UK: Brexit: What Do EU Leaders Think?

There isn't a day that goes by without copious column inches dedicated to the topic of Brexit. This has never been more so than in the days since the Prime Minister made her recent speech in Florence.

As part of my role advising clients across Europe and beyond and as Global Brexit lead, I have spent a lot of time on the continent talking to EU business leaders and politicians. I am often asked by my UK-based colleagues what the remaining 27 member states think about the UK's decision to leave and the ramifications both for the UK and the rest of the EU.

There is no doubt that Brexit is an era-defining moment in the history of the UK. The transition from EU member to an, as yet undefined future has already begun. Few UK political and business leaders will have switched off over the summer months. They will have been ruminating over the scenarios that may play out, the implications and the preparations their organisation will need to make to prepare for the likely changes to come, despite the high level of uncertainty that remains as the exit negotiations begin to play out. However, on the other side of the Channel I sense the mood is slightly different.

Across Europe, Brexit has gone from an almost existential concern in the immediate aftermath of the referendum, to one that is now among a number of other issues that require attention. Brexit is definitely an important issue, just not the number one priority. For example, Brexit hardly featured as an issue in the German elections.

The reason: back in June 2016, Europe had a number of milestone elections on the horizon that some feared could pose a threat to the union. Those fears have abated with the stemming of the populist tide in France, the Netherlands and Austria - the potential political instability that could have materialised across the union has to some extent waned. However, whilst Chancellor Merkel was elected to serve a fourth term in Germany over the weekend - the AfD won its first parliamentary seats, which has perhaps brought the issue back in to focus. It will be interesting to see whether Germany is more vocal on the topic of Brexit in the coming months. 

Businesses are also by and large carrying on as normal, recognising that they too have other issues to address. This was demonstrated over the summer when German car manufacturers - one of the industry's most likely to be affected by Brexit — met to discuss their most pressing challenges: the top item on the agenda was diesel emissions, not the future trading arrangements with the UK. Companies on the other side of the channel are not dismissing Brexit, but there is not the same emphasis that we see here in the UK, as it is assumed the impacts will be less. Optimism also seems to be improving as found by our recent European CFO survey, which asked CFOs how they felt about the financial prospects for their company compared to three to six months ago - 38% of CFOs said they are more optimistic, compared to 26% in the previous survey.

Pragmatism prevails

The initial sense of dismay following the referendum, alongside accompanying worries about the future of the EU, has been replaced by a growing realisation that the UK voted to leave the EU, not Europe, and a continued close relationship will be in everyone's best interest.

The conversations I am having are pragmatic. There is wide agreement that the UK is an important market for the EU, that a disorderly separation is not desirable for anyone, and my general sense is that there is no desire to punish the UK.

There are however some very firm red lines around the four freedoms to ensure the fundamental principles of the Union are preserved. The EU are clear that the UK cannot maintain the benefits of membership without the associated obligations and that there are some essential elements of the exit deal that need to be agreed – namely the UK's financial obligations on exit, the arrangements of the Irish border and the rights of EU citizens – before the EU will countenance the talks moving onto more forward looking matters.

Separation not trade

Therefore, for the moment, the dominant issue on the continent continues to be how separation will take place, not so much on what the future relationship will look like. There is a definite desire for a separation that will work for everyone. EU exporters do not want goods piling up at the dockside, excessive delays or extra layers of paperwork and bureaucracy any more than the British do.

Given the timing, it is looking unlikely that a trade deal will be concluded before March 2019.  Trade negotiations usually take years to complete and the proposed deal would need to be approved by every parliament across the EU. This makes the need for a transitional arrangement – perhaps in the form of an extended negotiation period followed by a phased implementation - crucial. The Prime Minister made it clear in her recent Florence speech that she felt a transition of up to two years was required and that business should only have to adapt to one set of changes, not two.

Business readiness

Whilst the future trading relationship between the UK and the EU remains uncertain, our advice to businesses both in the UK and on the continent is to prepare for the situation of most change — a position that will stand them in good stead for all outcomes. There is no 'one size fits all' approach – some organisations will experience a radical shift in the coming years and others will remain largely unchanged. On both sides of the Channel we are seeing wide disparities in the levels of business readiness.

Close ties will remain

The UK referendum has caused many on the continent to reflect on their commitment to the union and the four freedoms that underpin it. Whilst there is a sense of relief that the referendum was not the start of an unravelling of the EU, significant challenges still remain, such as Greek sovereign debt and the Italian banking system. Brexit is just one of the issues to address.

The negotiations between the UK and EU are unusual in that both sides are starting from a place of deep integration. Following the UK's exit there will be opportunities that both sides will look to seize. The UK government has set ambitious goals for future trade deals with markets beyond the EU and on the flip side we have already seen major continental European cities market themselves in London, looking to attract business and talent in a post Brexit world.  In any negotiation there needs to be give and take and I am optimistic that with pragmatism and compromise, a very close relationship between UK and EU will remain post March 2019.

Notwithstanding the optimistic tone of the Prime Minister's Florence speech and the confirmation of a desire for a phased transition and the offer of continued financial contributions to the EU - more clarity is required. This applies equally to the Commission negotiating team - what does the UK mean by an imaginative trade deal, and to business more broadly - whilst welcoming the phased transition, what are we transitioning to?

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