UK Politics: European Commission action is more noise than signal –

As negotiations on a post-Brexit trade deal approach crucial deadlines – most notably, the EU summit on 15-16 October – the two sides still seem some way from a deal.

Key sticking points remain on the issues of state aid and fisheries. Underlining tensions, the European Commission has sent a formal letter to the British government confirming that it would take legal action following the UK’s proposed internal market bill, which would break certain provisions of the Brexit Withdrawal Agreement ratified earlier this year.

This letter represents the first stage of EU infringement proceedings that could see the dispute going to the European Court of Justice (under the terms of the Withdrawal Agreement, the UK remains subject to ECJ jurisdiction on matters of the agreement for four years after the transition period).

While making for some dramatic headlines, however, we view this development as more ‘noise’ than ‘signal’ in terms of its implications for post-Brexit EU-UK relations. This is because if (likely when) a trade deal is agreed, the legal breach to which it refers would become irrelevant.

In other words, there would not be any need for the UK government’s internal market bill, which was drafted to ensure the continued flow of goods between mainland UK and Northern Ireland in the event no trade deal is agreed with the EU.

A deal is ultimately likely, but a technical delay to the transition period could be needed –

Negotiations on a trade deal have quietly continued in the background, despite the headline-grabbing legal machinations covering hypothetical no-deal scenarios.

Regarding the remaining sticking points, the disagreement over fisheries is probably easiest to resolve – the EU seems to accept that a final deal will involve some loss of access for EU fishermen, but not as much as the UK is currently proposing.

The issue of state aid is more difficult to resolve, with the EU insisting on legal limits to subsidies in any trade deal.

According to the FT, talks have been helped by a UK government statement that it “does not intend to return to the 1970s approach of trying to run the economy or bailing out unsustainable companies,” and that “the UK will adhere to any international obligations on subsidies agreed under future free trade agreements.”

We doubt the UK government will allow a deal to fall away on the issue of state aid alone, and that if an agreement is reached in other areas – as looks likely – it will ultimately compromise and accept some legal limits.

All that said, a deal looks unlikely to be sealed by the time of the EU summit in mid-October, and this raises the possibility of a technical extension to the end of the transition period – currently 31 December.

This would be short (perhaps only weeks) and only to allow sufficient time for ratification of a deal. In the meantime, markets will continue to be buffeted by both the signal and the noise of negotiations.