Theresa May Outs Herself as Wall Street’s Poodle in Brexit Talks

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?

Iron Knee
Hedge Funds will make a fortune from Article 50, bet they are all telling her to go for it

Harry Bollinger
Soft exit = free movement = not available = hard exit = oh dear!

Adam Pharaoh
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.

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  1. Jeff

    ” 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.”
    Didn’t Francois Hollande get a “World Statesman Award” for 4 years of this same attitude?

  2. paul

    This is a consequence of the advanced decadence of the UK political class.
    They are in politics for the looting, not much more.

    Stealing assets,blowing up other countries, punishing the poor were all be done by fiat and problems laid at the door of immigrants and the bloody eurocrats.

    This is the first time they have had to experience something that requires statecraft rather than stagecraft and they are inadequate to the task.

    The 2008 meltdown was merely papered over, I’m not sure this one can be, and certainly not by this administration.

    It might be party political justice to stick lazy,egomanical incompetents such as Johnson and Fox in the frontline but it is also a complete admission that they have no real grasp of the situation.

  3. vlade

    May is a good political infighter, but has absolutely no clue to anything outside of her echo chamber of politics. During her time as Home Secretary, she managed to screw up a number of times, but her skill lied in covering it and getting everyone to forget about it.

    Look at her handling on Hinkley Point nuclear station – managed to piss everyone off, but moved on with the same result as if she just kept it going. But, in the meanwhile, she also managed to disassociate herself (in at least public mind) from her responsibility for it under Cameron’s cabined.]

    One word – teflon.

  4. PlutoniumKun

    I think the proof that May doesn’t know whats going to hit her when the A.50 declaration is made is that she didn’t immediately call an election on her nomination. Back in 2007, when Gordon Brown was made PM after Tony Blair, I was amazed he didn’t immediately go to the country. It seemed very obvious to me (and, i thought, most other people) that the UK and world economy was headed for the rocks at the time (although I’d no idea how bad it would be) and that the sensible thing would be to win himself enough time to do what was needed and claim credit in 4 years time for the recovery (Labour were well ahead in the polls at the time). When he didn’t call for an election, that seemed to be proof that the UK establishment did not actually realise there was a storm coming. Thats when I got worried.

    Similarly with May – if she knew how bad it would be, she would surely have called an election during her summer honeymoon period (while Labour is busy self-immolating), and that would give her clear breathing space and a mandate to deal with Brexit in a grown up manner. The fact that she chose to hang on and assume something will work out seems proof that she (and by extension, the people around her), really are clueless.

    1. paul

      Brown would have won and could not help but have been better than what followed, but his own fearful,defensive nature won out.

      That left him open to a prolonged onslaught in the media (similar to the one he contributed to in the Scottish Referendum), one the establishment will not apply to May. After all, who else have they got?

      The fixed term parliament innovation makes things tricky as well.

      1. PlutoniumKun

        Yes, I forgot about the fixed term Act, but I understand there are ways around it (not least, changing the law). Brown was enormously defensive and fearful (why can’t we have leaders who don’t seem to suffer some sort of severe personality disorders?) but at the time it still seemed to me to be a political no-brainer to go to the country at the time so he could have the space needed to ride out the coming turbulence. I am pretty sure the prime reason was that he, and the rest of the cabinet, had bought the ‘no more boom and bust’ and ‘this time its different’ bullshit.

        1. paul

          If they could believe that in 2008, they had more than personality disorders.
          Brown crapped out, plain and simple.

          Alistair Darling recalls:

          ‘When I went across to see Gordon in the flat that evening,
          I told him that nationalization [of RBS] was looking increasingly likely… me
          [he] could see the political watershed we faced.
          It would hark back to the wilderness years, when Labour appeared unelectable.’

          Far better to prop up the corpse of RBS than be accused of being old fashioned.

      2. Harry

        Brown could have won. It was not as clear as you suggest, which was why his fears dominated. He wanted a risk free alternative.

        Frankly Brown was as overrated as Blair. You might hate Corbyn, but his moral compass has proved to give him the kind of strength those nasty bullies like Brown, Blair and Campbell never had.

    2. Inert_Bert

      Great points,

      The most charitable reading of her decision not to call for an early election I can muster is the following:

      1. Having a mandate now, ties her to Brexit inexorably: She’d have to campaign on “making a succes of it” and commit herself politically to a deal that does not yet exist, of which no-one can tell her what it would look like, that no-one will be truly pleased with, and that might be disastrous or even impossible.

      2. Having a mandate now reduces her chances to gain one later, when the actual deal might be on the table. Gaining a mandate for a concrete deal is politically far more valuable to her, both for her post-Brexit legitimacy and for keeping her options open to get there.

      To elaborate on that second point, I think that if she waits until there is a deal, she might have options to frame the election and campaign in such a way as to deflect blame and prolong her reign of terror political carreer. Once there is a deal, she can try to frame the general election as a proxy-referendum and use the campaign to nail any potential conservative rivals more closely to said deal (and its probably disastrous consequences). Even remainers like Osborne would have to campaign for the party’s platform in that scenario.

      She might even consider that in a year or two the political climate could possibly tolerate an actual second referendum. The lack of a mandate now, as well as the existence of a concrete proposal then, would both help strengthen the case for a second referendum.

      Such a course of action might even allow her to wash her hands of the whole business. If the deal is bad, she can present it as a Davis-Fox-Johnson effort and try to stay above the fray, she was in the remain camp after all. This scenario may be what Bankers and Yves’ High tories are betting on.

      Furthermore, a fresh mandate when a specific deal is on the table might sidestep the constitutional concerns over the referendum.

      This is not to say this type of strategy would work of course (for one, it is as yet unclear what the rejection of a deal by referendum would mean except to be thrown upon the mercy of the member-states once more). But not playing the election-card right now might be the best way to maximize her chances to survive. Either way the least this does for her is to allow her to not immediately commit herself (politically speaking) to a deal that has not yet been written and might not even come into fruition in time.

      In all this, I am of course assuming she is primarily moved by her own political career and not the national interest. Considering how the UK got into this situation in the first place, I do not think that is overly cynical of me. And considering the mess Cameron and the Brexiteers left her, I wouldn’t even blame May if her this is indeed her priority.

      All that said, there are constant reminders that a large faction within the Tory-esthablishment simply have no clue:
      Brexit: Blue passport may actually be reintroduced once Britain leaves EU
      Brexit trade deal talks ‘should be conducted on Royal Yacht Britannia’ / Scrapping the Royal Yacht Britannia was self-defeating, short-sighted Blairite point-scoring. Bring it back

      Priorities, right?

      1. paul

        The Royal Yacht Brittania is attracting tourists in the Port of Leith, probably the only useful thing it has so far been used for.

  5. paul

    Hinkley Point is a classic move, a pathetic, deranged response to decades of dereliction in strategic planning.
    While its terrible on just about every consideration, it is no real problem to manage.
    She’ll probably be dead before it powers a single lightbulb.

    That she can get away with it is the central problem

    The red tories fighting their elected leader was far more important then inconveniencing her over this.

  6. Synoia

    The UK appears between a neo-liberal rock and a neo-liberal hard place.

    And is still looking for Tony Blair’s third way, the neo-liberal thrid way.

    There may be a third way, be prime minister for two years, call and election, and ensure you loose the election.

    She’s had the job, got the pension for life, gets kicked up to the lords, and can blame someone else for loosing the election.

    1. PlutoniumKun

      Not forgetting her post resignation autobiography which will earn a multi million pound advance from a Murdoch owned publisher and sell about a dozen copies.

  7. hemeantwell

    The cheery belief that the UK will get special breaks because it is oh so important is

    NC has had several posts focusing on the opportunities Brexit offers to UK bank competitors. Does the UK think that those competitors have no political influence on the EU bureaucracy, especially during a period where the Eurobanks are facing serious strain? It would be interesting to have a more complete idea of what sorts of restrictions those banks would find satisfactory and for what reasons. Passporting rights are mentioned above. Anything else?

    1. vlade

      The only way either of those move to Brexit corner is that the want out of EU or at least EUR. In which case Brexit becomes a sideshow.

  8. Benedict@Large

    Macroeconomics (and with it the sovereignty of states) died the day the right wing killed Keynes. These people we have left in charge are no longer leaders, but rather merely bureaucrats, pushing their pencils along lines they cannot see, but are quite sure are still there. Thatcher is dead, but remains uninterred, waiting to take more along with her to the Underworld. “There is no alternative,” she says.

  9. William C

    May may be playing for time in the hope some gamechanger occurs so that they can forget the whole idea.

    It is what I would do.

    Re Thatcher, she may be dead but Murdoch is not. I am starting to wonder if he was not the senior partner (read about Charles Douglas Home, Thomas Kiernan etc.)

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