20 Jun 2018

Wishlist: The Government is largely united on what it wants from Brexit, but not on the price of it

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The attention of the media and others on Brexit of late has been mainly on the theatrical elements of it. These include the bitter battles over the EU (Withdrawal) Bill within the House of Commons and between the Commons and the House of Lords and the negotiations being held about the legal details of the Withdrawal Treaty in advance of the EU Council meeting on 28-29 June. The third element, however, namely the White Paper on the ultimate “end state” relationship between the UK and the EU-27, which will be published shortly after that Council, has been barely mentioned.

Which is pretty strange, really. In the wider scheme of life, the Government finally setting out an opening bid on the end state should be seen as a rather important occasion. Up until now, the closest that we have come to such a “blueprint” has been through two speeches delivered by Theresa May. One last September in Florence, which was in any case mostly about the “offer” to be made to the EU to facilitate an orderly exit, and another this March at the Mansion House (although it had been intended for Newcastle until adverse weather intervened) which provided certain hints about the future settlement, but was again more designed with the management of the exit in mind.

All of which has led to the impression and hence the accusation that the Government does not know what it wants from the post-departure relationship. This charge is even made within Conservative circles themselves. If so, one would have thought that the production of a White Paper on the “end state” would be a very difficult exercise and highly divisive within the Cabinet. Actually, that is most unlikely to be the case. The Government is largely united on what it would like from Brexit. Where there is division, and there certainly is discourse, is on the price deemed to be needed to achieve it.

So what would ministers want the “end state” to involve (beyond a freedom to strike trade deals)?

A comprehensive free trade agreement involving goods

There is a clear consensus that the ideal outcome for goods would be a free trade agreement that essentially duplicated the core features of the operation of the Single Market between the UK and the EU. Goods would move entirely freely without either tariff or non-tariff barriers. Rules of origin would be marginalised. Mutual recognition of standards would be the order of the day. The passage of goods would be, to deploy one of Theresa May’s favourite phrases, “as frictionless as possible”. The weakness in that form of words is that it is unclear where “as frictionless as possible” means as frictionless as technically possible (minimal) or as frictionless as politically possible (more awkward).

Absolutely everyone in the Cabinet could sign up to this as a first principle. The dispute is between those in the “soft Brexit” camp, who think that the inevitable and acceptable price of this is a very modest level of divergence between the UK and the EU over matters of regulatory policy (basically the UK sticks to current arrangements and does not flex its muscles in terms of its autonomy), and those in the “hard Brexit” contingent, who assert that as the EU runs a large surplus in goods traded with the UK (to the tune of £82 billion in 2016), it must not be able to impose itself on our rulebook.

Setting that (admittedly substantial) argument to one side, it seems likely (despite some rhetoric from Brussels at the moment) that the interests of key nation states (especially in northern Europe) are such that an agreement on goods of this kind is entirely possible, but there may well be certain exceptions. Almost no free trade arrangement, no matter how liberal overall, almost anywhere on the planet does not involve some deviation from the norm when it comes to the agriculture sector. Agriculture is such a consistent anomaly in these matters that one senior trade negotiator allegedly said privately that the one and only proper free trade zone in that space was in the Garden of Eden.

A broad but less than totally comprehensive agreement involving services

Then there are services. Ministers are not naïve about the challenges here. There is not a genuine single market in services in the EU to start with, as any private equity operator who has ever sought either to purchase, or merely to deal with, financial institutions across Europe, could ruefully testify. Furthermore, even when the UK was within the EU and showed no sign of leaving it, the dominance of the City of London over financial services, and trading in the euro notably, was openly resented. The notion that this might continue irrespective of Brexit would cause feathers to be spat in Paris. Even a harmonious Brexit deal overall will require a form of “blood sacrifice” to occur in this realm.

Yet it is also a fact that the EU has a dependency on London in this area which would take decades to duplicate. Hence, there is a mutual interest in finding an agreement on services even though this would involve far more of a departure from the status quo than exists for goods. It is especially important for the UK because financial services (narrowly defined) are worth 6.5% of economic output as of 2017 (or £119 billion) and massively more than that when high net worth individuals who are employed inside this industry are assessed in the national tax base. Retaining this is crucial even though the UK‘s surplus on services with the EU is surprisingly small (only £14 billion in 2016 or barely a sixth of its deficit on goods). The debate is whether the operating principle in this sector should be a variant of “mutual market access” (as the UK would like), or the more fragile concept of “equivalence” (which the EU would prefer). The Cabinet and indeed the parliamentary Conservative Party is as of one in preferring to retain an accord with the EU on services rooted on mutual market access. The discord will come if the EU digs its heels in and demands a very high level of equivalence and minimal regulatory divergence as its terms for sticking with existing practice. The “soft Brexit” lobby would want to play ball with the EU. The “hard Brexit” fraternity will resist such a solution.

A continued association and active involvement with a small set of important EU agencies

Google does not offer many examples of great quotes from Prime Ministers of Luxembourg. Despite this, the current incumbent in that post, Xavier Bettel, provided one earlier this year when he cutely described the UK position on the EU thus: “They were in with loads of opt-outs, now they will be out and want a load of opt-ins.” His words were a touch sweeping but not without sizeable legitimacy.

The formal stance of the UK Government is that while it wants to be outside of the Customs Union and the Single Market (which are the nitrogen and oxygen of the EU), it would be very content to maintain an associate membership with certain aspects of the EU and provide a “fair” financial contribution to them as part of the bargain. The list is not that long, but it is not inconsequential. It includes the Galileo Space Programme from which the UK appears to be on the edge of expulsion despite having contributed £1 billion to the costs (although BVCA Insight would stake its money on a very last minute compromise on this one). In addition to which, the UK has indicated that it would like some form of involvement with Horizon Europe, the EU’s £100 billion-plus science programme, the Erasmus Study Abroad Programme, a slew of security and terrorism related bodies including Europol, the European Criminal Research Information Service and Passenger Name Records, and an association with the European Aviation Safety Agency, the European Chemicals Agency, plus the European Medicines Agency, and (not legally an exclusively EU item) the European Space Agency.

Once again, the Cabinet will have no difficulty endorsing all of this in theory. The challenge will be in what sort of role under what sort of terms and what sort of payment such an alliance might involve. The “soft Brexit” faction will want in at almost any price. The “hard Brexit” fraternity far less so. Thus the real split will become evident. It is about access versus autonomy in theory and cash in practice.

Tim Hames
Director General, BVCA


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