Brexit: Posturing and Impasse

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Even couples who intend to have a friendly divorce usually find they turn ugly, and the best that can be hoped for is that the acrimony turns out to be just a phase. There were never such intentions for Brexit, at least from the UK side. The triumphal Brexiteers reveled in the prospect of freeing themselves from what they saw as an oppressive Europe. The EU side started out resigned but prepared to do what was necessary to accommodate the UK’s departure.

As I’ve indicated, interpersonal dynamics matter in negotiations. The UK’s gratuitous hostility, inconsistency, and refusal to listen has to have worn on the EU side. And this may simply be the slow and painful working out of what we pointed out from close to the outset: that there was no bargaining overlap in the two side’s positions, which means no deal. In classic EU “kick the can” dynamics, that time has been postponed far longer than we anticipated. But as with the first game of chicken, over the Withdrawal Agreement, both sides manage to forestall a crisis. It’s hard to see how they pull that rabbit out of a hat again.

The event of the week, that of the UK publishing its draft legal texts, slipped into high drama because the UK’s Brexit negotiator, David Frost, made it so by. He sent a borderline testy letter to his counterpart Michel Barnier, and Barnier sent back a chilly response. We’ve embedded both missives below. They are short and very much worth reading.

You only have to get to Frost’s first substantive point to find confirmation that the talks have foundered. Fatally, Frost makes clear that the UK and EU are at loggerhead over a basic “shape of the table” issue, which is what the form of the agreement should be. If the two sides can’t get past that, they won’t even get to substance.

Here is the relevant section:

First, we have tried to be clear consistently that we are looking for a suite of agreements with a Free Trade Agreement at the core…

Given this reality, we find it perplexing that the EU, instead of seeking to settle rapidly a high-quality set of agreements with a close economic partner, is instead insisting on additional, unbalanced, and unprecedented provisions in a range of areas, as a precondition for agreement between us.

This may seem innocuous. It isn’t. Frost’s “tried to be consistently clear” looks designed to signal exasperation.

The UK wants a series of so-called sectoral deals. The EU has never agreed and has signaled it wants a broader, more integrated agreement. From a January post, quoting Richard North:

Speculation here, from a variety of sources, including this one, has it that the parties will opt for sector-by-sector agreements….

But if that is supposed to be the game plan, there is no hint of it from Barnier. With his feet firmly on the ground, he puts as his first priority new capacity building, setting up mechanisms and institutions that will enables [sic] the EU and the UK to work together in the future.

And not being in agreement on what the end product of the negotiations looks like means they are nowhere. They aren’t even agreed on what a blank outline of an end product would be.

Needless to say, Frost called out Barnier on substantive issues. While he is right to finger-wag about the EU’s aggressive position on fisheries, he’s on thin ice on many other issues. It’s cheeky for him to act as if the EU-Japan could be any sort of model for the UK. But most importantly, as we previewed, the EU and UK have a fundamental disagreement over what the EU calls the level playing field, which is basically that the UK can’t undercut EU standards if it is to have low-fricion access to the Single Market.

Further commentary from the Twitter peanut gallery:

And the Financial Times is calling for an extension to the transition period, which is na ga happen.

Having said that, there was some more progress on the Irish Border front. The UK has had to admit that there will be checks at the Northern Ireland border. From the BBC:

The government has confirmed there will be new checks on some goods entering Northern Ireland from the rest of the UK as part of the Brexit deal.

It will expand infrastructure at Northern Ireland’s ports to carry out checks on animals and food products.

The details are contained in UK proposals for implementing the NI part of the Brexit deal.

Northern Ireland will continue to follow some EU rules on agricultural and manufactured goods.

The Northern Ireland protocol is supposed to be operational by January and has to be applied even if the UK and EU do not reach a trade deal.

Terry Connelley of RTE was cautiously positive about the latest proposals on the Irish Protocol:

The UK paper on implementing the Protocol skirts as close to the rocks of EU disapproval as possible. But it may have just done enough to avoid a fresh crisis over the Irish question….

In reality, today’s paper is a further rhetorical reassurance for unionists, and not the technical detail that the European Commission has been asking for.

The Financial Times was not so keen:

The UK conceded for the first time there will be post-Brexit checks on trade between Great Britain and Northern Ireland, flying in the face of Mr Johnson’s claim there would be no such controls.

The checks, which will be “minimal”, according to Michael Gove, the Cabinet Office minister, are unlikely to satisfy Brussels. It wants rigorous customs and regulatory checks in Northern Ireland to protect the EU single market after Brexit.

Responding to the UK document, Dublin said customs remained a “real tricky” area in the talks. Simon Coveney, Ireland’s deputy premier, described the UK document as a “step forward” but that, at the border, enforcement was crucial. “It’s very clear in the language of the [protocol] that the EU will be entitled to have a presence to ensure that the protocol is being implemented in full,” he said….

But Mr Gove’s plan is likely to run into opposition from the EU, which wants rigorous checks to protect the integrity of its single market: under the UK-EU deal the north-south border in Ireland will be left open….

One diplomat told the Financial Times that Britain’s rejection of any new customs infrastructure “raises red flags”, while noting that “all this needs to be studied thoroughly, before jumping to conclusions”. 

Asked whether the plan honoured the protocol that Mr Johnson agreed with EU leaders last year, one Brussels official said simply: “It doesn’t.”

So no deal is back on. I welcome any cheery ideas as to how this outcome might be averted. I can’t come up with any.

00 Frost to Barnier
00 Barnier to Frost
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50 comments

  1. vlade

    First, the EU have tried to be clear consistently that it is NOT looking at a suite of agreements, cf. Swiss.

    Given this reality, we find it perplexing that the UK, instead of seeking a unicorn, does not try to negotiate something that is within EU’s mandate, or accepts that there is no interesction in mandates and allows both sides to prepare for no-deal.

    The UK consistently ignores the main fact that the EU cannot, and will not, allow Singapore-on-Thames (or even an attempt to do so, as there are structural things in Singapore that are not replicated and unliely to rebe replicable in the UK). To do would be suicidal. The EU may be on a sick bed, and is conducting a lot of other suicidal moves, but all of those are more like smoking. May kill you but not right now.

    Giving the UK what it wants is more akin to calling Ankh-Morpork’s university librarian a “monkey”

    Reply
    1. Yves Smith Post author

      Oh, Lordie, there’s a scene in Soul Music I’d have to look up to recount properly, but the key bit is a visitor to Ankh-Morpork has been set upon by several locals who think they are going to have some sport with him. They encounter The Librarian. The intended victim tells The Librarian, “You know, they’ve been calling you a monkey.” If you know The Librarian, you can imagine the thrashing that ensues.

      Reply
      1. TheMog

        Ook, and if I may say so, Ook!

        Even given the strong (for diplomats) language in the response from Barnier, I have to admire the composure in his response.

        I still can’t figure out if the so-called negotiators on the UK side are just desperately holding onto the back of the tiger they found themselves riding, or if they actually still think it’s 1890 and they can throw their weight around Because Empire.

        Reply
          1. Terence Dodge

            Thank you. I occasionally forget this is a “cultural” blog and become depressed for some reasons. Quoting “Sir Terence Pratchett” Librarian helps with my perspective issues.

            Reply
  2. Maff

    Looking forward to seeing what the good capitalist German automakers think of this Napoleonic approach.

    Reply
    1. vlade

      They have enough of their own problems. But more importantly, those in the UK who would buy a BMW/Mercedes or similar will still do so (or even more, as it would be even more of a luxury good/status symbol). And the rest won’t be able to buy a new car anyways.

      Reply
      1. TheMog

        Also, the UK car market is odd in the sense that the majority of new car sales at least used to be fleet sales (mostly company cars) and the sale to individuals at least was a considerably smaller percentage compared to other EU countries.

        I don’t think that’s changed that much since I lived there.

        Obviously the Japanese automakers have been preparing for any kind of Brexit for a while now, and losing that capacity is going to make a much bigger dent into the UK car landscape than the relatively small percentage of German cars sold in the UK.

        Reply
  3. PlutoniumKun

    I can’t add much to this – reading the mood music I can’t help feeling but that most parties to the negotiation have already given up any hope of anything resembling an agreement. The most they can aspire to is yet another postponement of some kind, but even this might be a stretch.

    A huge issue in the psychology of this type of negotiation is that few people are really focused on it. Negotiations by zoom will never have the subtlety or the urgency of face to face meetings. Most European leaders have pretty much moved on, and are focused on the much more urgent issues of Covid and the battles over how to pay for it (and how to stop Italy imploding and dragging Europe down with it). Nobody cares about the UK anymore, and those businesses who need the UK as a market are finding that they are falling down the priority list. The car and airline industries are now only thinking about survival now, not future markets.

    The concessions over checks on the Irish Sea are important. The Irish governments priorities have moved on to an urgent need to be seen as a ‘winner’ in the fight against Covid, and this is impossible with a neighbour like the UK if you have an open border. Its been widely noticed in Ireland that the hotspots are the border counties, leading to an assumption that there are far more cases north of the border (the figures don’t back this up, but I don’t think anyone trusts the UK figures). Politically, this throws things over to the Northern Ireland parties. They can either go all in with the UK, and accept the probability of strong border controls on the island of Ireland, or go with the economically rational approach of accepting Irish Sea controls and making the best of a ‘half in/half out’ arrangement with Ireland/the EU. There has been a strong souring of generally good communication between Dublin and Belfast, meaning that there seems less appetite in Dublin to do everything they can to keep things open. Its every country for themselves these days, and for now, Dublin is desperately trying to associate itself in international perception with the ‘strong’ northern European nations.

    Reply
      1. PlutoniumKun

        Yes, if it was a case that Ireland got largely Covid free, but it was obviously leaking over the border, I think closing it off would not be an unpopular move. There would be a lot less sympathy for border communities if they were seen as a disease threat (and by implication, stopping the pubs opening, tourism season starting, etc). The huge economic blow would to a large degree be subsumed within the overall upcoming depression. An Irish government would only be punished by the electorate for border chaos if they were seen as partly responsible. If they can pass on the blame, then they will not feel keeping it open is a no.1 priority.

        Of course, this is assuming that NI doesn’t decide that its tied itself to a sinking UK ship. There are still plenty of people within NI who recognise that being a half way house between the UK and the EU could be the provinces economic salvation.

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      2. Kolyn

        Even that wouldn’t persuade the Irish government to argue for closing the border. In the 1st the border couldn’t be physically closed anyway and 2nd the border communities would never accept it. But also the peace process in Irish politics has a quasi-religious character, & no government would even conceive to suggest it

        Reply
    1. The Rev Kev

      In history there has always been the “Irish Question” but not like this. The only partial solution that I can see is if Northern Ireland follows the same rules as the EU – which includes Ireland on their border – but is still nominally under the rule of the UK. It would mean that any imports from the UK to NI also follows EU rules so that the UK does not try to use NI as a backdoor to export substandard goods to the EU.

      Of course with Coronavirus running rampant through the UK, people coming from the UK would also have to follow Ireland’s rules on matters like quarantine. Trouble is, I cannot see NI accepting any of this. Well, for at least this generation. The demographics are changing in NI so this may change down the track. Thing is, the EU has bigger fish to fry than put up with Boris’s bs.

      Reply
      1. Clive

        The problem is, there’s a huge amount of non-compliant goods in circulation in the Single Market anyway. So NI’s compliance (subject to a lot of the consternation about what, exactly, should constitute the regulatory border between the UK and NI) is just another EU Cinderella. In some market segments, it’s easier to buy non-compliant goods than it is to buy compliant ones with epic levels of abuse in the system.

        Regulatory enforcement action is patchy at best (it has to be done by the Member States) and usually only ends up happening at the behest of a well-connected and well-financed industry or trade body who can nag the Commission into Doing Something. German “Mittelstand” industries are the only ones who bother and then only if it is in their direct interest to do so. If it’s not a business which is someone’s “national champion”, forget any guarantees of ensuring standards compliance. China, for example, is Fake Central for CE marking. Again, it’s down to the Member State where the import occurred to try to sort this all out. It’s a losing battle. Like so much of what the EU claims to do, a lot simply doesn’t stack up to what happens in reality.

        The Commission expecting the UK government to implement some super-duper high levels of product standards’ compliance and gold-plate EU certification checks in the UK (NI) mini-Member State-lette is a silly expectation and the UK government has every right to tell it to get stuffed. When Romania, for example, starts being ultra-vigilant on the massive amount of counterfeiting which is sloshing around there (and the Commission applied the same heavy hand it somehow expects the UK to apply in NI) then it can have the claim of the moral high ground (and the legal footing to say the UK must not materially differ from what it allows elsewhere in the EU). I won’t hold my breath.

        Reply
        1. Zamfir

          Is there really much interest in the moral high ground anymore? The UK wanted out, they have been aggressively nasty about it for years. At this point, I am positively in favour of actions that are unfair to the UK.

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        2. d

          Then why is the UK and EU even bothering with any negotiations, that are doomed to failure? Especially when they have to have ready in time for each legislature have to approve them? And that means has to ready for review next month…not happening..unless Doctor Who intervene

          Reply
        3. disillusionized

          The Commission expecting the UK government to implement some super-duper high levels of product standards’ compliance and gold-plate EU certification checks in the UK (NI) mini-Member State-lette is a silly expectation and the UK government has every right to tell it to get stuffed.

          Great – there is just one problem for the UK – since it no longer is an EU member, the commission no longer needs to care about UK soverignty. It may very well decide to run the NI-UK border just as it would like all eu external borders be run, the difference being that if it did so, Dublin or Bratislava can pick up the phone and complain. These days they need not care what London says. It can simply tell it to get stuffed.

          Reply
    2. Bsoder

      “Nobody cares about the UK anymore”, the Germans do (or my do – Siemens) And the recent court holding on treaties is very interesting. I’m willing to grant the U.K. was been about as incompetent as one can be under the condition the EU has since the Brexit vote been taking advantage of that stupidity the way locals do to lost tourists in Roma. The combination of stupidity and disingenuousness is not a good one. But there are larger issues afoot like is the collusion between between the Federal Reserve and other Central banks is it going to work. I don’t think so. And climate heating, is restless and no attempt to solve systemic problems without exactly explaining the impact of climate heating in them are worthless. Less then, because they imply magic or insanity.

      Reply
  4. David

    Connoisseurs of irony will note that the two sides are now exchanging rational communications and arguing, if fairly superficially, about real issues. Frost’s letter, taken in the abstract, isn’t that bad. As a preliminary exchange of views at the start of a negotiating process, this correspondence is reasonable enough. Ah, you say, but it’s not at the beginning of the process: we are almost at the end. The time for these sorts of discussions was in 2016 or 17, not today. And of course you are right. But it’s only the logical culmination of a whole series of catastrophic errors over the last few years.

    Because the Brexiters had no agenda other than Brexit, they didn’t think much (if at all) about the future relationship. Because they didn’t think much about the future relationship, they agreed to negotiate Brexit and the future status sequentially, instead of at the same time, so drastically weakening their negotiating position. They also didn’t really bother to find out what the 27 wanted, and didn’t pay much attention to what they said. They also assumed that the EU needed the UK more than the UK needed the EU, which was clearly wrong. All of this made them – as I said last time we discussed this – the demandeurs, without realising that that is what they were. In spite of that, the Johnson government still doesn’t understand that there are clear EU positions on future status which Barnier has no flexibility on. What the UK is asking for may, in the abstract, be reasonable, but it isn’t on offer and never has been. After nearly 50 years in Europe, the UK still doesn’t understand how things work.

    It’s impossible to say how this will play out, because it depends on the interactions between a whole series of things that haven’t happened yet, and are inherently unpredictable anyway. None of the 27 want the UK to crash out at the end of the year, given the damage that would do to the economies already being monstered by CV19, but none of them want to divert resources to worrying about that now, and none of them want to open up even more divisions among themselves than exist already. And heaven only knows what state the EU will be in by the end of the year.

    Reply
  5. Marshall Auerback

    There won’t be a new deal or an extension. But COVID-19 has changed the backdrop. The No Deal position is actually the preferred outcome of the new UK government. The coronavirus has collapsed world trade and travel, dwarfing any changes Brexit might bring. The UK is over that cliff edge already, along with everyone else, so why delay the inevitable. So many supply chains have already been disrupted and the means by which the gov’t wants to reconstruct them likely violate existing EU rules (which, btw, none of the other EU countries are following right now). Meanwhile, the benefits of taking back powers to reshape the country’s approach to trade may well prove invaluable as the UK thinks about how to reconstruct its economy after the pandemic has passed. Ergo, no deal is the most likely scenario.

    Reply
    1. John Jones

      Reluctantly, I think you are recognising what many in the government are thinking – it ain’t ideal but there seems little point in agreeing onerous terms , in perpetuity with a potentially nasty train crash that is both the EU/EZ , particularly the EZ.

      Add a dollop of German Constitutional Court pragmatism ,perfect recipe for a disjointed union per Hungary who are now challenging the CJEU hegemony.

      Reply
    2. The Rev Kev

      Speaking of supply chains being disrupted, there is something that I saw in the novel “World War Z” which illustrated how that works nowadays. A transport pilot (former F-22 pilot) being interviewed after the Zombie war had a paper tacked up on her wall which had the following-

      Ingredients:
      molasses from the United States
      anise from Spain
      licorice from France
      vanilla (bourbon) from Madagascar
      cinnamon from Sri Lanka
      cloves from Indonesia
      wintergreen from China
      pimento berry oil from Jamaica
      balsam oil from Peru

      And that’s just for a bottle of peacetime root beer.

      I do not know how accurate that list is but it does show how even mundane things are at the end of a complex supply chain. That bit had me wondering about a lot of the stuff that is in my household.

      Reply
    3. Yves Smith Post author

      Erm, if you think trade is disrupted now, just wait until those new border procedures kick in. The UK depends on imports. Its live animal exports depend on a fast process and they don’t have the capacity at ports or nearby to hold and feed critters waiting for inspection.

      So the live animals get slaughtered and those farmers go bust. Brief surplus of cheap lamb and veal, followed by shortages of fruit and veg and Lord knows what else.

      Reply
      1. Clive

        Live animal export is already a fated business model, not just on economic grounds with COVID-19-induced border delays creating legal risks for exporters who find that cross-border movements are suddenly unpredictable (there’s a legal limit on how long you can confine a live animal in a trailer) but also on animal welfare grounds.

        https://www.gov.uk/government/news/ban-on-live-animal-exports-for-slaughter-explored-by-government

        It only exists as an industry because the EU’s Single Market ban on restrictions prevent a Member State from instigating it’s own national policy https://www.bbc.co.uk/news/50587148

        I really don’t know why Richard North makes such a big thing of it. It is the most problematic part of any No Deal border transportation issues, but no-one would be sorry to see the back of it. The UK government could simply ban it if it caused any problems and compensate the farmers for a period where they redirected their output to the UK market over a number of years — if it was necessary. There’s nothing to stop currently-exported live animals being slaughtered in the UK and diverted into frozen meat products.

        As for these “chaos at the ports” stories, it really depends on who you believe. Solutions are already in place to handle clearances away from the ports themselves https://bifa.org/news/articles/2020/feb/ccs-uks-roro-solution-addresses-post-brexit-cargo-border-delays. As for the RoRo operators themselves, COVID-19 had reduced them to (their words) “a skeleton service for commercial freight only” https://www.brittany-ferries.co.uk/information/coronavirus/your-sailings anyway. Given that passenger / tourist travel is likely to remain subdued at best, putting the previously in-service ferries back in place would give a lot of headroom for imports even if fixes to clearances didn’t work.

        Of course, if France did an effective Work To Rule on imports, you’d get problems in those specific modalities. But it’s hard to see Holland and Spain doing that, even if France was tempted (and given that any French obstructionism would hit flows coming from the Republic of Ireland via the UK “land bridge”, it’s difficult to see why they’d want to harm Ireland in the process). Ireland would no doubt demand the Commission intervene to protect its intra-EU commerce if France tried it.

        Plus Eurotunnel announced it was “no deal” ready last year, too https://www.theguardian.com/politics/2019/mar/28/were-ready-no-matter-what-eurotunnel-all-set-for-no-deal-brexit

        A lot of these crash out chaos tales of woe seem to have been written two or three years ago and some media (well, we’re talking about the Guardian here, really) think the U.K. froze like a ice sculpture at that time and did nothing at all. I’m never going to claim the U.K. government is a bastion of competence and excellent execution but the notion it just shrugged and did nothing in four-and-a-half years isn’t credible.

        Reply
    4. vlade

      Ah, but there is some difference. A lot of the UK exports are services. Service can be done remotely, unlike manufacturing.

      But if you cannot provide the services, because for example the professional certification is not recognised, then being remote doesn’t help.

      So a lot of accounting, consulting, architectural, law etc. firms in the UK can find in 6 months their contracts in the EU will be done and not renewed.

      Not that it changes the overall likelyhood of no-deal, but my point is that no-deal _can_ make the UK’s situation still worse a bit.

      Reply
      1. Clive

        Which goes back to a question of materiality. Projections for a No Deal Brexit were of the order of a four or five percent drop in GDP against theoretical trend over a period of five years. Which would have been not great.

        But GDP fell by two percent last month alone in the U.K. (as typically it did everywhere). Eight to ten percent drops this year are usually bandied about and seem plausible. We are talking if not exactly drops in the ocean then thimbles in a glass of water.

        Plus the Single Market for services has always been, even by the EU’s reckoning something of a bust https://www.ft.com/content/d073f25a-885f-11e9-a028-86cea8523dc2

        Reply
        1. vlade

          The UK exports services were actually pretty unaffected by COVID so far,
          https://commonslibrary.parliament.uk/research-briefings/sn02815/.

          But even with a large hit to goods exports, the hit the UK took is mostly domestic – because a lot of the UK economy is domestic consumption. Retail, small services and suchlike, which pretty much all shuttered down.

          And yes, the EU services market is far from perfect – but the UK _despite_ that managed to sell a lot of services to the EU (cca 130bln, or about 4% of the UK’s GDP). A lot of which it won’t be able to come Jan 2021. It’s not impossible that the services exports to the EU would be cut by half – which would be > 2% of GDP. Doesn’t look like a drop, or even a thimble to me.

          Services for export are mostly provided by the middle-class who could often work remotely even now. The domestic slump decimated the poorer sections of the society, but if the services slump decimates the middle class too, it will have secondary impact on domestic consumption too.

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          1. Clive

            But invariably those services are, once you get above the small scale one-man-bands or similar, motivated to operate from a local subsidiary which will be a Single Market economic operator. The sales are booked from the subsidiary back to the (U.K. here for the purposes of our calculations) parent and simply show as repatriated sales or, depending on the tax treatment desired, profits.

            Brexit with No Deal may spur some corporate legal arrangement rejigging to optimise tax treatments (consultancy firms are happy to sell their advice in this matter https://www2.deloitte.com/content/dam/Deloitte/ch/Documents/financial-services/ch-en-fs-Brexit-Performance23.pdf). But this is merely sorting out the accounting, it does not affect the “who does want, where” staffing and supply of services.

            To say that all U.K. to EU services sales will simply evaporate on 1st January 2021 isn’t therefore correct. The only problematic businesses will be as I mention really small scale service providers who don’t have a head-office/regional-branch structure and try to do everything out of the U.K. but any business which has evolved to more than a handful of employees will either already have or be able to set up a local subsidiary.

            Put it this way, you don’t sell £10M of services cross border without, sooner or later, having to consider setting up a local subsidiary just to make the admin and client relationship management easier. Once you have a local subsidiary in place (and it was the forcing of service providers into doing this through “soft” barriers to the trade in services which has got the Commission in a lather, rightly so, but fixing the problem is easier said than done) you don’t need to rely on EU recognition of standards and qualifications. Your local subsidiary licensing covers your supply of services.

            All of the big consultancy, law, accounting and finance firms rely on this model. I know of none apart from the Mom and Pop minnows who try to run things out of a U.K. only office.

            Reply
            1. vlade

              If the services are operated from the subsidary, then they are not counted as an export.

              Toyota built cars in the UK are not counted in Japanese car exports in the UK.

              Santander UK banking is not Spain exporting banking services to the UK.

              So put it another way, the 290bln in EU services _exports_ (not group _profits_, which, if repatriated show in the current account balance via investements, but not exports, and crucialy deliver 0 jobs in the UK) are not delivered by subsidaries, otherwise they would not be exports to start with.

              Reply
              1. vlade

                I.e. exports are defined as a UK based company booking reveue from a non-UK based customer (I know, one year I was selected by ONS and was hassled about it to no end. If I had, as I was considering a subsidary in the EU, the subsidary would not have counted in exports.).

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                1. Clive

                  Yes, so you would simply substitute the accounting classification from “sales” to “profits”, if the tax treatment warranted doing so. The “sales” could be booked through the EU subsidiary. None of this changes the genuine economic value accruing to any particular country.

                  Similarly the cost of providing the services is equally fungible.

                  When you buy an app or a downloaded track in the Apple App Store or iTunes and you’re paying Apple’s subsidiary in the Republic of Ireland, that shows as a services “export” for that country. But none of the inherent economic activity or added value happened in the Republic. It is merely a tax convenience for Apple.

                  The only changes for services as a result of a No Deal Brexit are on tax and VAT treatment which, for big multinationals, may necessitate adjustments to how they are structured https://www.ey.com/en_uk/ey-brexit/the-impact-of-brexit-on-indirect-tax

                  No “work” is inherently moved “to” or “from” anywhere to anywhere.

                  The only genuine economic value add impacts are for a small number of credentialed fields such as solicitors, accountants etc. where their licences as bestowed by the U.K. professional bodies won’t automatically be recognised by the EU.

                  But if I tell you that for my TBTF, we even have to employ different firms of solicitors for the England and Wales, Scotland and Northern Ireland jurisdictions (and this is within the U.K.!) because a solicitor licensed in England and Wales by the Law Society can’t automatically practice in, say, Scotland, this gives an indication as to how many problems proving services cross border there are anyway.

                  I’m not saying it doesn’t happen somewhat right now and that a No Deal Brexit won’t cause some issues for a few in the credentialed classes. But you can’t take the figure for U.K. to EU services exports and say it’s all made up of these (very niche) elements.

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                  1. d

                    Depends, if say the sale for finance to EU citizen requires that the seller be licensed in the EU and the EU doesn’t allow those not physically in the EU to have said license, the work must be moved to the EU

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      2. Fazal Majid

        It’s like fish. The UK’s position is reasonable, but it ignores the fact most fish caught in UK waters is for export to the EU (the British get their fish from Norway). Thus if they play hardball, they will get hardball.

        If anything, Barnier has been way too accommodating on financial services. The UK will find no-deal even worse than the thin gruel they are being offered today.

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    5. Bsoder

      Marshall – well put. Dylan’s Song ‘Things have Changed’, especially “People are crazy and times are strange
      I’m locked in tight, I’m out of range, I used to care, but things have changed”, keeps going off in my head”. If I had to guess, which I’m paid to do, I’d say things have only started to change and I mean paradigms.

      Reply
  6. John Jones

    A large part of the problem is the wooly worded political declaration – the chickens are coming home to roost – it’s not legally enforceable and is sufficiently constructively ambiguous to mean pretty much what anyone wants it to mean – outcomes at the end of any extension are undefined – logic dictates that, in reality, the EU don’t have to agree to anything at the end of two additional years – in theory this could cost UK c. £20bn with no guarantee of any agreement. With hindsight , both sides cocked up.

    With CV19 it’s a moot point , but many trade and aviation are likely to look very different in the next 2-3 years – maybe two to three years of additional trauma is worth paying for both UK and EU as the EU )EZ might be a very different fish with which to negotiate in the intervening years.

    Maybe , reluctantly the grown up thing to do is a) shake hands in June and let UK /member states get on with no deal preparations or b) shake hands , extend by 6 months , minimum transition but agree jointly what could be done in 12 months June 20/21 to mitigate no deal Brexit ie agree realistic outcomes for the end of June 2021.

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    1. Yves Smith Post author

      I would have to look at key sections again, and I don’t have time to do so, but I am pretty sure you are misreading the political declaration. Yes, it is not legally binding….the same way a letter of intent in a merger os not legally binding. It’s an outline of main points both sides have agreed to in principle but they still need to work out detailed terms.

      For someone to walk away from a point in a letter of intent would be seen as a major change that would upend the deal. For someone to do that and still consummate the transaction, they’d be expected to offer a commensurate concession on price or other terms.

      That is what Barnier keeps effectively telling the UK: “My principals signed on this agreement. You said you wanted frictionless access to the Single Market. That is where the ‘level playing field’ language you agreed to came from. You change your mind on that, I can’t bring my principals around to something much different at this very late date.”

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      1. David

        No political declaration is legally binding, but all political declarations are politically binding. If they are made in the context of negotiations, then they are assumed to be a reliable indicator of what the two sides intend to agree. After that, you can make any detailed proposals you like, *but* you must be able to relate them plausibly to the text of the joint declaration. In Barnier’s case, the declaration amounts to constraining political guidance that he can’t ignore, and can’t go beyond. He would need to reconvene the 27, and have them either unilaterally disown the guidance, or propose, at this late stage, something new. There’s no interest that I can see in doing either.

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        1. vlade

          Dropping political declariation is possible, but you’d better have a pretty damn good reason. Or take the bad-will-implicatins on the chin, with all it entails.

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          1. David

            That’s the situation the UK is effectively in, but it’s not the same for 27, because there would have to be a collective political decision not simply to abandon part or all of the declaration, but also to move to another political position. The chances of that happening …. well.

            Reply
  7. Ian

    Sooooo why should we care? This write up looks to me that I should care that Britain is heading for no Brexit. But they voted extremely enthusiastically for it, especially the labour wall. Any problems temporary or permanent they face because of it like chlorinated chickens, privatisation of NHS, more gig jobs, further reduction of univeristy funding and hard Tory class rule.is well deserved! If you want democracy and all the goodies that come along with it, you better atleast know where your damn farm subsidies come from.

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  8. Alex Cox

    At the mid point of both letters is a reference to state aid. I think this is as big a sticking point for the EU as the NI border.

    Banning state aid prevents states from investing tax revenue in domestic industries and infrastructure. From a leftist perspective it was perhaps the most damaging aspect of British EU membership.

    State aid is what enabled the Asian tigers to become tigers. It is an essential tool for any autonomous government. And it is detested by globalist bureaucrats.

    Unless the UK surrenders on this point, presumably a crash-out is inevitable.

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    1. vlade

      The EU state aid rules are actually way more benign that the UK (including left) often presented.

      Or put it otherwise. How comes that say in Germany a number of municipalities took over their utilities from private hands, and are sucessfully running them for years if it’s such a problem with the EU rules? Or that Germany runs its public rail, public post, has public investment bank (KfW), in France Electricty de France is has state as the major shareholder (and similar case is with energy companies in some other countries) etc. etc? While the UK has only private utilities, private energy distribution grid, private mail, private rail (ex the infrastructure, which is state run and was nationalised after the private experiment turned into a disaster)?

      Maybe the issue is elsewhere then the EU? But the EU is sooo convenient a scape goat.. I wonder what the UK pols will do when they’ll have to take responsibility. I guess they won’t and will keeping blaming it on the foreigners, as that’s what they known since ever.

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      1. Clive

        The EU insists on the “private investor test” in any state aid permission. EDF itself fell badly foul (a north of €1bn repayment being ordered by the CJEU https://www.covcompetition.com/2019/02/application-of-the-private-investor-test-in-state-aid-cases-lessons-from-the-edf-saga/) of this.

        The precondition for allowing state aid in the EU is that the state provides the investment (or “aid”) on the exact same basis as a commercial or private investor would. If a Member State is deemed (and it is the CJEU which does the deeming) to have funded investment or taken over a business on a basis which no commercial concern would have done, it will be ruled unlawful. Cue fines and repayment orders. This is the fate which befell Italy when, with the EU’s sometimes uncannily hapless timing, it slapped a fine on it for trying to help its tourism industry https://curia.europa.eu/jcms/upload/docs/application/pdf/2020-03/cp200029en.pdf in the middle of the very worst phase of the COVID-19 crisis. Given Italy’s parlous economic situation and its limited options for growth, this sort of “rules is rules” approach by the Commission is just the sort of thing that gets the EU a deserved bad name.

        To call the EU’s state aid rules anything other than neoliberalism 1-0-1 is to not understand how it differs from “genuine” state operated enterprises (i.e. nationalisations). The whole point of these is that the government concerned does *not* need to do some batshit “commercial” evaluations of the business case. It can simply do, in extremis, what it takes.

        Unless the U.K. government wants to risk similar outcomes as Italy got (and why would the Commission cut it any slack?) it should run a mile from any adoption of EU state aid rules. That aspect alone, if it does end up being a deal-breaker red-line imposed by the EU, is more than sufficient reason for the U.K. government to walk away. It would be a bullet well and truly dodged, in view of the enormous levels of state support which will be needed in the next few years and how difficult the “private investor test” requirement will be to satisfy in the current economic climate.

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        1. vlade

          The investor test is not the only one.

          There are strategic-interest exceptions which Germany, France and others are very good at using. Even with the private-investor rules, there are _no_ rules that say that the nationalised company must turn profit, as opposed taking subsidies for permanent loss-running (which is how the municipalities run their utilities).

          Which is a major difference, and IMO, taxpayers should not just subsidise loss-making nationalised (or private) companies – if needed, it can subsidise the clients directly instead (which is an easy way to bypass the loss rule) as a subsidisation of a loss-making company is usually an invitation to corruption and looting.

          The problem with Italy is that it is trying to get the state help to everyone, and yes, for a blanket state help it was hard, but the rule was relaxed with CV, and has been used en-masse. Indeed, even the UK’s mostly failed support schemes (that no-one lends through) and the furlough are technically within the EU state aid rules and were oked as such.

          We can argue till cows come home on the rules and intereprtations, but the reality remains that the continental Europe HAS a number of nationalised industries that happily operate for decades, see no need to privatise everything in their sight, and recently even sucessfully took into public ownership utilities and similar.

          Another fact is that the UK is and was hell-bent on privatising everything that could be, while at the other hand moaning about how the EU state aid rules stopped it from what it wanted to do (like turning Dyson into a national champion?)

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          1. Clive

            It is completely incorrect to describe the amendments to the state aid rules for COVID-19 as in any way facilitating nationalisations.

            The “private investor test” must still applied to any would-be nationalisation which a Member State might attempt — the government in question has to prove to the Commission that a private investor would have acquired the enterprise concerned. Unless it can be shown that a private investor would have paid the same money as the government paid (or was willing to take over the businesses debts) it will be ruled unlawful “competition distorting” state aid.

            For a failed enterprise, the only permissible state aid in the EU rules is the Temporary Framework for State Aid Measures to Support the Economy During the COVID-19 Outbreak. These mandate — demand — privatisations:

            https://www.covcompetition.com/2020/05/the-european-commission-includes-recapitalisation-measures-in-the-temporary-framework-for-state-aid-measures-to-support-the-economy-during-the-covid-19-outbreak/

            Remuneration of the State

            The State must receive appropriate remuneration for its investment and the recapitalisation should be redeemed when the economy stabilises.

            Remuneration of Equity Instruments

            With regard to equity increases, the price of the shares acquired by the State should not exceed the average share price of the beneficiary over the 15 days preceding the request for the capital injection, if the beneficiary is publicly listed. If the beneficiary is privately held, an estimate of its market value should be performed by an independent expert or by other proportionate means.

            A step-up mechanism increasing the remuneration of the State should also be put in place, in order to incentivise private shareholders to buy back the State’s participation. The step-up mechanism can take the form of additional shares or other appropriate mechanism and should consist of two steps:

            If the State has not sold at least 40% of its equity participation resulting from the Recapitalisation Measures after four years, its remuneration should be increased by at least 10%, e.g., if the State still holds 40% of shares, its participation should be increased to 44%;
            If the State has not sold in full its equity participation resulting from the Recapitalisation Measures after six years, its remuneration should be increased again by at least 10%, e.g., if the State still holds 44% of shares, its participation should be increased to 48%.
            Alternative step-up mechanisms may also be designed, provided that they have the same incentive effects and impact on the State’s remuneration. Further, if the beneficiary is not a publicly listed company, each of the two steps may be implemented one year later, i.e., respectively five years and seven years after granting of the Recapitalisation Measures.

            In addition, the beneficiary should at any time have the possibility to buy-back the State’s shares at a price which should be the higher amount of (i) the nominal investment by the State increased by the annual interest remuneration set out in paragraph 63 of the New Amendment; or (ii) the market price at the moment of the buy-back. Alternatively, the State may also sell its shares to other purchasers than the beneficiary provided that this is done on market terms.

            Exit Strategy

            Finally, if the Recapitalisation Measures represent more than 25% of the beneficiary’s equity at the moment of intervention and the beneficiary is not an SME, it should present a credible exit strategy laying out:

            A plan for the continuation of the its activities and the use of the State’s funds, including a repayment schedule for the remuneration and redemption of the State’s investment; as well as The measures that the beneficiary and the State will take to abide that schedule.

            The exit strategy should be submitted to the Member State within 12 months of the State’s intervention, unless the State’s participation is reduced below 25% within that period, in which case no exit strategy has to be submitted. The beneficiary will also have to publish every 12 months information on the use of the aid received, including how the aid supports the company’s activities in line with EU and national obligations linked to the green and digital transformation.

            The State will have to report annually to the Commission on the implementation of the exit strategy and the beneficiary’s commitments. Further, if the State’s participation resulting from the Recapitalisation Measures has not been reduced below 15% within six years of the State’s intervention, a restructuring plan complying with the Rescue and Restructuring Guidelines must be prepared and notified to the Commission. This period is extended to seven years if the beneficiary is not a publicly listed company.

            I’m sorry, but this is no arguing about rules and interpretations. It is abundantly clear and spelt out in black-and-white. A Member State cannot nationalise an enterprise in anything but the short-to-medium term. And if it does, it must extract a “market return” from the business and it must commit to returning it to private ownership.

            Further, it can only invoke the Temporary Framework if no private investor will purchase or take an interest in the enterprise (it must do this to satisfy the “private investor test”). In other words, it has to let vulture funds pick over the carcasses of the unfortunate businesses which have got into difficulties first, only then does it get to sort out the real messes even they won’t touch.

            The EU’s State Aid rules are a manifesto for disaster capitalism and looting. I really can’t get my head around why there are so many apologists for this deliberate, intentional imposition of neoliberalism. That some are egging the UK on to adopt this awful crushing of the working class in the name of “free market economics” because otherwise, oh, how awful, there’ll be no FTA, has me wondering quite why the EU is so lauded when it appears to have a chronic debilitating case of what the UK gets criticised for having.

            Especially when the UK government is actually seeking every possible way to prevent economic damage by supporting viable businesses and their workforces which are temporarily stymied by COVID-19.

            It makes me wonder just how bad UK Derangement Syndrome has gotten.

            Reply
  9. Anonymous 2

    ‘this awful crushing of the working class’

    But this surely is what is coming down the track for the people of the UK in any event? Large scale government spending in a country with a huge government and balance of payments deficit will not be tolerated by the international capital markets for long. We should expect a major financial/economic/political crisis for the UK by the end of 2022 at the latest. The most likely consequences would be major cuts to public spending, a radical reduction in the welfare state. The Randians will get their mean and nasty society, Johnson will be dropped,to be replaced by a ‘clean face’ to run in 2024 who with the support of the Murdochs and their allies may just squeak in for another term if they can dupe enough of the gullible?

    Reply

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