Theresa May and Jeremy Corbyn have taken surprisingly similar positions on Brexit up to now - ones of "constructive ambiguity".  In other words, they have been fudging tricky issues. As Laura Kuenssberg tweeted  “the problem with fudge is that it keeps people sweet for a while, but later they might feel a bit sick and wish they'd had something more nutritious instead.” This week we are seeing the government, Labour and the EU all provide some meat to chew on; they are no longer sitting on the fence on key Brexit issues. That has opened up differences between them which provide some pointers as to where Brexit may end up. It also reveals the Catch-22 dilemmas at the heart of Brexit.

On Friday (2 March), Theresa May is giving a speech setting out the conclusions of last week’s cabinet awayday on Brexit. The hope is that this will provide the most clarity to date (admittedly not a high bar) on the UK government’s proposed future relationship with the EU. Initial indications are that the Prime Minister will set out proposals for ‘ambitious managed divergence’ of UK laws from EU ones.

This ‘pick and mix’ approach sets a clear course of moving away from the singe market framework in some areas. The gist of this is that the UK would take a sector by sector approach to EU rules and regulations: very close alignment or convergence of regulatory standards in areas such as the automotive industry; general alignment with some exceptions in sectors like financial services; and in other areas the UK would do its own thing (e.g. in agriculture and fisheries and emerging sectors like robotics). The Prime Minister also seems to have been happy for other ministers to state this week that the UK will not be seeking a customs union with the EU. Overall this marks a preference for moving away from the single market.

This also creates divergence from the Labour party’s position, as set out by Jeremy Corbyn on Monday. He set out a preference for ‘convergence’ or alignment to the single market and a customs union – except where it might get in the way of the more radical elements of a Labour manifesto.

Corbyn’s commitment to a comprehensive customs union, and preference for continue membership of some EU agencies and programmes, will be seen as Labour edging towards a soft Brexit. But the speech as a whole revealed as much of a ‘cake and eat it’ approach as the Government has been accused of:

- a customs union (with tariff free trade) … and a UK say in future EU trade deals with 3rd countries.

- many aspects of single market membership … but not free movement of people.

- a commitment to existing single market “rights, standards and protections” …. but with exemptions from “public service competition directives, state aid and procurement rules and the posted workers directive”.

At a high level, the main components of Labour’s new approach do start to sound like EEA membership: tariff free access, maintaining EU single market standards and rights, and continuance of some EU programmes and agencies.

Meanwhile the EU has published its draft legal treaty for implementing the‘withdrawal agreement’which was agreed in principle between the UK and EU in December. Translating warm words into hard legal clauses has created some concerns, notably on the Ireland – Northern Ireland border. The draft treaty (note it has yet to be agreed by EU heads of state) sets out a ‘backstop’ approach to Northern Ireland in the event that a trade agreement is not concluded between the UK and EU that provides for an open border. This ‘backstop’ would essentially involve Northern Ireland remaining in the single market and customs union – and would therefore create a ‘hard border’ between Northern Ireland and the UK. This backstop position is unacceptable to the Ulster Unionist DUP MPs who provide Theresa May’s government with a working majority in parliament; it is therefore also unacceptable to the Government.

A certain logic starts to emerge if you put these three developments together; the speeches by Theresa May, Jeremy Corbyn and the EU’s draft withdrawal treaty. Theresa May’s ‘managed divergence’ could lead to divergence from EU rules in areas like food and farming which are central to trade across the Northern Ireland border. If the government succeeds in negotiating a trade deal with the EU that allows for ‘managed divergence’ it would most likely create the ‘backstop’ situation in Northern Ireland which the UK Government is opposed to (where the EU envisages a hard border between Northern Ireland the rest of the UK). This creates a Catch 22 for Theresa May’s government – and one which could lead to the collapse of EU-UK negotiations. As I have said before, ‘no deal’remains a very possible outcome.

Even today the odds moved back and forward on the likelihood of a 'transition deal' (agreeing to a period of around two years during which our relationship with the EU will stay much as it is, to enable business to prepare for Brexit). The EU's chief negotiator warned this morning that progress was slow and there were several big roadblocks to agreeing a transition deal with the UK.  Then this afternoon the UK government removed one of these roadblocks, announcing that that the UK will recognise rights to stay for EU citizens arriving in the UK during the transition period.  As things stand it currently looks like the EU and UK may agree a transition deal in principle in the coming months.  

Theresa May faces another Catch 22 situation: parliamentary numbers do not add up for her. As we have seen in recent weeks, there is an ever more vocal ‘soft brexit’ group of Conservative MPs as well as an equally vociferous ‘hard Brexit; group. There is unlikely to be a majority in Parliament for the government’s Brexit position and there appears no majority within the Conservative Party for any alternative. There is therefore a strong chance that Conservative MPs will split on Brexit whatever the outcome of negotiations.

This means that at some point later this year, the Government’s Brexit proposals may be defeated in Parliament. Unable to secure Parliamentary agreement to Brexit, the most likely outcome may be a general election. And in the event of an election, it is a distinct possibility that Jeremy Corbyn would emerge as Prime Minister. This may well lead to a softer Brexit, based on a customs union and perhaps continued membership of the single market. This Brexit outcome – customs union and single market – is generally the one that most business people I speak to want; the Catch 22 for some of them is that if this happens it will most likely be accompanied by tax, nationalisation and regulatory policies that may seem as disruptive to their business model as a hard Brexit….

What this means for businesses and other organisations is that with just over a year to go before ‘Brexit day’, the possible outcomes are still varied and uncertain; indeed rather than narrowing, the range of possible scenarios is actually widening. As I have said before, there remains lots that business can do to prepare for such uncertainty. And increasingly clients are exploring with me not just Brexit outcomes but also some wider political scenarios to inform their business strategy and plans. “Forewarned; forearmed: to be prepared is half the victory”.