After misreading the likely outcome of last June's Brexit referendum, the British political establishment has rebounded. Taking a deliberate and extremely measured approach, it has managed to avoid any major disruptions to the economy and financial markets. But there is only so much time a "slow Brexit" approach can buy you, particularly in the face of impatient EU partners and also among segments of the British electorates. As such, and notwithstanding some renewed attempts by the likes of former Prime Minister Tony Blair to derail a Brexit altogether, the British government has triggered Article 50 and officially launched what is likely to be a tricky and, at times, heated negotiation that could last for up to two years. And you can add to the sense of overall institutional uncertainty the component that comes from the recent call by Nicola Sturgeon, Scotland’s First Minister, to hold another referendum on independence from the rest of the UK.
The EU-UK discussions process will — inevitably — involve threats and bluffs from both sides, many of which will make it to the public domain as each side postures, positions, and pressures. Already, Prime Minister Theresa May has stated that no deal is better than a bad deal for the UK, a view recently reiterated by her Chancellor of the Exchequer (Philip Hammond). For their part, European officials have warned Britain not to expect any special deal or preferential treatment. They repeatedly have reminded the UK that its either in the EU or outside it, with no in-between.
The negotiation will be rendered even more complicated by the UK's government need to contain the influence of anti-establishment forces at home, a new Scottish referendum, and by its European partners' desire to avoid setting what they see as costly precedents. Yet it is the longer-term economic and security interest of both sides to avoid an acrimonious divorce that would rupture a deep co-dependency that can still be made to work for both sides under new circumstances, albeit not as well.
Replacing something with nothing is not in the interest of either negotiating party. As such, compromises will need to be an important feature of the process.
In a perfect world, the UK and its European partners would iterate a solution that would maintain most of the existing elements of free trade between the two, and only slowly phase out the financial passporting arrangements that allow UK-based firms to easily serve EU markets out of London. They would find ways to grandfather citizens that currently work and reside in each other's legal jurisdictions, and to gradually reduce over time the new migration flow.
This is a destination that serves the longer-term interest of both parties; and it can be defined in a way that limits precedents and other negative spillover effects.
But a viable destination also needs a manageable journey. And this is where the challenges are most acute, with the following three issues likely to play an important role in determining its bumpiness:
The outcome of upcoming European elections, particularly in the Netherlands and France: Should anti-establishment movements prevail there, the core of the EU would face a lot stronger fragmentation pressures from within, making the orderly negotiation of a UK compromise deal even more difficult. Further complications would arise if Italy were forced to call an early election and/or if German Chancellor Merkel were to be significantly weakened in the autumn elections there.
The health of the European economy: A strengthening European economic recovery - and, in particular, the ability to supplement the cyclical engines of growth with more durable structural and secular ones - would go a long way in improving the environment for EU-UK negotiations. If, however, growth were to falter yet again, both parties would find it a lot harder to get their multiple stakeholders to agree on the allocation of a shrinking pie.
Migrant flows: The absorption of refugees from Africa and the Middle East has been one of the main factors that fueled the "leave" vote in the Brexit referendum, as well as other European fragmentation movements. As such, a further significant influx into Europe of migrants would accentuate worries about unequal burden sharing and poor solidarity - which would make it harder for each side to compromise on multi-year transitional arrangements.
While it's the UK that voted to leave the EU, pulling off an orderly outcome is a joint challenge and a shared responsibility. The consequences are significant for both current and future generations.
Navigating an orderly journey and delivering a win-win destination will require that both parties leave their hurt feelings and egos at the door, that they be willing to compromise in a constructive and fair manner, that they engage in effective internal and external communications, and that they secure the buy in of citizens, including some who appear not yet sufficiently cognizant of what is at stake. For this to happen, both sides will need to bring to the table and execute visionary political leadership.
Mohamed A. El-Erian, the top LinkedIn Influencer in 2016, is the author of two New York Times Bestsellers: "When Markets Collide" and "The Only Game in Town." A former Deputy Director of the International Monetary Fund, he is chief economic advisor to Allianz, the corporate parent of investment manager PIMCO where he served as CEO and co-CIO (2007-14). He was Chair of President Obama's Global Development Council.