The Irish border has crashed Brexit negotiations. Here's what you need to know.

British Prime Minister Theresa May (R) and European Commission chief Jean-Claude Juncker arrive for a Brexit negotiation meeting on December 4, 2017 at the European Commission in Brussels. JOHN THYS/AFP/Getty Images

A couple of hours ago, the Financial Times top headline announced “Britain and Ireland agree Brexit border deal.” Now there’s a rather different headline: “Brexit deal falls through over Irish border dispute.” The British pound, which had jumped earlier, has now fallen from its earlier highs. Here’s what has just happened to Britain’s Brexit negotiations — and what is likely to happen next.

The E.U. was important to Ireland’s peace deal

Britain’s decision to leave the European Union has major consequences for both the Republic of Ireland and Northern Ireland (the part of the island of Ireland still under British rule). Decades of violence were ended when Britain and Ireland negotiated a peace deal, in which Britain agreed that Northern Ireland could join the Republic if and when Northern Irish people wanted to, and the Republic of Ireland agreed to abandon its constitutional claim to the North.

One of the key enabling conditions for this deal was that both Britain and the Republic of Ireland were members of the European Union. This had already allowed them to get rid of customs posts at the border between Northern Ireland and the Republic of Ireland. It was also much easier to reach an agreement and maintain it when both countries were part of a broader political union.

This poses problems for Brexit

Now, however, the U.K. is leaving the European Union thanks to the Brexit referendum. This poses some very tricky questions for both the U.K. and Ireland. First, they will no longer have a shared political context, calling the stability of the peace deal into question. Second, they now have to confront new questions. If the U.K. is no longer a member of the E.U., then it is no longer automatically part of the E.U.’s customs arrangements, and Ireland and the U.K. might have to reintroduce customs controls along the border. The Irish and Northern Irish economies are closely intertwined, so that goods move back and cross all the time. These ties would be weakened or severed if border controls were reintroduced.

This is why the border between Northern Ireland and Ireland is one of the three key issues that the U.K. and European Union have to resolve in the “Phase One” negotiations over the U.K.’s exit terms, before they begin to negotiate any new relationship in the future. Under E.U. rules, the Republic of Ireland, like every other E.U. member state, has veto powers over any Phase One agreement, and the E.U. Council President, Donald Tusk, has made it clear that other member states are not going to bully Ireland into accepting an agreement that goes against Ireland’s interests.

Both Ireland and the U.K. are in tricky situations

Both Ireland and the U.K. have to pull off tricky balancing acts. On the one hand, Ireland urgently wants a deal where there are no new border controls between the Republic and the North. Irish politicians fear that the reimposition of border controls would anger Irish republicans, and weaken the peace deal further (it is already in some trouble). They also want an invisible border for economic reasons. However, they also fear what might happen if there were no deal at all between the U.K. and the E.U. A ‘hard Brexit,’ in which the U.K. left the E.U. without agreement on trade and economic exchange, would gravely damage the Irish economy, since the U.K. is Ireland’s biggest trading partner.

Ireland’s ideal would be if Britain stayed in the E.U.’s Customs Union as well as its Single Market (which ensures that regulation does not become a barrier to intra-E.U. trade). Failing that, Ireland would prefer that the U.K. grant a special status to Northern Ireland so that it could keep to E.U. rules.

The U.K., in contrast, does not want to commit to staying in the Single Market and Customs Union. Some within the governing Conservative Party think that this would be a bad idea, and that the U.K. could do better negotiating on its own behalf in world markets. Others are more open to some kind of compromise with E.U. rules, but do not want to make concessions now, since they hope to link future U.K. concessions to E.U. concessions on issues that the U.K. is concerned about, such as immigration.

Furthermore, the U.K. government depends on the support of hard line Ulster Unionists in the Democratic Unionist Party. While these Unionists recognize a pragmatic case for continued economic links (some of their voters are farmers who depend on markets in the Republic of Ireland), they are intensely suspicious of any proposals that Northern Ireland have special status, since they fear that this might separate Northern Ireland further from the rest of the United Kingdom, making a United Ireland more likely. The Conservative government fears that if they make concessions, the Unionists will pull the plug on their government by helping the Labour party win a motion of no confidence in the U.K. parliament, perhaps allowing Labour to win the next election.

This explains the failed ‘deal’

Earlier this morning, the U.K. and Irish governments thought that they had a deal. Both agreed to a form of wording under which there would be ‘regulatory alignment’ between Northern Ireland and the Republic of Ireland. This was intended to make continued trade easier — if both sides shared similar and compatible regulations, then (depending on further negotiations), customs inspections might not be necessary. However, Northern Ireland and the Republic of Ireland would continue to have parallel systems, rather than shared rules that might make Ulster Unionists think that the two parts of Ireland were tiptoeing toward common government.

However, the Democratic Unionist Party has made it clear that it is still extremely suspicious, and not willing to accept this deal. Its leader has said that Northern Ireland must leave the E.U. “on the same terms as the rest of the U.K.” without any “regulatory divergence” that would separate Northern Ireland from the rest of Britain.

The result is that the proposed deal has collapsed. While both the U.K. and Ireland are suggesting that they will keep on talking, and that a new deal will emerge soon, it is likely only to happen if one or another party blinks. It may be that the Unionists are less intransigent than they now appear, and are willing to be bought off with slightly changed wording and other concessions. However, if they did fold, they would likely face a hard time with their voters.

The Republic of Ireland might decide that a poor border deal is better than the risk of a hard Brexit, but again it faces sharp political pressures. It too has a minority government, which nearly fell last week thanks to an unrelated scandal, and its leaders are not likely to want to make concessions that can be used against them in an election.

Finally, the U.K. government could agree (as the opposition has already suggested) to a longer term relationship for the U.K. as a whole with the Single Market. However so doing would likely lead to civil war within a Conservative Party where different factions are already preparing for the next leadership battle. While no-one wants a breakdown of negotiations, it is currently difficult to see which side will be prepared to make concessions.

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