As an expert I know who has written regularly on EU trade treaties said, “Whatever the Brits are smoking, I want some. Not only is it very strong, it’s clearly a hallucinogen.”
It’s astonishing to see what passes for leadership in the UK retreat into its own echo chamber and ignore the clear and consistent messages sent by EU officials, the even clearer signals of their actions in recent trade matters, the content of the various precedents that serve as points of reference for a possible Brexit deal, and the difficulties of negotiating any particular deal.
The only logic I can see behind the City pumping for a wildly unrealistic and unworkable “Swiss plus” deal, aside from sheer arrogance and stupidity, which has been on display in abundance, is that it might be a cynical ploy. Depict a plan that is destined to go nowhere as eminently fair, reasonable and achievable when it isn’t but the UK media will broadcast otherwise, then blame those evil controlling Eurocrats as the problem, as opposed to the unreasonable UK expectations.
The big problem with this charitable interpretation is how British officials get European officials to trash the UK fantasy without pulling the Article 50 trigger.
As to why the City’s plan is wildly off base, let’s start with the overview from the Financial Times:
The City of London has given up hope of universal access to the EU single market and is now seeking a bespoke deal for its different sectors to trade with Europe, with similar but stronger ties than Switzerland…
Mr [Anthony] Browne [chief executive of the British Bankers Association] cited Switzerland’s trade deals with the EU that give some sectors, such as life insurance, full two-way access to the single market via a so-called passporting deal in return for keeping its regulation at an equivalent level to that in the bloc.
Swiss banks do not benefit from any such trade deal, meaning they must do most of their EU capital markets business from their London subsidiaries.
But the City, which was overwhelmingly in favour of remaining in the bloc before the June 23 referendum, will argue that because the UK is the biggest export market for the rest of the EU it should be able to negotiate a beefed-up version of Switzerland’s arrangement…
Earlier this week, Michael Roth, Germany’s European Affairs minister, said that the UK could gain “special status” with the EU and have a bespoke deal. He repeated warnings, however, that the UK would not be able to “cherry pick” its position.
Why is this nutty?
Europan officials have made it clear that any Brexit arrangement needs to be consistent with the templates for other deals. Consistent does not mean “the same” but it means generally that it needs to be fair with respect to the gives and gets of the arrangements that other non-EU members have. In other words, even the very term “Swiss plus” which seems to reflect an expectation that the Brits can get a better arrangement that Switzerland has, is fundamentally wrong-headed. Conceptually, they could use the Swiss treaties as a starting point for formulating their relationship, but the negotiators need to expect to make tradeoffs: if they want a better deal than Switzerland on one axis, they need to make a concession on some other element.
The general tenor of the EU negotiating posture has become frostier since the UK voted for Brexit. The cheery belief that the UK will get special breaks because it is oh so important is contradicted by the consistent cool messages EU leaders have sent, and more important, their stern posture toward other trade supplicants of late. Swiss citizens in a binding referendum voted in 2014 to restrict immigration and the arrangements must be in place by early 2017. The EU has said firmly that Switzerland will lose its access to the single market if it restricts immigration. Similarly, Canada and the EU recently agreed on the terms of a trade pact which took seven years to conclude. In the wake of the Brexit vote, the European Commission threw a spanner in the works by stipulating that the pact be ratified by all the parliaments in the 28 member states. This means that any country that feels the Canadian deal will put it at a disadvantage has a veto.
Passporting rights for financial services is a huge ask. Note, as the pink paper points out, that the Swiss arrangement has passporting for life insurance only, a much smaller sector for them than banking. Recall that the EU was already trying to take a chunk out of the City by requiring that the UK be barred from Euroclearing. The only reason the EU lost that suit (in which the powerful ECB was one of the plaintiffs) was that the European Court of Justice ruled that discrimination of that sort against an EU member was not permitted. With the UK out of the EU, the Euroclearing business will need to be migrated to the Continent. We’ve also pointed out that European member states, such as France, Germany, the Netherlands, and Spain have large banks that are eager to take a piece of the City’s business. And even though British and American concerns that operate out of the UK can probably hold on to much of their franchises by reorganizing their operations, the UK still comes out a loser because people and activities will move out of London to other cities in the EU.
The Financial Times story points out that passporting is important to the provision of quite a few services:
Both the BBA [British Bankers Association] and [chair of Sandater UK] Ms [Shriti] Vadera’s task force — known as the European Financial Services Chairman’s Advisory Committee — have spent hours examining what access the City would have to the single market without a bilateral trade deal to replace EU membership.
They have found that many areas of the industry — such as cross-border lending and corporate deposit-taking — would be left without access to EU customers. Their work mirrors a parallel assessment being made by the Treasury.
What could the UK possibly give up in return for such an enormous concession? I can’t come up with any fix save a ginormous bribe, um, annual contribution, which would be anathema to British voters.
The UK will not get concessions on immigration if it is to have access to the single market. European leaders have been completely consistent on this issue, and with good reason. It would be political suicide for them to let the obstreperous UK get a special break when EU members allow freedom of movement. The tough posture towards the Swiss was a warning shot. The Financial Times acknowledges this issue but weirdly downplays it:
A likely obstacle to achieving the type of bespoke trade treaty that many in the City are pushing for could be an EU demand that the UK accepts freedom of movement of people from the bloc as a condition of keeping any single market access.
Given how passionately many Brexit supporters want to control immigration, they are unlikely to accept the type of arrangement that Switzerland and Norway have in effect accepted by joining the Schengen passport-free travel area.
A Swiss-type deal would be nightmarishly complex to negotiate. Due to competing duties, we’ve been remiss of late in not writing up the huge difficulties the UK is having in assembling a remotely competent and sufficiently adequate in size team to handle Brexit talks. The UK has not had to handle any meaningful trade talks in decades, so it has no one with relevant skills in house. To make matters worse, has severely hollowed out its Foreign Office, so it is even lacking in generalist negotiators. The difficulties in getting a team include: no one wants to accept government pay when they can make a multiple of that getting hired through a mercenary like an outside law or accounting firm; those firms tend to have siloed experts (usually by industry), making it hard to make tradeoff across issues and areas; the sort of negotiators that the Brits might be able to tease out of retirement or poach from Brussels are pro-EU and will not be philosophically aligned with UK objectives.
One analysis warned that one of the major objectives of the deal, for the UK to have more national sovereignty, was almost certain not to be realized in practice. Why? UK officials at all levels would be so taxed by a Brexit (recall that many UK rules and regulations that reference EU agreements would need to be redone as well) that they would almost certainly revert to copying and pasting existing provisions!
A Swiss type deal makes all those difficulties vastly worse because it is not one deal (as say, the TPP and the TTIP are) but a huge raft of separate treaties. As Lee Sheppard of Tax Notes explained in early July (no online source):
Switzerland has more than 100 separate agreements with the EU, which it negotiates sector by sector. Switzerland has to accept free movement of people from the EU, which threatened to throw it out of the trading area when it proposed to restrict immigration from the EU. The EU is trying to persuade Switzerland to abide by CJEU decisions. Switzerland also contributes to the EU budget. So even though Switzerland has a pretty good deal, it still gets pushed around a lot, as its recent concessions on bank secrecy demonstrate…
Despite having a lot of bilateral agreements with the EU, Switzerland does not enjoy the extensive market access that the UK would need. Switzerland lacks the financial services passport but can sell insurance in the EU. For those privileges it follows EU rules and contributes to the EU budget.
Reality check: it took Canada seven years to negotiate a vastly simpler, less contentious agreement. Its approval was expected to take a minimum of a year before the European Commission got cute and imposed a 28-parliament signoff requirement. The Financial Times admits this might be a wee problem:
There are fears that even if an acceptable deal is struck between the UK and Brussels, it could be scuppered if one of the 27 member states rejects it, as happened in April when the Netherlands voted in a referendum to rebuff a planned EU free-trade accord with Ukraine.
So as we’ve said before, the UK expects to get a pony in its Brexit talks. Good luck with that.