We’ve not said much about Brexit in the last few weeks because reader comments on those posts have been exceptionally insightful, so we thought we’d hold back. Hence a bit of catch-up now.
While the progress of the Great Repeal Bill through the House of Commons is the big Brexit event this week, far more important was the impasse between the UK and EU negotiators in their third round of face-to-face talks at the end of August. The Brits thumbed their noses at the EU side by blowing off the first day, which occurred on a bank holiday Monday. While David Davis and his team did show up that day and made a short statement along with his counterpart, Michel Barnier, the talks, such as they were, didn’t start until Tuesday at 11:30 AM….which I guesstimate is about when a UK team would have been ready to go to work if they had taken the very first flight that morning out of London to Brussels.
Things did not get better as the week went on. There was a near-total dearth of any progress. The UK kept insisting that the EU include a future trade deal in this phase of the talks, when the EU has made clear from the outset that that is off the table until enough progress on the divorce issues are resolved, in particular the three teed up for this round: the movement of people, the so-called exit bill, and the Northern Ireland border.
The really embarrassing part of this UK effort to renegotiate the shape of the table is that the Brits might actually think their gambit might succeed, as opposed to simply grandstanding for the benefit of Brexit fans. If the Foreign Office were competent, a question that really is in doubt, it would recognize that the EU cannot negotiate these issues even if Barnier wanted to. Barnier and his team had to obtain approval for his brief from the 27 remaining EU members, which he got at the end of May, and he does not have the latitude to go beyond those parameters. 1
What is so disconcerting, even at this remove, is that the UK’s delusion hasn’t dissipated in the slightest. It instead has taken new, creative forms. For instance, the UK produced a series of position papers before the August session and seemed really chuffed about them. They were typically 12-14 pages each. The EU’s documents on the same issues, by contrast, had already been out and were typically over 100 pages. And that isn’t due to Eurocrat verbosity. These are complex issues. A 10-20 page document is a napkin doodle relative to the level of specificity needed.
And from a negotiating perspective, some of the papers were a joke. For instance, the one on a possible customs deal (which remember, the EU is not prepared to discuss right now) set forth two incompatible options. That’s not how you negotiate. You present your position and hopefully have some planned fallback options.
A Bloomberg editorial at the end of August poured cold water on the UK customs proposal for a different set of reasons:
The U.K. has now officially embraced the idea of a transitional deal to bridge the gap between exit in March 2019 and the conclusion of a long-term agreement. That’s crucial. There’s no chance of designing a final deal by that fast-approaching deadline.
Trouble is, it still isn’t clear what kind of transitional deal May and her ministers want. To work as intended, this interim arrangement needs to keep Britain’s existing obligations almost entirely intact. Over the weekend, Labour belatedly announced it has come around to this position. The government, so far, has not.
There’s no point in seeking a transitional deal that will be almost as contentious and complicated as the final one. To be done quickly, it has to be simple. More than that, it also has to put the U.K. in a plainly disadvantageous position.
Britain is the supplicant in this process, and the transitional proposal shouldn’t ask for favors, much less demand them. It should say, in effect, Britain will abide by EU rules until the long-term deal is done, even though it will no longer have a say in deciding what those rules are. That’s the price of being granted an orderly rather than chaotic departure.
The government’s paper on future customs arrangements suggests “two broad approaches” — one that requires a customs border with the EU, and one that doesn’t. Pending agreement on that eventual outcome, Britain wants “a model of close association with the EU Customs Union for a time-limited interim period.”
That could mean a lot of things. It would be better to say that Britain wants to remain a member of the EU’s customs union until the longer-term deal has been finalized. Even that, by the way, would not be as simple as it sounds. But a deal that leaves the U.K. half in and half out of the customs union would be much more complicated and does not meet the immediate need.
In fairness, Treasury Secretary Phillip Hammond has been pushing for something along the lines of an “off the shelf” transition deal, which is code for “something a lot like the status quo”. Theresa May, who increasingly looks like a figurehead, is expected to signal the direction the Tories will take on this issue in a major Brexit speech this month.
The result of two days of talking past each other in August (which should have been a week) is that the already not great interpersonal relations between the two sides have become more difficult. For instance, New Europe called them “increasingly bad-tempered negotiations“. The UK side also made statements to save face with its home audience that were clearly not helpful to the negotiating dynamics. For instance, from the BBC:
Michel Barnier said: “There are extremely serious consequences of leaving the single market and it hasn’t been explained to the British people.”
The UK has hit back, saying the EU does “not want to talk about the future”.
Brexit Secretary David Davis said it was “frightened” and the UK would not be bounced into a divorce bill deal.
The importance of the human dynamic is not to be underestimated. One of the reasons the Troika became so punitive towards Greece as its 2015 negotiations were failing is that the creditors felt, with some justification, that Greece was negotiating in bad faith. It would make commitments in the talks and then repudiate them less than 24 hours later when the team returned to Athens.
Brussels had long warned the U.K. that Brexit could not mean keeping the privileges of EU membership without the obligations.
But after three rounds of formal negotiations, and a flurry of papers laying out where it stands on key issues, London’s approach looks less to EU leaders like the “cherry-picking” they warned against and more like a demand for a whole cherry pie — with a big scoop of ice cream on top to boot.
On every major issue, from rejecting the EU’s approach to a financial settlement to trying to fast-forward the discussion of a new trade and customs deal, and refusing to accept the jurisdiction of the European Court of Justice, the U.K. has laid out a vision of a post-EU future in which things only get better for Britain — and at no cost.
These disagreements are at the heart of an impasse that both sides fear no amount of negotiating will break: EU leaders and their negotiators insist that Britain must accept that there are negative consequences of leaving the EU while the U.K. government is intent on proving to its constituents that the country is better off single than attached.
And we have more fresh proof of how deep the denial in the UK runs. City AM today has a report, Hammond gives City first glimpse of government’s Brexit position on financial services. Among other things, the article describes how finance players are getting to be unhappy that the EU has not presented its position. Wowsers.
Apparently City AM and pretty much everyone living in the Brexit haze did not get the memo from Bank of England governor Mark Carney, to prepare for a hard Brexit.
First, there is the “What about ‘no’ don’t you understand? problem. The EU is not talking about any of this stuff until enough of the departure issues are resolved. Second, the EU has every reason to delay. Big financial firms are wedded to their profits, not countries. The day after the Brexit vote, the big international banks started to work on getting additional licenses in the EU. They’ve also been lining up office space. Third, the UK labors under the delusion that the EU needs the City of London. The Continent is not so enamored of finance or capitalism generally, and its needs can be served out of Frankfurt, or Amsterdam, or New York. Fourth, even if the EU were to want to play nice with London, services deals take much more time to negotiate than trade deals, so the odds that the EU and UK could work out a financial services pact by the Brexit date are low.
And the UK is taking steps that will make any deal on financial services even more difficult. From City AM:
Hammond spoke hours after a Lords committee was warned that the EU Withdrawal Bill would raise “major issues” for the sector from exit day.
The bill would give the powers to “correct deficiencies” in EU law, which means equivalence could not be relied on, said Cambridge professor Eilis Ferran.
“We will already be doing surgery on the body of EU law, so we’re not going to match on exit day,” she said.
The mention of “equivalence” is yet another tell that plenty of people in the UK who ought to know better are sticking their fingers in their ears and refusing to hear what the EU has said. From a February post:
The Financial Times obtained access to a European Commission document that puts paid to a pet proposal for how the City could have its cake and eat it too in a Brexit, that of the implementation of an “equivalence” regime. We had been skeptical that this arrangement would be approved by the European side. Our view appears to be correct.
While this had not been fleshed out in any detail, the UK proponents argued that London could be permitted to service customers on the Continent more or less as before if UK regulations were deemed to be “equivalent,” since the EU had already allowed for that with some financial services.
Moreover, as we pointed out, even an equivalence deal would be shaky, since the EU can withdraw the right to operate under equivalence rules with a mere month’s notice if they deem the other country’s regs to be not equivalent. So what was the UK’s fantasy as of early this year? Per an earlier Financial Times’ story:
TheCityUK argues that issue can be dealt with by the UK negotiating a long term deal that would establish the principles on which equivalence was founded and also creating a mechanism to resolve disputes.
As we pointed out:
This is tantamount to asking the EU to overturn its legal system to accommodate British bankers. Na ga happen.
So here we have the EU having already nixed the notion of equivalence, while we have the UK side saying that they fully expect to change UK laws relating to financial services to be less consistent with EU rules, and by implication, they expect the EU to bend. I can’t come up with words adequate to describe the depth of the pathology at work here.
Clive gave a related sighting from the August bank holiday weekend:
I have the tiniest smidge of sympathy for May because the party her leadership is supposed to corral in to some semblance of coherent, logical thinking (a necessary precursor to a strategy which isn’t a dingbat delusional) is in a world of its own. I spent the holiday weekend at my mother-in-law’s and went to a garden party hosted by her neighbour who is a bit of a leading light, as so often haughty well-heeled women are, in the local constituency Conservative Party Association. The Constituency itself is hard line swivel-eyed Brexit-land.
I attempted to engage some of the other guests (a lot of party members) in conversation about what compromises they were willing to make for Brexit, what the trade-offs should be, what the electoral implications were and so on.
On immigration, I asked if low-wage low-skill industries like agriculture were, in their opinions, acceptable casualties to deterring net migration, if so, what about food security, what about the agri-businesses which owned a lot of the industrialised food production who were big conservative party donors, what about if EU migration was simply substituted for non-EU migration and the like. It was like I’d thrown a glass of tomato juice down their dresses / shirts. To their way of thinking, it was all delightfully simple and pleasantly consequence-free, you merely leave the EU and these things sort themselves out.
On the CJEU, I asked if we weren’t to fall under its jurisdiction, then surely we’d have something akin to it, as most if not all “trade” treaties rely on some sort of ISDS. Nope. The marvellous British system of justice would be just fine. It was the Best In The World (TM).
In the end, I got told to stop making conversation awkward as people were beginning to stare. I listened in on their conversations, they were merely talking the Brexit book with self-reinforcing beliefs that we just need to tell the EU to sod off.
Little chance, then, of May being able to get anywhere with that lot. Daily Mail land isn’t a handy cheap-laugh metaphor; I just spent the weekend there.
Based on Clive’s intel, I would not be hopeful about May taking a realistic position on a transition deal. It would be better if I were proven wrong.
1 In a display of cognitive dissonance, David Davis has made statements that show he does understand that Barnier’s hands are tied in terms of the order in which issues are to be negotiated. And this should not be a surprise, since the EU has said from the outset that the sufficient progress had to be made on the separation matters before it was prepared to talk about future arrangements. Yet Davis whinged as if Barnier could defy his marching orders. From Politico:
Davis also publicly declared a frustration that U.K. officials have voiced privately for weeks — their view that the EU27 are being overly rigid in their demands and have given Barnier and his team no flexibility to compromise. Again repeating his line that the EU’s rigid sequencing of the talks (divorce first, future relationship second) makes no sense, Davis implored his interlocutor to put “people over process.”
“For weeks”? They woke up to the fact the EU was serious that late in the game?