The UK press is in a tizzy tonight over the EU’s lead trade negotiator Michel Barnier having had to stoop to make extremely explicit a position the EU has taken from the morning after the Brexit vote: any future relationship has to fit within the framework set by existing deals. The most common expression has been “no cherry picking” which along with the many other variants, EU leaders have including in public pronouncements on Brexit.
An exclusive interview with Barnier in Prospect (hat tip Richard Smith) set off the pathetic spectacle of the UK press and officialdom reacting badly when forced to swallow even a tiny dose of Brexit reality. Key sections of the interview:
What about his determination to impose the sequencing of the negotiations rather than discussing immediately about trade agreements as the British government had hoped?
“The British had the idea they could mingle everything: the price for past commitments, the financial issue and the future. We said: first we settle the past, like in any separation, then we start talking about the future. So parallel talks will start probably next March. The actual negotiations on the future relationship will only begin once the UK leaves the EU.”….
Barnier continues: “They have to realise there won’t be any cherry picking. We won’t mix up the various scenarios to create a specific one and accommodate their wishes, mixing, for instance, the advantages of the Norwegian model, member of the single market, with the simple requirements of the Canadian one. No way. They have to face the consequences of their own decision.”
As we said earlier, there’s be nothing new in what Barnier said above. WTO and EU trade officials have said that the UK cannot negotiate a new trade pact with the EU until it is a third country, meaning it has left the EU. Yet Barnier seems to be making a one-man PR push to try to cut through the fog in Britain. He said pretty much the same thing a few days earlier. Per Politico:
By the time the U.K. leaves the European Union it will only be possible to draw up a “political declaration” on the future framework for trade with the bloc, not a full trade deal, the EU’s chief Brexit negotiator Michel Barnier said Tuesday.
Speaking at a press conference after a meeting of foreign affairs and EU ministers in Brussels, he said there is not enough time to do anything more detailed, but also that agreeing a full trade deal would be prevented by legal and technical constraints.
His comments were in stark contrast to those of the U.K. Brexit Secretary David Davis, who told the BBC’s Andrew Marr program on Sunday that barring “minor tinkering” by the time of Britain’s exit date of March 2019, “we would expect the substantive trade deal to be struck.” He said that the formality of signing would need to happen “one minute, or one second, after we leave.”
Mind you, there was never any basis for thinking the EU would go along with David Davis’ “sign right on the heels of official Brexit” fantasy. If he had still been hopeful, all he had to do was read the December 15 guidelines issued by the European Council:
The European Council reconfirms its desire to establish a close partnership between the Union and the United Kingdom. While an agreement on a future relationship can only be finalised and concluded once the United Kingdom has become a third country, the Union will be ready to engage in preliminary and preparatory discussions with the aim of identifying an overall understanding of the framework for the future relationship, once additional guidelines have been adopted to this effect. Such an understanding sho
uld be elaborated in a political declaration accompanying and referred to in the Withdrawal Agreement.
Look at all the words clearly signaling that any talks that happen in the neighborhood of a trade deal will be at most early-stage clearing of some underbrush.
Even if the EU had wanted to be somewhat accommodating and hash out some preliminary issues before the departure date, the timetable for negotiating trade deals means even this concession, had the EU signaled any receptivity to it, wouldn’t buy the UK as much as Brexit fans have fantasized. The EU’s recently completed agreement with Canada took seven years to negotiate, and it is certain to be less daunting than a EU-UK deal would be. Services are an inconsequential part of the Canadian deal, CETA, while they would be a a major constituent of any EU-UK agreement. Services agreements are more difficult and time consuming to consummate than trade deals.
And on top of that, as Sir Ivan Rogers has pointed out, trade deals have always been done between partners that want to get closer to each other. Concluding one with a party that has an express desire to get further away will almost certainly be more difficult, which means slower.
Look at the timeline. A two or even three year transition isn’t remotely enough time to get a new trade pact with the EU in place. The UK faces a very hard Brexit unless it relents and decides to stay in the customs union (as in a famed Norway-type deal) or the single market. All a transition period does is allow the UK to get some other types of agreements with the EU and perhaps other countries stitched up.
However, a few years down the road can be a very long time in political terms. Remember that May’s snap election was seen as a masterstroke, potentially dealing a fatal blow to Labour? But even a climbdown to a Norway-type agreement, which presently has been ruled out, would still exclude big parts of the UK economy. From Simon Nixon in the Wall Street Journal:
The EEA doesn’t pertain to the EU customs union, all EU free-trade agreements and agriculture, so it could only be a partial solution and would mean striking many other deals.
And the UK would have to agree to the “free movement of people” which would be a bitter pill to swallow.
A companion Prospect article describes why Barnier merely reiterating the EU’s position in an explicit manner so as to hopefully penetrate the UK’s delusion, has produced indigestion. Even though this again is familiar ground to regular readers, it’s still sobering to read a short recap:
Norway represents soft Brexit: it lives by nearly all EU rules…As a result, it can trade in the single market as if it were an EU member.
Canada, by contrast, represents the hopes some hold for hard Brexit…in charge of its own rules on immigration and much else, it has nevertheless struck a deal with the EU covering free trade in goods and a few other ground rules of doing business, such as in government procurement.
May’s whole approach to managing the Brexit process and her turbulent party has been to insist that the choice between Canada and Norway can be transcended….
Instead of a Norwegian or Canadian Brexit, Britain would negotiate its own tailor-made “red, white and blue Brexit”, offering the best of both worlds. The Brexit secretary, David Davis, has been most explicit in suggesting there can and will be a middle way, what he has called “Canada plus plus plus.”
This shouldn’t be a surprise. Barnier is just explaining what the latest European Council guidelines said. Again from that document:
The Union takes note that the United Kingdom has stated its intention to no longer participate in the Customs Union and the Single Market after the end of the transition period, and the European Council will calibrate its approach as regards trade and economic cooperation in the light of this position so as to ensure a balance of rights and obligations, preserve a level playing field, avoid upsetting existing relations with other third countries, and to respect all other principles set out in its guidelines of 29 April 2017, in particular the need to preserve the integrity and proper functioning of the Single Market
I hate to have to keep coming back to this point, but the kerfluffle makes clear that pretty much no one in the UK press, or for that matter, in May’s own government, can be bothered to take the time to read and comprehend a mere four page, obviously extremely important and very clearly written document. Honesty, I don’t know how Banier can keep his cool in the face of such rampant incompetence.
We also find the UK continuing to act as if the EU’s guidelines won’t be binding. The surgically precise European Council guidelines made clear the UK’s transition period would be a standstill: it would be just like being in the EU now, except it wouldn’t get to vote on anything. It would still pay dues and still be subject to all EU rules. Yet ITV News reports that May is planning to negotiate other trade deals during the transition period. Aside from the fact that the Foreign Office is so overwhelmed by Brexit that it is highly unlikely that her Government has the capacity to do that, negotiations like these would violate EU rules.
And that’s before we get to the elephant in the room….before the UK will be permitted to discuss “the future relationship” in a serious way, it needs to finish up its “first phase” work. In other words, the European Council approval of allowing the UK to move to “second phase” issues was qualified and depends on certain actions taking place first. From the final text:
It [the Union] nunderlines that negotiations in the second phase can only progress as long as all commitments undertaken during the first phase are respected in full and translated faithfully into legal terms as quickly as possible.
Translation: the EU might entertain some talk about Phase 2 topics, but nothing will be concluded on them until Phase One is wrapped up. And that means specifically memorializing the “commitments undertaken” as in turning the statement of intent in the Joint Report into binding language. That in turn means resolving the unresolved and unresolvable contradictions in the position the UK took with respect to Ireland. The only way its no hard border solution works is by staying in at least the customs union, which May has repeatedly ruled out.
Now one might wonder why the EU allowed May’s obviously unworkable Ireland compromise to not just go unchallenged but actually be legitimated by featuring it in the Joint Report. Our Colonel Smithers gave a report from a high-level conference he attended:
Both sides were keen to move on / to phase 2 and leave last Friday’s accord as a framework, not a binding agreement, but David Davis’ interview on the BBC last Sunday alarmed the EU27 who now want to have a binding agreement ASAP.
A transition is an EU27 priority, but only to protect itself and give firms time to move from the UK. The EU27 are worried about a cliff edge. With regard to financial services, the Single Supervisory Mechanism’s Sabine Lautenschlager has given firms an idea of what is expected, so no letter boxes and battle readiness from day one.
The UK is OK with a two-year transition and acceptance of new EU rules, but the EU27 are OK with a longer one. Firms see a longer transition as an incentive to move, especially as the capital markets union and other reforms, including proposals to make it easier to shift NPLs from banks to investment funds and for greater Pillar 2 scrutiny of (individual) banks and greater Pillar 3 disclosure, proceed.
On the one hand, both sides appear to have agreed on “transition as standstill” as we had anticipated (negotiating anything other than that would have been a nightmare). On the other hand, David Davis’ reckless remarks about the Joint Report not being binding (which it wasn’t if you read the text) spooked the EU members and they’ve now put the screws on the UK. No one has the foggiest idea how to resolve the Ireland conundrum, yet everyone is marching forward as if something will give.
In addition, note that that a drawn-out negotiating/transition process enables EU companies to take business from the UK in a more cost-effective, less disruptive manner.
In the meantime, the Financial Times published an article which provides new estimates on what leaving the EU will cost the UK economically. Since we have not much of an idea as to when the UK will actually leave for good and what the end state will look like, it seems pretty hard to come up with any reasonable guesstimates, particularly since a disorderly Brexit is a real possibility. Even though that looks like a certainty now, let us not forget that tail events are more likely than they seem. From the Financial Times:
Paul Johnson, director of the Institute for Fiscal Studies, says that “for every 1 per cent of GDP you lose, that’s getting on for £10bn a year of foregone tax revenues”. If 0.9 per cent of GDP has been lost over the five quarters for which data exists, there has already been a £9bn hit to the public finances. So even before the UK has left the EU, the referendum result is costing the UK government more than can possibly be recovered by ending net contributions to Brussels
I’ve never stuck my neck out with a public guesstimate of the cost of Brexit to the UK. However, I am highly confident that the UK will have a markedly smaller economy in ten years if it goes through with Brexit. Colonel Smithers reported that I am not alone:
One economist and bank capital expert said his new employer, a Japanese bank, which is moving to Frankfurt, has crunched the numbers and reckons the UK economy will be 10% smaller by the tenth anniversary of the referendum and the limited social mobility will be effectively frozen.
As I have been saying all too often, it would be better if I were proven wrong. But the fact that so many people in the UK who can get EU citizenship are doing so says plenty of Brits are worried about the downside.