Brexit Update 3rd August 2018

By August 17, 2018Brexit Updates

Top 3 developments  

  • May seeks support for Chequers White Paper in France
  • Barnier warns of UK proposals impacting Single Market
  • Carney says UK finance prepared to weather the storm if required

UK Update

MacrON to you

Theresa May is set to go on a charm offensive in the French Riviera today as she meets with French premier Emmanuel Macron to try and win him over to her Chequers plan. France has been described by EU diplomats and a former British Ambassador to France as one of the state’s least likely to shift from its rigid Brexit position, making it an essential target for the Government and British diplomats as it seeks political solutions to a technical stalemate. There are several reasons France has been described as reluctant, ranging from Macron’s pro-Europeanness and support of Michel Barnier’s plan, to potential economic gains from restricting UK access to EU financial markets and defence procurement contracts, including the Galileo space programme – both of which are set to benefit France as an economic and major military power. It is questionable whether May will achieve a breakthrough, but with Germany said to be softening its position, May could only need to do half the work. A deal that May is unable to sell to Parliament could result in a no-deal scenario, meaning EU leaders remain aware of the challenge they themselves face if both sides don’t reach compromise.

London Stock Exchange on Tour

The London Stock Exchange has applied for trading licences in Amsterdam for several of its platforms including Turquiose, TRADEcho and UnaVista as it begins the implementation of its Brexit contingency plans. The move will allow it to continue to offer services to EU customers after the UK leaves the bloc and follows a move by Deutsche Bank of its euro denominated derivatives trades from London to Frankfurt. Whilst the LSE remains in London, having reported a 30% pre-tax rise in profits in the first half of 2018, the partial move to Amsterdam will ensure the continuity of many services regardless of the outcome of negotiations. LSE’s CFO has warned against a deal that leads to increased fragmentation of markets, which increases costs and risks, and instead called for ‘existing benefits to be preserved’. The UK and EU are believed to be edging closer to a deal, however rhetoric over the possibility of a no-deal scenario if negotiations suddenly break down in the coming month is also increasing, meaning contingency implementation is more likely until the UK and EU look to be closing in on a final deal

NIESR Forecast

The National Institute of Economic and Social Research (NIESR) has published a report detailing a £500 cost to each UK citizen of leaving the EU on the terms set out in the Chequers White Paper. The forecast follows a warning by Jeremy Hunt that leaving the EU without a deal is a possibility unless the EU changes course. In a no-deal scenario, the NIESR forecasts a £800 cost equivalence per person, which could increase once the impact on productivity is considered. Liberal Democrat leader, Vince Cable, said that “no one voted to have less money in their pocket”, whilst Alison McGovern MP said it was very hard to see an upside to Brexit.

Doctor, doctor.

A health minister has proposed shortening the required time it takes for medical students to become doctors from five years, required under EU rules, to four years. Bringing forward the “point of registration” would mean students no longer need to undertake an additional year of education after graduating from medical school and is likely to save millions of pounds as set out in a 2013 independent report. Action Against Medical Accidents has warned against ‘dumbing down’ requirements and seeking a quick fix, stating that any changes must be carefully risk tested. The idea was highlighted as one area that the UK could diverge from EU rules after Brexit when Stephen Barclay was asked about the benefits he pointed to savings for training doctors, the NHS and an increase in the number of doctors qualifying in UK medical schools.

Quantum of Solace

Bank of England Governor Mark Carney has provided reassurances that the UK’s financial sector is ready to weather the storm of a no-deal Brexit. He cited tripled capital reserves of banks over the years since the financial crash, as well as ten times the amount of liquidity to deal with day-to-day cash trades as two reasons the UK is ready for a shock “whether it comes from China, abroad, or a no-deal Brexit”. He further stated that the Bank had “meticulously gone through the types of risk associated with a no-deal Brexit.” French Bank Societe General has predicted a no-deal scenario would lead to 0.5% lower GDP growth for up to 10 years in the UK economy, with a resultant 5% drop in the value of sterling against the Euro. However, this is far from certain given the many factors involved and possibility of new agreements with the EU and other being forged in the coming years.

The Bank of England increased interest rates to their 2009 levels at 0.75% this week also. However, the rate rise may have been too soon after service sector results were released showing business activity at its slowest pace since April and the rate of job creation at its weakest since August 2016. The service sector, including financial services, remains one of the areas outlined in the Brexit White Paper that will no converge with EU regulations in the long term, unlike goods. The Government is keen to build on the growth seen over the past 10 years to non-EU states. The UK service sector accounts for just under 80% of GDP whilst exports of services have increased over 70% in the last 10 years. Getting bank rates right in the upcoming months and years will be crucial to manage inflation as the UK’s economy is set to be diversified through new bilateral trade agreements when it leaves the EU.

National Pastimes

After a long period of joint-queuing with our EU counterparts, we are set to go it alone post-Brexit as UK ports introduce a UK-only queue, with others falling into the ‘Rest of the World’ lanes. The change is being planned for by the Home Office, as increased checks are undertaken on those passing through the non-UK lanes which traditionally are manned instead of having digital passport scanners. It is also possible that the EU may require UK citizens to pass through non-EU lines from March next year when the UK ceases to be a full member, although this remains unlikely given the UK will still be in the EEA and under EU law. Post-Brexit the UK is then set to “take-back-control” of its queueing lanes, and therefore our collective national pastime.

Food security questioned

Ian Wright, Chief Executive of the Food and Drink Federation, has said that it is “essential” that the government spells out the ramifications of a no-deal scenario when it releases its 70 technical notes this month. Saying that the federation had yet to discuss its major concerns with the Government, it reiterated that whilst the government was sure to understand food chains “it’s not possible for them to understand them as much as the people who actually operate them.” There has been concern about the level of food security procedures the UK has in place, but the Government has said no plans to stockpile food currently exists. Downing Street reiterated that the UK has “excellent food security” with “strong domestic production and strong imports from third countries”, which would remain the case after Brexit.

Labour Brexit policy set to be challenged

Support is growing across Constituency Labour Parties (CLPs) for a public referendum on the final deal, with leaders considering mounting a challenge to current policy at the Labour Conference in the Autumn. Official Labour policy is to ‘not have a second referendum, but to respect the result of the referendum’ held in June 2016. If the debate is brought forward and a vote in favour is supported, it is unclear how the party leadership will respond. Even if it is supported by the leadership and Labour MP’s, it is unlikely to lead to a majority in support in Parliament.

Groups campaigning for a second referendum have questioned whether a potential future vote should give two or three options. One that asks to reject or accept the UK-EU deal, or one that adds the option to remain in the EU. However, given both major parties commitment not to ‘re-run the last referendum’ and ‘respect the vote’, this last option is unlikely to be included if a referendum was held. The likelihood of which remains extremely low.

UK and China talk trade

Following a visit from Foreign Secretary Jeremy Hunt, China has offered to begin trade negotiations with the UK on a post-Brexit trade deal. With UK exports to China reaching £22.2 billion last year, and imports rising to £45.2 billion, the UK will be seeking to “intensify the golden era” between the two nations. China is currently in the midst a trade war with the US, with tariffs imposed by both sides as US President Donald Trump seeks to lower the trade surplus the US currently has with the US. As a major global economy, second only to America, China represents a key area the UK hopes to expand trade into. But given its size, several challenges present themselves as both sides seek to gain greater access to each other’s differently calibrated markets. The talks have not been given an official date, but both agreed to “expand the scale of trade and mutual investment.

EU Update

Hearts and Minds

20 newspapers across the EU have published an article written by EU Chief Negotiator, Michel Barnier, where he sets out the perceived threats that the UK’s white paper poses to the UK Single Market – described as one of the EU’s greatest achievements, ‘that the UK helped shape’. The article further showed a softening of the EU27’s position to the border issue in Northern Ireland, which was described as “the biggest risk to a deal”, with Barnier committing to improve the text on a backstop option with the UK.

The article comes at a key point in talks, as the Government seeks to gain support for its proposals with EU leaders directly. As the body in charge of negotiations, the EU Commission is the day-to-day face of UK-EU Brexit talks. However, as its position is defined by member states, the UK is seeking political backing for its proposals to help influence the tone and outlook of future talks. Michel Barnier’s intervention seeks to assert the EU-wide agreements on areas such as the Single Market at a time when member states often come under pressure from internal actors to protect industry and other areas of national life. The Commission will therefore remain a vital component of negotiations as the key arbiter as a deal progresses.

Upcoming Key Dates

  • 18th October: EU Council Summit, including sign off of the EU Withdrawal Agreement
  • 29th March 2019: UK planned exit from the European Union
  • 30th March 2019: UK planned transition period.
  • 31st December 2020: UK planned exit from the transition agreement.