effect, and that practicalities would argue instead for an extended transition period, argues Mij Rahman, a director at Eurasia.

“All the politics will allow right now is a temporary customs arrangement,” he said. “But the actual plan might be different and we will be locked in transition for a very long time.” Businesses have spent the past two years crying out for clarity on what Brexit trade terms will look like. The Confederation of British Industry said Thursday what mattered now was “measurable progress” from the negotiations.

But May’s backstop compromise could leave them staring at fudge. Businesses don’t care about the political wranglings — they just want answers, according to British Chambers of Commerce Director General Adam Marshall.

“It’s not the back room blow-by-blow that matters, but a withdrawal agreement and set of commitments on the future trading relationship that businesses can take to the bank,” he said. Meanwhile, the European Union has a plan up its sleeve to avert market chaos in case of a no-deal Brexit, according to a senior financial-services official. “We have the measures in place, whether it’s a soft or a hard Brexit,” said Patrick Pearson, who runs the financial-markets infrastructure unit at the European Commission, the EU’s executive arm. “We know what to do.” The Bank of England stepped up pressure on the EU this week to help stave off the threat that a no-deal Brexit poses to trillions of pounds of derivative contracts and millions of insurance policies. While the UK has announced steps to reduce the risks, including a plan to issue temporary licenses if needed, the EU has largely insisted that it’s up to companies to prepare for the worst.

The EU has made “only limited progress” in mitigating the risks of a disorderly departure, the BoE said. John Glen, economic secretary to the UK Treasury, drove that point home on Wednesday, warning that the risks must be addressed in “a matter of weeks.” This is “a political decision that the EU will have to come to terms with,” he said.

Pearson’s broad-brush assurances echoed comments by Daniele Nouy, the European Central Bank’s head of supervision, who said the ECB is “ready to help ensure a smooth Brexit — no matter the outcome of the political negotiations.”

The commission is “in contact constantly with the market” and ready to respond “at the right time — not too early, but at the right time with any measures,” Pearson said at an event in Brussels.