The only elements that differentiate Theresa May’s latest move from a Monty Python skit is her lack of a pith helmet and safari jacket.
The British Prime Minister, per the Financial Times, plans to visit with top executives of major Wall Street firms to “canvass” them on “how Britain should structure its departure from the EU to reassure them that Brexit will not damage their UK business.”
Mind you, she is not making this kiss-the-ring trip to New York to “reassure” the financial behemoths. That would mean the UK has a plan and is making the rounds to sell it and perhaps make cosmetic changes around the margins to make them feel important. Nor is it “consult,” which is diplo-speak for, “We’ll listen to your concerns but are making no commitment as to how much if any well take under advisement.” No, “canvass” means they are a valued constituency she intends to win over and is seeking their input for real.
This “canvass” is yet more proof of how out of its depth the UK government is in handling the supposedly still on Brexit. There’s a decent likelihood that May is running to the US because her team is short on staff and ideas and those clever conniving Americans might have some useful ideas up their sleeves. After all, they don’t want to go through the bother of getting more licenses and moving some staff to the Continent or Dublin. It’s much simpler to keep everything in London, particularly since top New York execs might face a tour of duty there, and the housing, shopping and schools are much more to their liking. Mind you, most financial services would remain in London with a Brexit, but Euroclearing will require a restructuring (that will have to be done out of an EU entity).
The embarrassing part is that May is apparently have to solicit input, when the big issue is obvious and binary: will the UK keep passporting rights for banking? This is binary and not hard to understand. If not, UK and US banks will need to obtain EU licenses to do certain types of business and some customer-facing personnel will need to be domiciled in the EU, not the UK. Numerous estimates have been bandied about, and they vary widely. Note that many important operations, like foreign exchange trading, were centered in the UK long before it entered the EU, are not regulated, and are conducted by phone and electronically, so there’s no reason to think they will need to migrate. But the City has taken a harder look, and a lot of core services, like cross-border lending and deposit-taking, would be vulnerable to a Brexit. And law firms and accounting firms that support these activities are likely to shift their staffing commitments across international offices to follow the financiers.
However, the UK banks are operating in a state of delusion as to what they are likely to get out of a Brexit negotiation. They’ve managed to convince themselves they’ll get passporting rights, which means that the status quo would remain largely intact. As we wrote last month in Brexit Delusion Rises Even Further: City Pumping for Presumptuous, Nightmarish-to-Negotiate “Swiss Plus” Plan:
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.
Back to the current post. In case you think that reading was unduly negative, today the Germans said “Hell no” to the idea of the UK getting passporting rights if it were not at least part of the EEA, which is what a “Swiss plus” deal means (see here for more background). From Sky News:
British-based financial institutions will lose passporting rights in the European Union unless Britain remains at least part of the European Economic Area, according to Germany’s top banker.
Passporting enables banks to trade seamlessly across the European single market without the need for licences in individual countries.
Bundesbank president Jens Weidmann said the passporting rights are tied to the single market and “would automatically cease to apply if Great Britain is no longer at least part of the European Economic Area”.
If one assumes an uncharacteristic outbreak of Brexit-related competence from the Government, perhaps the repeated, loud messages of EU officials to their UK counterparts, like “No special deals,” and “No restrictions on labor movement if you are to have access to the single market” have finally begun to penetrate. Perhaps May is going to the US banks to get some ammo to challenge the complacency and happy talk on her side and/or build the case as to why a Brexit would come at an unacceptably high cost to the UK and would do more damage to the Tories than finding a way to back out. But I wouldn’t bet on it.
But assuming these meetings are what they appear to be, they reveal a rudderless negotiating team looking overmuch for input from corporate interests who don’t have a stake in the UK’s best interest, just their profits, top manager pay, and bureaucratic convenience. The comments at the FT are acid. For instance:
So she wants advise from bailed out, fraudsters and market riggers, of course they’d know what’s right for a sovereign nation. Maybe some thing the help Greece got from Goldman?
Hedge Funds will make a fortune from Article 50, bet they are all telling her to go for it
Soft exit = free movement = not available = hard exit = oh dear!
How ridiculous and how embarrassing!
That the silly post Brexit PM should be asking a few US banks what her Government’s most important strategic decision should be and yet not show the slightest inclination to ask either the EU governments upon whom she depends for any deal whatsoever, nor the “experts” within her own country, just shows how out of her depth the whole Brexit Government which she now leads is on every single dimension to this question.
Never in the post war British history has so much depended on the incompetence of so few!
The sooner they make complete fools of themselves the better, for perhaps the UK now needs to make a stupid “hard Brexit” decision before some sensible political coalition regains power in 2020 and re-applies to return to the EU.
What is discouraging in watching this process from afar is that we are coming up on three months after the Brexit vote, and there is no evidence that Tory leaders have listened much, if at all, to their European counterparts, come to grips with what the negotiations entail, or done any planning as to how to deal with the fallout. It’s as if the Conservatives still regard this all as a lark, that things will sort themselves out, and life will continue more or less as before. The British public had better hope that this dilettantish attitude is a sign that the Tories have no intention of pulling the Article 50 trigger. If not, the lack of any sort of serious planning will guarantee a train wreck.