Rumours of progress in the Brexit negotiations have recently pushed the pound higher against the euro (albeit from a fairly low base) – but is this optimism justified? Ahead of next week's European Council meeting on 17-18 October, we look at the prospects for a deal.

Northern Ireland

As regards the Withdrawal Agreement, the border arrangements between Northern Ireland and the Republic of Ireland have proved a major sticking point. Both sides wish to avoid a hard land border, but the EU is known to be concerned about the potential for Northern Ireland to become a "backdoor" into the Single Market – and is therefore insisting that checks on goods between the UK mainland and Northern Ireland are unavoidable. The UK meanwhile insists that any agreement should not effectively result in a new border being created between Northern Ireland and the UK.

In a speech to European business leaders on 10 October, Michel Barnier, head of the European Commission's Article 50 Task Force, confirmed that the EU views the UK's desire to leave the Single Market and the Customs Union as necessitating checks on goods travelling between the EU and the UK after Brexit (notably controls relating to customs, VAT and regulatory standards). This in turn means that if there is to be no hard land border between Northern Ireland and the Republic of Ireland, then some checks will be necessary for goods travelling between the UK mainland and Northern Ireland. However, he argued that these checks should not be regarded as creating a hard border within the UK:

  • Customs checks: "Companies in the rest of the UK would fill in their customs declarations online and in advance when shipping goods to Northern Ireland. The only visible systematic checks […] would involve scanning bar codes of the lorries or containers, which could be done on ferries or in transit ports." Barnier noted that these arrangements already exist between Spain and the Canary Islands, for example (even though the Canaries are part of Spain). He added that many of these customs checks could be removed altogether if the UK agrees to remain in a customs union with the EU - a possibility which was reportedly discussed by UK Cabinet Ministers yesterday.
  • Regulatory checks: for the most part, these would "not need to happen at the border but directly in the market or at the premises of companies in Northern Ireland". The main exception would be checks relating to live animals and products of animal origin. Barnier proposed that these should be carried out at ports such as Larne and Belfast (although he conceded that this would require a substantial expansion in facilities at those ports). He also held out the prospect that agreement on the future relationship could improve the position further e.g. "a veterinary agreement would mean less frequent inspection of live animals".

If the UK takes the view that there can be no new barriers whatsoever between the UK mainland and Northern Ireland, then clearly the parties will be at an impasse on this issue. If, on the other hand, the UK is able to work with the approach outlined by Barnier in his speech, then progress in the negotiations with the EU may be possible – but it is unclear how that will play out politically in the UK, particularly given the hard line being taken by the Democratic Unionist Party on this issue and the UK government's reliance on the latter's political support. It is worth recalling that both sides thought they had put the Irish border issue "to bed" last December, yet the problem remains "live".

The future relationship

Turning to the future relationship, Barnier noted that there were significant areas of broad agreement such as on the need for cooperation in aviation and transport. However, he also provided some more detail on the EU's objections to the Chequers proposals. In particular, the EU is known to be concerned that the UK is effectively seeking to keep the benefits of the Single Market in goods, whilst allowing itself the freedom to impose lower standards of regulation in other areas, thus gaining a competitive advantage. Barnier gave the example of chemicals production, where he suggested that 31% of regulatory costs were attributable to the framework for chemical products, but 69% of such costs were attributable to environmental standards – and that the UK was seeking freedom to diverge from the EU in this area. He argued that the effects could be particularly marked in sectors where margins were very tight.

It therefore seems likely that if the UK wants the political declaration on the future relationship to say anything meaningful, it will have to make some kind of commitment to a "level playing field". This in turn is likely to involve continuing to align itself with the EU in areas beyond the regulation of goods. Again, there is considerable uncertainty over how such a commitment would play out politically in the UK – given that for many Brexit supporters, the Chequers proposals were already a step too far because of the commitment to align the UK with the EU's regulatory framework for goods.

Are there any grounds for optimism?

Based on what Barnier said in his speech, there is little outward evidence of significant concessions from the EU – although it is possible that some of what he said was "posturing" ahead of further negotiations. There are also a number of other difficult outstanding issues that have received less media attention, such as the status of Gibraltar, which could still present obstacles to agreement with the EU. However, there may be some grounds for optimism based on what Barnier did not say. For example, although the EU has in the past made much of the "indivisibility" of the four freedoms (goods, services, people and capital), there was no mention of this at all. In particular, Barnier did not cite the UK's desire to end free movement of people as a reason for not permitting the UK to participate in the Single Market for goods (which is effectively what the Chequers proposals seek - see this article). Nor did he insist that the capital and services aspects of the Single Market are inseparable from the goods aspects. This may be a sign that the EU is moving towards a more pragmatic position on the future trading relationship, focussing more on practical measures to make the post-Brexit arrangements work – such as those outlined in relation to the Irish border issue above. If so, this would in our view improve the chances of agreement being reached.

In the meantime, our advice remains that businesses should hope for the best but prepare for the worst - because even if agreement can be reached with the EU, any such deal will need to be ratified by Parliament. Given the political sensitivities outlined above, this is by no means certain.