Top 3 developments
- UK seeks more than ‘equivalence’ for financial services
- EU draft negotiating guidelines published
- Full impact analysis of Brexit published
UK Update
UK demands more than ‘equivalence’ for financial services
Chancellor Philip Hammond made the case for Britain’s financial services this week, calling for the EU to drop its red line on access in any future agreement. The EU has insisted that ‘equivalence’ was all that could be hoped for by the UK, something the Chancellor described as not fit for purpose given the UK’s intrinsic place in European markets. The Chancellor also used the opportunity to point out that the European Commission had included a chapter on financial services in a draft agreement with the United States as part of TTIP negotiations, which fell apart in 2016. This comes after multiple insistences by Chief EU negotiator, Michel Barnier, that no ‘off-the shelf’ model had ever included financial services to the extent the UK wishes and thus could not be considered.
Tusk announces FTA will be route for UK
Donald Tusk, EU Council President, has announced that the EU will be working towards a comprehensive Free Trade Agreement with the UK based on the UK’s red lines on the Single Market and Customs Union. Tusk mourned the loss of the UK and called the future FTA the first that would ultimately see two countries move further apart than closer together. The European Commission’s draft negotiation guidelines for the future UK-EU relationship, which were published this week, will be reviewed by EU member states leading up to an EU Council summit at the end of March. Once agreed, the European Commission will commence negotiations towards a Free Trade Agreement. The FTA is likely to go further than that of current EU agreements, however is unlikely to offer more favourable terms in sectors provided for under current FTAs given binding commitments to provide other partners the same terms. The guidelines also make mention of the services sector, however movement on the EU’s position on financial services is unlikely at the current stage. Only when negotiations begin in March however, will the full extent of the FTA become clearer.
Full Government Impact Analysis Published
The Exiting the European Union Committee this week published the full impact analysis study conducted by DExEU, deeming it to be in the public interest after earlier abstracts were ‘selectively quoted’, with the full report able to properly inform public debate. Only one section was retracted due to its sensitivity in Brexit negotiations. The report predicts that all negotiating outcomes would leave the UK worse off economically, with Single Market access deemed to be the least disruptive, although this has been ruled out by the Government.
The Devolution will not be televised
Time is running out for the House of Lords to debate an amendment on devolution in the EU Withdrawal Bill according to Cabinet Office minister David Lidington. The Government has thus far been unable to reach agreement with devolved administrations over the future of powers returned from Brussels after Brexit, with the Government seeking initial oversight to ensure UK-wide regulations over up to 25 different policy areas including fishing and food standards. The devolved administrations in turn are seeking for powers to be transferred automatically to Scotland and Wales, with the Northern Ireland Assembly also set to gain new competencies, despite not having an executive in place. A breakthrough will ultimately be needed if the Bill is to pass through the House of Lords, but with the Government fearful that it’ll bind its own hands if it concedes powers, compromises are likely to be drawn out.
McDonnell criticises Government’s negotiation priorities
Labour’s Shadow Chancellor, John McDonnell, has criticised the Government at a British Chambers of Commerce conference, saying they want to “win a deal for financial services first and then worry about the rest of the economy later”. The criticism comes after Labour proposed a customs union with the EU, with protection for manufacturing forming one of the key tenets of such a union. Philip Hammond wasn’t pleased with the intervention, pointing out Labour’s own red lines on financial service inclusion. Differences over the customs union have become one of the key dividing factors in recent weeks between Britain’s two main parties, with the Government insisting that such a union would limit the UK’s ability to negotiate trade deals.
The UK has a trade deficit in goods, and a surplus in service exports with the EU. However, with sales of goods standing at £145bn and £26bn for services, the UK is under pressure to secure as much access to markets as possible in both areas. The EU is seeking a ‘comprehensive free trade agreement’ with the UK, meaning zero-tariffs across many areas.
No border in the Irish Sea says Foster
DUP leader, Arlene Foster, has called on negotiators in Brussels and London to adopt an ‘optimistic, sensible and pragmatic’ approach to Brexit, whilst ruling out a hard border on the island of Ireland or with Great Britain across the Irish Sea. Foster further called out those who had ‘limited experience of the Troubles […] throwing threats of violence around as some kind of bargaining chip in negotiations’. Foster’s speech comes at a pivotal moment in Brexit negotiations, with the European Commission insisting that the UK finds a solution to the border issue considering its rejection of a customs union with the EU. The UK in turn has set out two broad proposals but has asked for the Commission to work alongside the UK in formulating how they might work in practice.
UK gives Guy assurances
Guy Verhofstadt, the European Parliament’s representative in Brexit negotiations, visited London to gain assurances that post-Brexit treatment of EU citizens well not be a ‘bureaucratic nightmare’. After holding meetings with a number of senior secretaries of state, he invited Amber Rudd, the Home Secretary to appear in front of the European Parliament to outline the UK’s position on a number of areas related to migration. He further sought to propose that the UK should stay ‘very near’ to EU rules and standards across several areas where no international standard existed, deeming it important for the future relationship. The European Parliament (EP) will finalise its vision for the future relationship with the UK next week, before it is considered by the Commission and Council. Whilst the EP does not take part in official Brexit negotiations, it does have a veto on the final deal, meaning its stance across policy areas form a key consideration for both sides.
Mr BL-EU Sky
UK negotiators have met with their US counterparts to scope out a future UK-US open skies agreement to replace the one the UK currently enjoys as a member of the EU. Signalling a possible future headache, the US has stated that for any agreement to be formed UK operators would need to be majority owned by parties based in the UK, posing a threat to the continuation of transatlantic operators such as British Airways and Virgin Atlantic. Both operators are either majority owned or soon to be owned by parties based in EU27 states. British operators are also under pressure to move to the EU to satisfy a 50% threshold required by the European Commission to operate between EU states under current conditions. A catch-22 situation remains in play therefore, with the UK having to consider the demands of both the US and EU if it is going to minimise disruption in this important sector.
£2.4bn fine for UK levied by European Commission
Accusing the UK of turning a blind eye to customs fraud at its ports, the European Commission has levied a £2.4bn fine against the member state. The fraud concerns the import of clothes and shoes from China which are subject to the EU’s external tariff, however crime syndicates in the UK have been shown to be intentionally underestimating the value of the goods they import and in turn avoiding taxes and undercutting goods sold by other member states.
The £2.4bn fine would traditionally form a part of a legal dispute overseen by the European Court of Justice, but Britain’s departure from the bloc will mean the case is unlikely to be heard in time. The UK disputes the fine, but it is likely that the European Commission will insist the UK settles the dispute and adds an additional amount onto the final divorce bill as part of negotiations.
European Update
Et nous? Questions President of Hauts-de-France region
With all eyes focussed on solving the Irish border issue, the President for the northern French region of Hauts-de-France, Xavier Bertrand, has asked London and Brussels to avert their gaze and focus on Calais as the busiest trading port between the UK and EU. Citing future economic problems as ten times greater than those between the UK and Ireland, Bertrand said it was a ‘black scenario, but it is going to get darker and darker’. Calais port boss further implored Theresa May and Michel Barnier to draw out immediate plans for the border crossing, with 20-mile tailbacks expected if no deal is agreed. A failure to agree customs arrangements for UK-EU trade risks disrupting the flow of goods across the border, with companies such as Airbus and DHL expressing concern at the associated disruption from longer customs procedures.
The UK has ruled out a customs union but is aiming for a free trade agreement with zero-tariffs across multiple areas. Whilst this will be useful in ensuring ‘as frictionless trade as possible’, more progress needs to be made on the regulatory status of relations between the UK and EU. The UK is set to align its regulations with EU standards in the initial term, but diverge in the longer term in certain sectors, which could lead to delays in the future as goods are processed.
Italian election ushers in Five Star Movement
In a blow for Brussels, parties standing on anti-euro, anti-EU policies have taken the most seats in both houses of the Italian Parliament, the Italian Chamber of Deputies and Senate. Despite ruling out governing in coalition, Five Star Movement, a broadly nationalist party, gained the highest percentage of votes at 32.22% and will now seek to form a government with at least one other party.
With nationalist, populist and anti-establishment parties gaining traction across Europe, including in France, the Netherlands and Austria, Brussels will need to respond appropriately to Italy’s forthcoming government. Issues such as protection of the EU’s borders, migration and equal distribution of economic prosperity across EU member states will all need to be considered if it is to gain legitimacy from both citizens and Government’s concerned with its direction.
Timeline
- 5th – 9th March – Transition talks continue
- 22nd – 23rd March – European Council Summit
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