Thursday, August 03, 2017

Don’t believe the bad news about Brexit

Published on CapX
Nobody should blame the British media for taking a critical look at whatever the British Government does. A scrutinising media is a great asset and mainland Europe can probably learn something from the UK. But when it comes to Brexit negotiations, there’s plenty of negativity being reported, and not enough attention paid to the progress being made.
Take, for example, the rights of EU citizens in the UK and British in the EU. After only three days of negotiations, agreement was reached on 50 per cent of issues listed in a joint negotiation document.
The most sensitive point here is the EU’s insistence that its own top court, the European Court of Justice (ECJ), where the UK will have no judge, is the arbiter of citizens rights and judicial disputes. But this particular demand has already been undermined by the Germans, who have said they would be open to a solution whereby a joint EU-UK panel serves as the ultimate judge.
The UK’s Brexit Secretary, David Davis, agrees with the Germans and has suggested that a judicial body including “a mutually agreed chairman and somebody nominated from both sides” might be acceptable. Indeed, some EU officials have intimated the EU is willing to drop this particular demand.
So rather than the talks stalling over the ECJ, it looks like EU negotiator Michel Barnier only needs ask EU member states if they can update the list of demands he’s obliged to defend. (It’s worth remembering that Barnier’s room for manoeuvre is limited – he has to work within the mandate set by the European Commission). If a solution is found through a joint panel, that may serve as a precedent for a long-term arrangement in the relationship between the UK and the EU.
True, there are other tricky areas. No deal has been struck over the thorny issue of the “financial settlement” of Britain’s obligations towards the European Union. But the UK government did try to smooth things over by stating that “the UK has obligations to the EU”. This was deemed by Brussels to be a potentially important development, and dissuaded them from stalling negotiations – although Barnier has since repeated his threat.
In fact, Britain’s plan seems to be to sign up to the principles of the financial settlement, while delaying any deal on a specific figure until the very end of the negotiations. But Barnier has already said that for the EU “to compromise … we want clarity on [the financial settlement].” If the UK were to publish a position paper on the methodology for the divorce bill, this could persuade the EU Commission to relax its initial decision not to open talks on Britain’s trade status before there is material progress on the financial settlement.
The EU certainly seems open to suggestion. It has also substantially relaxed its earlier refusal to discuss any issue besides citizens, finances and Ireland. Since it has agreed to opening talks on “wider separation issues”, which include trade in goods but also Euratom, police and security cooperation, it may as well agree to start proper trade talks in October.
One of the loudest complaints from the media has been the lack of clarity regarding what the UK wants its future relationship with the EU to look like. In reality, there aren’t many options to choose from. In my opinion, there are two models: the Norwegian, whereby Norway enjoys full market access in return for essentially implementing all of the EU’s trade rules without being able to vote on them, and the bilateral Swiss-Canadian, where market access and the extent to which both sides adapt their market regulation is subject to negotiation.
Britain’s financial sector is expecting the bilateral model to win out – and they may well be right. Could anyone really imagine the UK being bound by EU legislation without being able to vote on it? Of course not, especially as British membership of the Single Market seems now completely off the table.
But regarding the issue of whether the UK should leave the Customs Union, the decision is being taken on the ground. Now that the American President has shown such enthusiasm for a US-UK trade deal, it sounds increasingly unrealistic that the UK will not leave the Customs Union at some point, perhaps after an interim period.
Progress has also been made in the debate on how to move to a permanent Brexit settlement. The UK Government has agreed that there should be a transition period, after the idea was backed by “Brexiteer” Trade Secretary Liam Fox. He has, however, stressed that this should be “time-limited and limited in its scope”, and end “before the election” in 2022.
The fact that the UK is happy to accept a transition stage may also make discussions over the financial settlement easier, given that Britain could be willing to contribute to joint projects during that period.
A point which does still need to be resolved (though, tellingly, it’s also a bone of contention within the UK government) is whether the UK will be allowed to restrict immigration from the EU during that period. There’s a way around the difficulty: the UK could join the European Free Trade Association (EFTA) and then rejoin the Single Market or “European Economic Area” temporarily. It’s how Lichtenstein is able to restrict freedom of movement while being a member of the Single Market.
 If Britain wouldn’t join EFTA, the EU could still in theory tolerate restrictions on freedom of movement. Part of the transition debate must therefore be how to arrange British control over EU immigration in this eventuality (even though EFTA membership could protect national sovereignty better, affording, for example, the power to delay the implementation of EU rules).
The UK Chancellor, Philip Hammond, and some of his colleagues would seem to have ruled this out. It looks like the Chancellor prefers the EU’s offer that in return for full market access, Britain would – during the transition – respect EU rules, oversight and judicial supervision, and also allow unrestricted freedom of movement, with some minor adjustments. Be this as it may, a statement by the British PM seems to have overruled him, as it stressed that “free movement will end in March 2019” – when the transition stage after Brexit is due to begin, adding “precisely what the implementation model will look like is up for negotiation”.
In any case, the EU side also seems keen to prevent the UK from remaining in “transition” indefinitely, as the European Parliament has explicitly insisted in its “red lines “ that the transition “must not last longer than three years”.
So with both sides showing willingness to be flexible on certain matters, and with MEPs on the same page as Liam Fox, then surely Brexit negotiations can’t be going so badly after all.

Monday, July 10, 2017

Both the EU and the UK have already started to soften their positions in Brexit negotiations

Published on Open Europe's blog
In the Brexit debate, two myths are remarkably persistent. First, that the UK Government is unwilling to compromise and is pursuing a so-called “hard Brexit”. Second, that there won’t be any real negotiation, as Brussels will simply dictate terms to the UK.

Where the UK has shown itself open to compromise

First, it’s hard to think of any other kind of negotiated Brexit than the one being pursued by the UK. Notwithstanding the live debate in Cabinet about how to manage a Brexit transition, the UK Government is pursuing a negotiated deal, with the UK leaving both the EU’s Single Market and the Customs Union, after a transition or implementation period. Sure, Theresa May did say that “no deal is better than a bad deal” – imagine if she had declared she would accept any deal! – but the UK Government clearly would prefer a good or even a limited trade deal over a cliff-edge Brexit without a deal.
Since being in the Single Market and the Customs Union means accepting EU rules without a vote and severe constraints on UK trade policy, can anyone imagine this position being politically sustainable for the UK for any length of time? Even if the UK could gain license to close trade deals on services, staying in the Customs Union would dramatically weaken the UK’s hand. It would not be able to offer more goods access in return for greater services access.
Second, Theresa May put her job on the line to enable a Brexit compromise. Her plan to increase the Conservative majority hasn’t worked out very well, to put it mildly. But there is no longer any necessary need to hold a general election in 2020. If May had not called an early election, the build up to a 2020 general election would have coincided with the immediate aftermath of the Article 50 process and ongoing trade discussions, potentially making a smooth transition more difficult.
Third, the UK has dropped its demand to have perfectly simultaneous negotiations on the exit bill and trade. The EU has insisted on sorting out the UK’s divorce terms before discussing its future trade status. The UK has basically accepted this, despite initially opposing such a “sequenced approach”. That being said, as I note below, the EU side has also compromised on sequencing.
Fourth, the UK Government is open to accepting a role for supranational institutions after Brexit but, for obvious reasons, it cannot accept the ECJ as the ultimate arbiter. Brexit Secretary David Davis has said that he’s open to setting up a new arbitration body to resolve disputes over trade or the wider functioning of EU-UK agreements. This is likely to mean that EU officials or the ECJ play a role, as will UK institutions, but the UK is clear it cannot be the ultimate referee.
The EU’s demand for ECJ oversight has become the thorniest issue regarding the protection of EU/UK citizens’ rights. Here too, the UK has signaled it is open to arrangements that ensure these rights are guaranteed in international law, not simply UK law. This could function under a joint UK-EU dispute mechanism as described above.

How also Brussels has already softened its stance

For its part, the EU side has already softened its stance on a number of issues, perhaps realising that nobody gains if Brexit negotiations go off the rails.
First, the EU has conceded to allowing simultaneous negotiations on divorce and trade negotiations, provided there is “sufficient progress” on the former.  In January, the European Commission’s Brexit negotiator Michel Barnier stressed that “[an] agreement on [an]orderly exit is [a] prerequisite for future partnership”. Under pressure  from moderating voices among member states, this was watered down to a position that it would be sufficient “to agree on the main principles of the key challenges for the UK’s withdrawal”, before progressing to other issues. Whether “sufficient progress” has been made will be assessed at the EU Summit in October. Barnier’s initial plan was to wait at least until December to start talking about trade. Obviously, nobody can predict how these negotiations will go, but the point is that the EU side has softened its stance here.
Second, the EU’s biggest proponents of freedom of movement in the EU aren’t as passionately in favour of this anymore. While politicians in Central and Eastern Europe are of course strongly in favour of securing the rights of their citizens already present in the UK, they are much less keen than they were to preserve the right of their countrymen to move to the UK after Brexit. The central European ‘Visegrad’ countries seem to have shifted towards Hungary’s position, which is that the continual flow of their well-educated citizens to the UK is a “brain drain” that they would like to stem. This development could be quite a game changer.
Third, according to three EU officials quoted by Bloomberg, the EU may be willing to drop its demand for the UK to be subject to direct ECJ jurisdiction, after Brexit. As former Belgian ECJ Franklin Dehousse judge has warned, the EU’s demand makes “a final deal less likely.” Bloomberg quotes officials as saying that the EU “could settle for alternatives” to a direct ECJ role. German Foreign Minister Sigmar Gabriel has suggested that a joint EU-UK court may be a better idea, although he thought it should still follow the EU’s top court “in principle”. The last element may still be an issue, given that the ECJ fiercely guards its position and has previously taken a dim view of rival centres of judicial power, such as the European Court of Human Rights in Strasbourg.
Fourth, the EU has moderated its plans to force London’s euro clearing business to move to the EU27. Attempts to force part of London’s financial clearing industry to mainland Europe pre-date the Brexit vote. It’s no wonder that a new attempt is underway. After Brexit, the EU Treaties will no longer protect the UK as they have to date. Nevertheless, in its newly proposed rules for supervision of non-EU clearing houses handling euro-denominated transactions, the Commission has stopped short offorcing all clearing of euro-denominated transactions automatically to the EU or the Eurozone. This a far more cautious position than the one initially suggested by several senior politicians across Europe, such as the former French President. Indeed, it’s been estimated that the cost of a more fragmented clearing market could be high for banks in mainland Europe, as they would need to post billions extra collateral. For this reason, German banking watchdog Bafin has warned against rushing to move euro clearing out of UK after Brexit and both German Finance Minister Schauble and EU Brexit negotiator Barnier have made clear it isn’t in the EU’s interest to fundamentally damage London’s position as Europe’s financial centre.
Lastly, the tone suggesting Britain has to be “punished” has all but disappeared. To be fair, nobody openly said the UK should be “punished” for daring to vote to leave the EU, but the talk of the town was that in any case, the UK had to expect an ‘inferior deal’, as the Maltese EU Presidency stated in January, with the clear suggestion that this is what the UK deserved. Never mind of course that any good deal for the UK really is a good one for the EU, as trade openness benefits both sides.
That was before the Netherlands and France went to the polls. Those results are, rightly or wrongly, perceived as a disappointment for eurosceptics. Just before the negotiations started, EU Council Chairman Donald Tusk urged “discretion, moderation, mutual respect”. The European People’s Party, the biggest group in the European Parliament, has talked of possibly extending talks after two years, if necessary to conclude a deal. As we witnessed during the Eurozone crisis, the tone of politicians on both sides is often an indicator of the chances of success for the negotiations.
In conclusion, there still are major hurdles to achieving a good Brexit deal, but despite the collective political/media meltdown in Britain following the election, there is actually growing reason to believe a deal can be done. That’s a good thing for both Britain and the EU.

Monday, June 19, 2017

There aren't very many ways to implement Brexit

Published on CNN

As Brexit negotiations have finally started, there’s quite a bit of confusion. Despite Theresa May’s insistence that “Brexit means Brexit”, for many it isn’t clear at all what it actually means. Nevertheless, reality is imposing itself here, as it becomes apparent that there aren’t so many ways to implement Brexit.

Apart from the “cliff-edge” Brexit scenario, when there wouldn’t be any EU-UK deal on legal arrangements in place when Britain automatically exits the EU, on March, 31th, 2019, and which would risk trade happening on WTO terms, including tariffs, there really only seems to be the version of Brexit which the UK government pursues: a carefully negotiated exit, with the UK ultimately leaving the customs union and the single market.

As the debate rages on, all suggestions to “moderate” this kind of Brexit are being revealed as undesirable and unrealistic, on closer inspection. 

First, there was the idea that Britain could perhaps stay in the single market”, as proposed by some politicians from both Conservatives and Labour. However, when people realise this would mean that the UK would copy paste all of the EU’s rules without being able to vote on it, something dawns that this may not be a good fit for one of the world’s oldest democracies, let alone for the majority of the public who voted for Brexit. Norway, which is outside of the EU but inside the single market, has been described as a “fax democracy” by its former PM, Jens Stoltenberg, the current head of NATO. Of course, perhaps the UK could accept this status, which comes with full market access to the EU, for a limited transitional period, as Norway can still delay EU rules, which would effectively grant Britain the power to say “no”. In any case, the idea has lost traction, with Labour ruling out “formal membership” of the single market, and already in February, the UK High Court rejected a legal challenge over whether the government must give parliament a separate vote on Britain’s withdrawal from the single market. 

A second attempt seems currently underway to mitigate the UK government’s version of Brexit by having the UK stay in the EU customs union after it has left the EU. The idea seems to be supported by the European Commission, which hopes that this may limit the risk of “regulatory divergence” and therefore “regulatory competition” - as if that would be a bad thing, but anyway.

The idea of the UK staying in the EU’s customs union is flawed. It would effectively mean that Britain continues to outsource its trade policy to the EU even after Brexit. Turkey, a non-EU member state which is in a customs union with the EU, has little or no freedom to develop trade policy. It also has to beg to get the same market access the EU manages to secure in its trade deals with for example Canada or Japan. Can anyone really imagine the UK in this situation, even if one could of course delay the UK’s exit from the customs union a bit until it its own bureaucracy is ready? Labour is still open to it but at least UK Chancellor Philip Hammond, who seems to have expressed some doubt, is now firmly in favour of a British exit from the customs union which would allow the UK to conduct its own trade policy, one of the great benefits of Brexit which can compensate for some of the inevitable “exit costs”.

Equally, also from the EU side, some less good ideas seem to run out of steam. The EU’s demand that the UK would still need to accept the rulings of the EU’s top court after Brexit was slammed by Franklin Dehousse, a former Belgian judge at that Court, as “dangerous” as it would “make a final deal less likely.” On his turn, Germany’s Foreign Minister, Sigmar Gabriel, has undermined this particular EU demand by suggesting that a joint EU-UK court may be a better idea, although he thought it should still follow the EU’s top court “in principle”.   

One can of course argue Brexit wasn’t a good idea, but as the lack of success of the UK Lib Dems, who are keenon a second referendum, has shown, the British electorate doesn’t like to be asked again about the issue. Therefore, it’s better to try to implement Brexit with as little trade disruption as possible and to avoid a “cliff-edge”, chaotic event. To negotiate an arrangement which ultimately allows Britain to determine its own rules and trade policy is the obvious way to do that.