Why a “Canada Plus Plus” Brexit deal won’t happen

2018 is only a fortnight old but there is already speculation about the shape of any future trade deal between the UK and EU.

One model that has been talked about is "Canada Plus Plus". This would involve a free trade deal similar to that between the EU and Canada, but with the addition of special rules that would allow British financial firms to retain their automatic access to European markets. Such a deal could possibly involve some sort of continued regulatory harmonisation and continued payments to the EU budget, but not continued freedom of movement.

To see whether this is a realistic goal we've decided to approach someone from inside the European financial world. Lon Cornelissen, who lives in Rotterdam, is the chief economist for Robeco, a global Dutch asset management firm. "A Canada Plus Plus' deal is not on offer", he argues. By allowing the UK "to protect its financial services industry and at the same time take full control of movement of labour", it could be seen as "having your cake and eating it", he says. European negotiators have made it clear that there "has to be a difference between being a member and staying outside."

Start your trial of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

Sign up for MoneyWeek’s free twice-daily newsletter.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Sign up

Of course, the individual states will have a big role in the negotiations and press reports suggest that some countries such as Italy may be willing to consider some sort of bespoke arrangement. However, Cornelissen remains sceptical that pressure from those European countries sympathetic to the UK can lead to the sort of compromise that Phillip Hammond seems to be seeking. When it comes to any Brexit deal "the noises from the most powerful EU members, such as France and Germany, are much moreimportant", he says. Indeed, "it is difficult for Europe to forgive the UK the self-inflicted damage and unnecessary diversions it is creating by leaving the EU".

Of course, Germany has its own issues, with September's inconclusive election injecting another element of political uncertainty into the equation. However, German chancellor Angela Merkel's difficulties in agreeing a new coalition seem to be coming to an end, with signs that the talks between the CDU, CSU (Merkel's sister party) and the SPD are making progress. In any case, German domestic politics "doesn't matter", says Cornelissen: "all the major non-populist German parties have basically the same view about Brexit and German interests" namely that "the integrity of the internal market and Germany's relationship with France take top priority."

The stakes are high, since a basic free trade deal that fails to maintain the current level of access to the single market, would "be highly damaging to the UK's service sector". If that happens, then you should expect "significant job losses". Using the Canada agreements as the basis for a deal would also make the Irish border a pressing question again because "leaving the internal market and the customs union implies a hard border". In that case, the only alternative would be to give Northern Ireland a special status, and transfer the border to the Irish Sea, something strongly opposed by Ulster Unionists.

Of course, a Norway-style deal comes with its own conditions. The biggest of these is that "the UK would continue to pay a contribution to the EU and accept free movement of people". We would also have to obey most EU rules, although there would be exceptions like agriculture and fisheries. Still, it's hard to dispute that, by allowing British firms full access to the single market, "the Norwegian model would be the most favourable in economic terms".

Ironically, the government's desire for a bespoke arrangement means that Brexit is unlikely to take place either in March 2019 or even at the end of 2020. Such a deal, "could easily take five to ten years" to arrange. With only 15 months before Britain leaves the EU, "a transitional deal is inevitable".

During this period "the UK will continue to pay, implement new EU regulations, accept free movement, but now without voting rights and being a rule taker". Indeed, it is "likely that, "the transitional deal will have to be extended, initially for another two years, and thentime will tell".