Your Thoughts: Soft Brexit Vs Hard Brexit

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As negotiations are underway, are we looking towards a soft Brexit or a hard Brexit? How will each pan out for various UK sectors? How will they impact the pound and the economy? How will small businesses be affected? And though we’ve already seen a glimpse via the proposed bills in the Queen’s speech, what will our new laws look like?

Below Lawyer Monthly has noted Your Thoughts, from top specialists around the UK and EU, on the prospects moving forward.

Caron Pope, Managing Partner at Fragomen LLP:

A year after the EU referendum result and post triggering Article 50, there is still endless discussion about a ‘Hard’ or ‘Soft’ Brexit. While this is critically important to the future of the country, abstractly pontificating doesn’t really help anyone. Immigration and the fate of free movement is a central issue and we need to know what is going to happen to European citizens already in the UK and how businesses in the UK will access skills in the future once the divorce with the EU is complete. What’s more, we need to know quickly.

The immediate priority has to be to treat EU nationals living here properly – they need and deserve certainty. Whatever our eventual relationship with Europe, we need a fair and transparent immigration system that can be properly controlled, while providing the right level of support for the UK’s skills base. Employers will respond in a variety of ways: some businesses, for example, are already looking at how they recruit and train staff in attempt to attract more British people to fill vacancies; some companies may automate the way they work – this, of course, is not great for employment but could increase productivity; and some businesses are looking at whether jobs should be moved elsewhere in the world. Frankly, most of Fragomen’s clients want to see free movement remain but accept that it probably will not. If it is removed, they need the Government to bring forward laws that:

  • give EU nationals already living here certainty that they will be able to stay (and the EU Commission needs to do the same for Britons in Europe);
  • provide for reciprocated visa free travel in Europe;
  • allow EU nationals to continue to work here but without the delays and red tape in place for non-EU workers and their employers;
  • ensure employers have access to the labour they need.

The businesses we work with know that this process cannot be a one way street. They already do lots to recruit and train British workers and have every intention to do more. There is no single right answer, but what we can be sure of is that business will still need access to foreign workers to deal with skills and labour shortages.

Nicolas Groffman, Head of International, Harrison Clark Rickerbys:

EU law affects nearly every aspect of national life, from grand concepts like constitutional law and foreign relations to the shapes of valves and how multi-national families can stay together. It is as unrealistic to expect any single lawyer to be an expert in all these as to suggest that the UK must choose between the “Norway model,” the “Swiss model,” the “Canada model” etc – there are a myriad ways that the UK’s future could be shaped, and only a small part relates to the outcome of Brexit negotiations.

My view is informed by spending 16 years working in China, later switching to handling strategy for all of my firm’s international work. For centuries, Britain looked far beyond its borders, even when that meant dangerous journeys in square-rigged ships. Ironically, when global communications are easier than they have ever been, it appears trapped in a Eurocentric bubble. The EU accounts for only about 15% of the global economy, so from a legal, regulatory and treaty-making viewpoint, there is greater benefit in exploring the more difficult but more lucrative non-EU markets.

There is a genuine, and justified, concern from British lawyers that regulations are too complex to be negotiated in just two years. In particular, the UK’s income is so dependent on our financial services industry that any major shift could have very serious ramifications. But the positive effects of successful FTA negotiations globally, and, more importantly, of UK businesses creating commercial links outside the EU, will potentially far outweigh any negative impact.

Lastly, there is the question of immigration law, of considerable significance since it directly affects individuals. I believe that the only fair way to treat immigrants is with equality, based on the concept of natural justice. If we need immigration quotas, let them be equally applied. If free movement is the price of staying in the Customs Union, I don’t believe it is worth paying. It would be equally wrong, and arguably unconstitutional, to deny EU citizens resident in the UK their existing rights.

So, while a “hard” Brexit will probably involve a short-term economic downturn, it will also allow the UK to once again espouse natural justice, and will force us to look to cooperation with major nations. This is already happening – I see many SMEs now putting effort into research and links beyond the EU, and the extent to which Commonwealth countries, and China, are anticipating greater cooperation with the UK.

Neely Reyes, Managing Director, Sapphires Model Management:

A hard Brexit that clamps down on free movement could be disastrous to these industries. While many industries argue that native British workers can take up the job vacancies left by the lack of EU workers, this is simply not the case in the Creative Industries. Although many people in this industry are formally trained, creativity and artistic flair isn’t something that can be simply taught; they are talents that are inherent and not learned.

From actors and models to artists and illustrators, a clampdown on free movement is going to massively damage one of the most important industries to the economy. A soft Brexit that allows for free movement of people is the only way to ensure that our creative industries continue to be able to compete on a global scale.

Hard Brexit and immigration restrictions are going to damage small businesses in the creative sector even more. Assuming that a hard Brexit would extend the current visa sponsorship system to cover all immigration, the restrictions on sponsorship licences and the costs involved with visa applications are going to put hiring foreign talent out of the reach of all but larger businesses.

John Workman, Managing Partner, BPE Solicitors:

Currency markets don’t like uncertainty, so we would expect continued volatility with the pound, which is likely to stay low for the short-term. Good news for exporters, but bad for our importers, and definitely not great for inflation.

As any exit deal now has to be passed by a ‘coalition of interest’, requiring support from the ‘left of centre’ parties, it may be a softer Brexit – a better and more balanced result in the longer term. That is, if a soft Brexit is even possible, and many voices within the EU suggest otherwise.

There is also uncertainty regarding whether triggering Article 50 also triggers Article 127 which serves notice to leave the European Economic Area (EEA) and hence the single market. The UK Government asserts that it is party to the EEA Agreement only in its capacity as an EU member state, so once the UK leaves the EU, it would cease to be a member of the EEA. If the UK is a member in its own right, separate notice will have to be given.

Leaving the single market in a hard Brexit would involve giving up the four ‘freedoms’ at the centre of the EEA; the free movement of goods, capital, services and people. This would achieve the Government’s aim of curbing immigration, but as they come as a package, the Government cannot elect to retain free movement of goods and services, without ceding something to the requirement of free movement of people too.

However, this could be addressed by an implementation plan / transitional agreement that may last up to five years (potentially longer). Agreeing a comprehensive free trade agreement inside Article 50’s two years was already a challenge; a transitional agreement could avoid the “cliff edge” and give businesses more certainty.

The unlikely long-term alternative could be a ‘firm’ Brexit, neither hard not soft, where the UK is part of a single market shaped especially for it – perhaps within a multi-speed Europe. Stranger things have happened (quite recently) on the political stage, after all.

Jonathan Watson, Chief Market Analyst, Foreign Currency Direct:

Negotiations for Brexit have finally commenced and with it, the long hard process of establishing the UK’s new relationship with the European Union. With the recent hung Parliament in the UK election and Theresa May appearing hampered in her pursuit of a Hard Brexit, it appears a Soft Brexit may now be more likely, more through default than choice.

The Pound has been impacted heavily from uncertainty since the vote plummeting around 15% in the last year. A Hard Brexit is seen as negative for the Pound, a Soft Brexit is seen more positively. These attitudes all stem from the likely impact to the UK economy from this disruption. A Hard Brexit will by severing ties with the UK’s biggest export market, making life potentially very chaotic for UK businesses.

So far reports from the meetings suggest David Davis and the UK team are on the back foot, agreeing to EU demands as to how to stage the talks. Leaks have shown the EU to be in the driving seat of the talks with the UK appearing ‘dazed and confused’ and unsure of its actual position.

Ultimately, the UK has voted to leave the EU and that remains the will of the people and the instruction to Government. The Government should be planning to make this a success for the people of Britain and also our European partners. It is in no one’s interest to see talks turn sour or for negotiations to leave anyone worse off.

Such negativity hurts the Pound and will only see Inflation rise, compounding the problems the UK is facing. Whilst a weak Pound helps exporters and the FTSE, the UK as a net importer will ultimately suffer from a weak Pound. Falling living standards as a result of higher Inflation will do little to increase business and consumer sentiments already on edge.

Business and trade flourishes when there is confidence, security and an ‘ease of doing business’. The single market and harmonisation of legislation in many areas across the EU ensures these building blocks of trade allow growth and opportunity. Brexit by nature disrupts these ideals and the end goal of leaving to have a more ‘independent’ UK is difficult to measure against the losses we are suffering in the short term.

The UK Government needs to establish a position on the key issues and take the lead to demonstrate to our European partners how highly we value the beneficial elements of the relationship. We need to take the initiative on topics of trade and immigration that show intelligence and a desire to make things better. To make a positive case for the new relationship rather than focusing on just leaving.

Rose Carey, Partner, Charles Russell Speechlys LLP:

Realistically we are looking at a soft Brexit. A hard Brexit was always going to be difficult even with the full support of MPs. Now Theresa May’s mandate for a hard Brexit has been called into question following the general election, the parties supporting a “soft Brexit” are in a stronger position. There are also concerns about the effect on the economy with a hard Brexit which make it seem less likely.

A soft Brexit will ultimately involve less immigration control on workers from the European Economic Area (EEA). The government will want some form of immigration control but this is likely to be very light.

A hard Brexit would involve full immigration control with the government determining whether to introduce a new immigration system for EEA workers or use the current Points Based System which currently applies to non EEA workers. In this scenario EEA workers would need a visa to work in the UK unless exempt e.g. the government has previously talked about exempting certain sectors where there is a recognised skills shortage or highly skilled workers. This would be for the government to determine.

If the government has a hard Brexit this would affect small businesses particularly as they would struggle to afford the visa fees to obtain a visa for an EEA worker. In addition they would struggle to offer competitive salaries with larger businesses able to pay more to attract the brightest and the best.

Under the Points Based System, a UK employer deemed to be a small company can expect to pay just under £10,000 in government fees for a non EEA worker with a spouse and 2 children. A UK employer not deemed to be a small business would pay just under £14,000 for the same visas.

The UK government has not disclosed what the new immigration system for EEA workers would look like either for a soft Brexit or a hard Brexit.

A soft Brexit would have few immigration restrictions. A hard Brexit is likely to involve full immigration control which would either mean a new immigration system or incorporating the current system used for non EEA workers.

At present it is too early to say what the new system will look like but it is increasingly looking like a softer Brexit which means less immigration control than initially envisaged by Theresa May which is better for business especially small companies.

With speculation around Brexit and what will and won’t be discussed and agreed continuing to hit the headlines, Rashmi Dubé, Founding Director of national legal firm, Legatus Law, provides her thoughts and fears for the months and years ahead.

Rashmi Dubé, Founding Director, Legatus Law:

The outcome of the general election has undoubtedly led to political instability; furthermore, it is now difficult to distinguish the type of Brexit that we as a nation are facing. The post-EU arrangements that are being discussed are so vast and what makes this all the more complicated is that the outcomes will have implications for individuals, families and businesses alike, which makes it a topic of much debate.

Although some progress seems to have been made with talks now underway with Europe, the minority government has led to uncertainty all round. This has only fuelled the number of questions that are being asked, which remain unanswered. Not only does this impact negatively on business, it is also bad for entrepreneurs and the UK plc.

As there seems to be no majority in the House of Commons for a completely hard Brexit, and some options such as remaining in the Customs Union now being put back on the table, I believe that we are heading towards a much softer Brexit than we first envisaged.

However, I am undecided as to whether this would have a positive impact. On the one hand, staying in the EU means we have the European market open to us to a similar extent as now, but we also need to understand that as a country we will not be able to do deals on our own terms with others.

I am a passionate advocate that we need to be as brave and determined as possible as a country outside of the EU.

Whilst we need to do all we can to protect businesses at every step by securing the best deals and providing more stability, we also need to embrace our freedom with emerging and growing markets. There are an abundance of opportunities for putting in place stronger, better deals with the likes of India, China and South America, which I am already witnessing.

There is no doubt that there is a lot of doom and gloom surrounding the impact of a hard or soft Brexit, but I am not one to be deterred by this. A lot of suggestions have been made that the economy would be hit solely by the decision to leave the EU, which has not come to pass to the same extent as some had feared.

Global events and significant changes such as Brexit should be viewed as opportunities, which we should look to exploit by being prepared and ready to do so. This means having the right people in place such as those with mediation and negotiation experience but also a legal background to look at existing and future contracts.

It is only by having a diverse range of people in different places and at different times that possess the necessary experience, skills to network and awareness of cultural sensitivities that we can ensure in practice that a new strategy will work.

Emma Roe, Head of Commercial at Shulmans LLP:

Whilst not having any technical definition, whether we see a ‘soft’ or a ‘hard’ Brexit, there will be various implications in terms of what it ends up looking like in reality. Essentially, these terms describe the extent to which there is a hard-line approach or a slower, transitional slide into exiting the EU.

For some, these terms might also indicate how long the tail is on the legislative changes needed, following the actual date of the UK’s exit from the EU. The Government’s proposal is to use the Great Repeal Bill method; a way in which to incorporate all EU legislation into domestic law from day one. This allows for a prioritised approach, picking and choosing which specific laws need amending immediately, against those to be actioned at a later date. Clues can be taken from contents of the Queen’s Speech as to what the Government considers a priority in reference to new laws, with the new Customs Bill and Trade Bill clearly being critical consequences of the current Brexit negotiations.

The most significant interpretation of the terms is to view them as articulating the Conservatives’ ‘no deal is better than a bad deal’ mantra. ‘Hard Brexit’ could be considered as the ultimate extreme of no transition or negotiated position at all, but a reliance instead on WTO terms for the UK’s trading relationship with the EU and remaining Member States.

Different countries, such as Turkey, Switzerland and Norway, already have their own versions of negotiated deals with the EU which demonstrate some possible models available to the UK. Mirroring one of these might be regarded as a softer Brexit, given that to an extent they are tried and tested. However, all of these have disadvantages, which is probably what led the Government to coin the phrase in the first place, as they continue to argue that a hard Brexit is better than a soft Brexit which could disadvantage the UK too severely.

…and of course, a lot of the debate within the UK seems to assume that we will have a choice. In some cases, the choice over whether Brexit is ‘soft’ or ‘hard’ – we need to remember that the EU itself and each Member State will have its own idea of what it wants to see and so our Government’s position will have to remain fluid out of necessity.

Russell Brown, Partner, Glaisyers:

While it could be argued that the recent election result diminishes the likelihood of a hard Brexit, the reality is that the Government is holding its cards very close to its chest. We will only really start to get an idea of how things will progress now that negotiations with Europe have started; and let’s not forget these could last for up to two years.

Last week’s proposals regarding EU citizens being allowed to remain in the UK is the first tangible sign of there being some attempt to negotiate a soft Brexit, by which I mean a willingness to retain some formal links with the continent. From an employment lawyer’s perspective, there was a clear statement by all parties during the election that employment rights derived from the EU will effectively remain untouched. This leaves the door open to continued trading links with Europe, in the same way that it applies to EEA nations and Switzerland.

One of the main issues is going to be the so-called Brexit bill. This has such a major significance for both parties that it is likely to impact on all other aspects of the negotiations, particularly where liability is likely to lie in relation to long term commitments, such as pensions and loan guarantees, and the EU’s claims that we should continue to pay into the Brussels budget for two years after our departure from Europe.

What will the future hold for business? While many small companies perceive a reduction in red tape, those who manufacture and export to Europe will be concerned about the potential loss of access to the single market. There are also concerns about the impact of Brexit on lenders; given that access to finance is vital to growing businesses, this will be of particular concern if interest rates rise. If we face inflation due to a lowering value of the pound, banks may raise interest rates which could lead to creating negative equity for property owners. A decrease in property values will also be a concern to many, meaning they put future acquisitions and associated job offers on hold.

We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!

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