Theresa May has spoken of a future deal that allows the UK to categorise single market regulations according to whether it wants industry sectors to continue to follow them fully, in principle only, or not at all. This has become known as ‘managed divergence’ or, perhaps less cryptically, the ‘three baskets’ scenario. However, the EU is concerned that this approach involves exactly the kind of ‘cherry picking’ that it believes could undermine the integrity of the single market and will not countenance it.
In her Mansion House speech on 2nd March, the prime minister stated that the UK wants to continue as an associate member of various EU agencies that preside over sectors such as pharmaceuticals and aviation. She also called for mutual recognition of post-Brexit regulatory frameworks. The EU is expected to reject both proposals if the UK insists on withdrawing from the single market. A further UK demand for a financial services regulatory framework to be included in any future trade deal is also likely to be dismissed by the EU.
So, is the UK’s goal of managed divergence realistically achievable or will the EU’s resistance on the issue hold? Or could a compromise be reached (after all, Mrs May predicted in her recent speech that “no-one will get everything they want”)?
One possible solution under discussion would be to follow the Swiss approach which has echoes of managed divergence. On the face of it, the model could be attractive to the UK in that it offers a high level of access to the single market. However, the nature of the arrangement binds Switzerland to numerous clauses contained in more than 100 bilateral agreements that may be far less attractive to staunch Brexiteers, most notably a requirement to accept free movement of people across borders.
It would also mean that, despite regaining sovereignty, the UK would still be tied to many EU regulations which could, therefore, restrict any divergence. There are also potential economic hazards – if any of these clauses (known as ‘guillotine’ clauses) is breached by Switzerland, then its entire trade relationship with the EU is affected.
Potentially, under a ‘three baskets’ system, these scenarios could be avoided if the various industry sectors were permitted to abide by single market regulations in isolation to each other, i.e. only a sector in breach of the rules would be penalised rather than the entire economy.
However, EU reluctance to agree a Swiss-style deal with the UK is strong, amid concerns that it would encourage the afore-mentioned ‘cherry-picking’ that it wants to avoid. The European Council’s negotiating guidelines preclude a sector-by-sector approach.
While the outcome of this aspect of the negotiations is uncertain, there is little doubt about its importance in striking a final deal.
Article published: 16th March 2018
