Hammond is right; the UK needs a transitional deal

by Sam Ashworth-Hayes | 14.12.2016

“Thoughtful politicians”, Philip Hammond says, agree that a transitional Brexit deal will be needed to avoid massive economic disruption. A new report from the House of Lords concurs. Even David Davis – who just last month said he would only consider such a deal to “be kind” to the EU – is coming round to the idea.

Davis may have found it more appealing to “be kind” to British business. If the UK were to crash out of the EU in 2019 without a deal, the economic damage would be immense. Overnight, after 40 years of ever-deepening trade, a red-tape curtain would fall across the Channel.

The much-maligned forecasts produced before the vote were conditional on an Article 50 notification having been sent, injecting a jolt of uncertainty into the economy. In other words, they assumed exactly the sort of shock we have so far avoided, and which Davis wants to set us up for. Brexiters pouring scorn on economists may want to consider this before egging the minister on.

A transitional deal would allow us to lessen this shock, providing greater certainty for investors and businesses. The best option would be for Britain to stay in the single market until a new deal were in place. Unfortunately, this is unrealistic because it would involve extensive treaty changes. The alternative mentioned by the Lords is a deal where Britain stays in the EU customs union for a time.

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While this would limit the shock for trade in goods, it would do nothing at all for trade in services. The City would suffer hugely. This would not be in our interests, or those of the rest of the EU – the last thing the eurozone needs right now is another financial shock – but it is likely to be the outcome. A transitional deal is not a panacea. We will not avoid the cliff edge completely, but we will have a shallower drop.

In the longer term, however, a transitional period is likely to lead to a better final deal than attempting to reach one in parallel with the Article 50 negotiations, even if that were possible. The two year negotiating period Article 50 stipulates would put intolerable pressure on Britain to sort a deal out as fast as possible. This would not necessarily be in our interests; in trade as in business, sign in haste, repent at leisure.

The case for a transitional deal is not just economic. There is a strong moral obligation on the British government to do everything possible to avoid the nightmare scenario of a hard border in Ireland. A transitional deal would give all parties more time to work on a solution.

While the details – and feasibility – of any transitional deal would be a matter for negotiation with the rest of the EU, it would be helpful if the Chancellor and the Minister in charge of sorting out our exit could refrain from giving completely contradictory messages. Agreeing on a plan and thrashing the details out with proper scrutiny would be better still.

This article was updated after publication to reflect Davis’ comments in favour of a transitional deal

Edited by Michael Prest