Tuesday, April 24, 2018

Tackling the myths about Brexit and the customs union

Published on CapX
Wild theories are doing the rounds about whether Britain should or should not join a permanent customs union with the EU after Brexit.
Unsurprisingly, Remain supporters have leapt at the idea as a way to soften Brexit. Some even hope that it would constitute such a bad deal that it might just lead to a reversal of Brexit.
Downing Street yesterday ruled out Britain either remaining in the customs union or joining a future customs union with the EU. Nonetheless, the spectre of the customs union continues to loom large. And there are a number of dangerous myths that are badly confusing matters.
Myth number one: Britain joining a customs union with the EU would solve the Irish border issue
The customs union issue refuses to go away because there still isn’t agreement on how to prevent a hard border on the island of Ireland after Brexit. But a customs union would not be sufficient to solve the issue.
If Britain were to remain in a customs union with the EU, there wouldn’t be any tariffs charged on goods travelling across the Irish border. But, given that Britain would have left the single market. there would be divergence in terms of regulation. As a result, goods would be subject to checks at the border. (That is one of the reasons why there are checks on the border with the EU and Turkey, which has a partial customs union with the EU.)
One could, of course, argue that the easy solution to all of this is for Britain to join the single market too. That would in effect deliver undisrupted trade, and many Remainers probably wouldn’t mind. But, as I explain below, that would be even more unsustainable than merely staying in the customs union.
Myth number two: Britain joining a customs union would at least keep the status quo for customs and trade
This simply isn’t the case. At the moment, as an EU member state, Britain can veto trade deals that the EU undertakes. That would no longer be possible if Britain was a in a common customs union with the EU. In such a scenario, Britain wouldn’t be able to block an EU initiative to, for example, start trade talks with Russia. Far from maintaining the status quo, such a scenario would effectively leave Britain powerless over its own trade policy.
Myth number three: Britain joining a customs union with the EU is a sustainable arrangement and would “soften” Brexit
Because single market membership seems to be beyond the realm of what is politically possible after the referendum, a customs union has emerged as the primary tool to “soften” Brexit.
While limiting the disruption the process will cause to both citizens and business of course makes sense, customs union membership would dramatically reduce British sovereignty.
Britain wouldn’t be able to veto and therefore influence EU trade negotiations, for example with China, as the EU would effectively be negotiating to what extent China would get access to the UK market. Moreover, China would not be obliged to grant Britain whatever access the EU would gain to China’s market.  Is there anyone who seriously thinks this is even remotely sustainable, even if it were enshrined in the British Withdrawal Agreement?
It isn’t hard to spot the recipe for trouble. Short of some farfetched strategy that this may convince Britain to reverse Brexit altogether, it would mean a lot of time and energy intended to soften Brexit would have been wasted.
More realistic solutions
Those who genuinely want to soften Brexit, should look at more realistic solutions. Switzerland, for example, isn’t a member of either the single market or a common customs union, while it has a lot of trade with the EU and a lot more daily cross-border travel.
Conservative MEP Daniel Hannan has been a vocal supporter of looking at the Swiss precedent, pointing out that “the Swiss border is crossed by around 2.4million people every day — a colossal figure for a country with a population of just 8.4million… Switzerland also manages to sell more than five times as much per head to the EU as Britain does.”
He has received quite a bit of pushback for this, but at least the “Swiss precedent”, which has been ignored for a long time, is now getting more attention.
There are some very decent reasons why the Swiss-EU border arrangements could only be part of the answer to Britain’s predicament. Some “physical infrastructure” is needed and there are some petty import restrictions for tourists as well as delays and lots of bureaucracy which small companies in particular find difficult to cope with. Even at the border between the EU and Norway, whose single market membership should make things smoother, trucks would face an average of 4 minutes delay to cross the border.
Nobody claims that there are no challenges in finding a solution. A border will bring some disruption. But there are some precedents to smoothen things out and make it work. In Switzerland, the challenges may be bigger than in Ireland, as there is ten times as much traffic as between Ireland and Northern Ireland.
Christian Bock, the head of the Swiss customs service, says that his experience suggests an “invisible border” in Ireland after Brexit is possible. Speaking to the UK Parliament, he has described how there are customs “control points” at locations away from the border, also stating that only about 2 per cent of consignments crossing the Swiss border have to be subject to physical checks.
That said, Britain will be in a common customs union with the EU during the transition period after Brexit and it may well be the case that Britain will stay in it for longer than until the end of 2020, as planned, even if that poses some legal problems.
This because a number of issues need to be solved before Britain can leave. Not only is there the Irish border, there are also the procedures at the Channel ports. Furthermore, what would be the point of Britain leaving the common customs union if no new trade deals have been agreed yet by the end of 2020?
It’s difficult to predict how long it will take Britain to agree trade deals, safeguard the trade access it has enjoyed to third countries as a result of trade deals negotiated by the EU and sort out customs procedures at its borders.
What we know without doubt is that remaining in a common customs union with the EU permanently is certain to reopen negotiations on the UK’s status after Brexit, due to the grave implications this would have for British sovereignty. That is surely also not something the EU would like.
And so rather than obsessing over the customs union, those on both sides of the channel who warn of the perils of a hard Brexit should focus on serious, realistic and sustainable ways of softening Brexit.

Thursday, April 19, 2018

The Selmayr affair risks further damage to Juncker’s legacy

Published on Open Europe's blog 

The European parliament yesterday backed a motion stating Martin Selmayr's appointment as European Commission Secretary-General "could be viewed as a coup-like action." Open Europe's Pieter Cleppe examines the political fallout of this episode for the EU.

A large majority of the European Parliament have condemned the controversial appointment of Martin Selmayr as EU Commission secretary-general in a resolution, which stated that this “could be viewed as a coup-like action.”
The Parliament has asked the Commission to adopt new rules on appointments by the end of the year, so “that the best candidates are selected within a framework of maximum transparency and equal opportunities.” They then plan to “reassess” Selmayr’s appointment under the new rules.
The response of the European Commission came less than half an hour later, with Commissioner Oettinger stating that it won’t reassess his appointment, claiming that it “cannot be revoked,” that everything happened legally and it “[did not] go against the existing practice followed over many years.”
Furthermore, according to a former Belgian judge in the European Court of Justice, Franklin Dehousse, the appointment is “legally shaky.” He argues that the episode will “destabilize the whole institution,” writing that “for the first time since 1952, the appointment of the secretary-general is both legally shaky and widely contested.”
Although there have been calls for Selmayr to step down, a majority of MEPs voted against this. An official of the European People’s Party, to which Selmayr belongs on behalf of his membership of the Belgian Christian Democrats, said: “We are not going to create a political crisis for the appointment of a high official.” This of course also relates to the fact that Commission President Jean-Claude Juncker has linked his own fate with that of Selmayr and has quite aggressively forced his EU Commissioners to toe the line here. Interestingly, MEPs also voted against reassessing the European Parliament’s own – troublesome – ways of appointing their own top officials.
Assuming that Selmayr continues to refuse to go, the episode risks being seen as more proof that the EU is going the ‘wrong way’ where sharp practice goes unchecked, even at the highest levels. It also underscores that the European Parliament – recently described by President Juncker as “ridiculous” – is mainly a motor and not a check on the EU Commission machine.
This affair also risks further tarnishing Juncker’s already troubled legacy, which includes presiding over Brexit and a severe breakdown of relations with Central and Eastern Europe.
Nonetheless, it seems that the Commission leadership have made their choice: Selmayr stays on.

Wednesday, March 21, 2018

The UK’s wins and losses in the Brexit transition deal

Published on CapX
On Monday, Britain and the EU announced a lot of progress on the terms of the British exit from the European Union, specifically when it comes to the so-called “transition stage” which will last until January 1st 2021, and during which Britain will take over EU rules in order to keep access to the EU single market.
Here’s an overview of some “wins” and “defeats” for the UK government.
Some UK “wins”
More control over trade policy during the transition
Britain will be able to negotiate and sign trade deals with third countries during those 21 months, although deals cannot enter into force until after the transition, unless approved by the EU.
EU negotiator Michel Barnier has however made clear that the UK Trade Secretary Liam Fox will probably need to focus more on keeping the trade access Britain enjoys to third countries thanks to trade deals negotiated by the EU, as he said: “They are leaving 750 international agreements. 750! The UK has work to do to reestablish relations with all those partners.”
Also, here, however, the British have obtained a concession. The EU has been convinced to adopt the British strategy of telling non-EU countries to treat the UK as a Member State during the transition period. Whether Mexico and South Korea will be happy to do so is another question, but one would suspect they won’t create a big fuss. They’ll probably save that for later, at the point when Britain would no longer enjoy full access to the EU’s single market.
Out of EU foreign policy, right to opt in to new justice and security measures
According to UK officials, the EU has listened to its concerns by fulfilling its desire to be opted out from EU foreign policy decisions during the transition phase while giving it during that time the right to opt in to new justice and security measures. In times of terrorism, and with a UK Prime Minister who has always been very keen on EU security cooperation during her time as Home Secretary, this is no surprise.
A pledge from both sides to act in “good faith” with a joint committee to oversee the agreement
The main concern for the UK government obviously is for Britain not to be called a “vassal state” during this time when it won’t be able to vote on the EU regulations it will be bound to apply. To make this bitter pill more acceptable, the EU has conceded to insert a promise that both sides will act “in full mutual respect and good faith” and “assist each other in carrying out tasks which flow from this Agreement”. Given that the transition period isn’t all that long and because both sides will be negotiating a new trade relationship at the same time, one shouldn’t expect anything less, but it’s a good idea to remind everyone of the obvious by including it in the withdrawal agreement.
This is no “right to delay rules”, as enjoyed by Norway, that other non-EU country that is in a “rule-taker” status in order to keep full access to the EU’s single market. In a previous commentone month ago, I’ve made clear how Britain is missing out on some of the perks enjoyed by Norway. Some of that has been mended. New is that the EU has also included a provision – in article 123(7) – for Britain to be consulted on newly proposed EU laws during the transition period, while a joint committee will oversee application of the arrangement. These are elements reminiscent of Norway’s deal. For the Norwegians, it is very important to be able to “shape” decisions, short of having the right to vote.
Fundamentally, the question will be how long the transition stage will turn out to be. There are no provisions to extend it, but apparently, many European governments think the duration can be reviewed. Legally it’s possible to extend it simply by having EU leaders and the UK government sign a Treaty to extend it, while enabling the trade aspects to enter into force provisionally, similar to the procedure of the EU’s agreement with Ukraine and Canada. Parliamentary ratification can then follow later. Without any doubt, one can and should raise some legal questions if this method were to be applied, but the urgency and importance of it all may well make this happen. If the “transition” is extended, the UK will likely ask for more sovereignty, as this would be decided right before the 2022 general election. Then, on the other hand, it should be possible to agree a lot. The UK’s pragmatic vision for its future relationship with the EU should stand a good chance of being accepted, as I’ve written.
Some UK “defeats”
Free movement
The UK government wanted to restrict freedom of movement from the point it will have legally left the EU, but it has backed down on this one. Therefore, freedom of movement will more or lesscontinue to apply during the transition, meaning that any EU citizen who wants to move to Britain in order to reside there for the rest of his or her life has time to make such a decision until the end of 2020.
The question is whether we’ll see a last-minute “rush” into Britain. Perhaps it will depend on what the UK’s future immigration laws look like. Given the fact that the UK public isn’t very keen on excessive migration restrictions after Brexit, we shouldn’t expect major restrictions. According to Open Europe polling, 56 per cent of British agreed with the idea of “controlled migration” while only 36 per cent supported simply “reducing the numbers of people coming into the UK”. Those British economic sectors dependent on EU workers will be happy to hear it. The fact that the UK government hasn’t played it hard here with the EU should also be an indication that when the UK has regained control over immigration policy towards EU citizens, it will remain a welcoming destination.
Fisheries policy
When it comes to the annual fishing negotiations on how much EU countries’ fishermen can catch in each other’s waters, the UK has accepted that its share of the total allowable catches will remain the same during the transition period.
David Davis said that: “Through 2020 we will be negotiating fishing opportunities as an independent coastal state, deciding who can access our waters and on what terms.” That doesn’t satisfy Scottish politicians or the Scottish Fishermen’s Federation, which stated that “we will leave the EU and leave the Common Fisheries Policy, but hand back sovereignty over our seas a few seconds later” as “our fishing communities’ fortunes will still be subject to the whim and largesse of the EU for another two years.”
Under the transition arrangement, Britain will only have the right to be consulted, not to vote during the annual haggling on fishing quotas. France has been pushing for the EU to increase its share relative to Britain, so the UK government has negotiated that the British share of “total catch” will remain unchanged during two years after EU exit.
The idea is now to link any changes in fishing quotas to the future EU-UK trade arrangement. Here, Britain has a strong hand, as European fishermen would catch four times the value of the catch allowed for the British fleet in British waters, but then UK fishermen catch a lot more fish than British consumers are able to consume, so the UK will want to keep the ability to sell British fish in Europe. That is why environment secretary Michael Gove had already pledged last summer to continue to grant European fishermen access to British waters.
What’s not agreed yet
On the issue of the Irish border, both sides have agreed that there should be a “backstop” option in the withdrawal agreement, which would enter into force if no other solutions are agreed. It doesn’t really go much beyond that, as the legal text is currently “unacceptable” for Britain, so expect quite a bit more drama on this issue, which is ultimately linked with the future relationship between Britain and the EU. Britain has suggested it’s keen to follow the “Swiss model” for selected sectors, by voluntarily cut and pasting EU rules that apply where there’s a lot of trade, to avoid disruption – with the caveat that the UK may still ultimately refuse to apply EU rules, accepting that it would then risk losing market access. A solution may be to apply this to the Irish border issue, with Britain taking over EU rules in those sectors that are relevant for Northern Ireland and the all-island economy. For now, the EU has branded this “pick and choose” – but on the other hand it had agreed in December that Britain should selectively “align” its rules only with the “rules of the Internal Market and the Customs Union which, now or in the future, should support North-South cooperation, the all-island economy and the protection of the 1998 Agreement.“ Supposedly, all other rules shouldn’t be aligned. Isn’t that picking and choosing as well? Never mind that there wasn’t, of course, agreement on the content of the word “align”.
Maybe the EU was a bit frustrated when it suggested that Britain should erect a customs border within its own territory, but let’s hope that following the British outcry, the EU has realised it’s not exactly making a great contribution to solve the Northern Irish puzzle, also given that it was agreed in December that the whole UK – not parts of it – would leave the Customs Union. Also Labour has stressed that the EU’s backstop option for the Irish border as currently drafted could never be acceptable to any British Prime Minister. On March 26, talks will begin between the EU, Britain and Ireland, so let’s hope cooler heads prevail.
Despite stressing it is acting as a single bloc, the EU has provided a de facto veto to Ireland regarding the border question and to Spain regarding Gibraltar. Barnier has stated that no deal can apply to Gibraltar without a bilateral agreement.
Tensions over Gibraltar and Spanish border checks have been nothing new, but whereas the UK could in the past count on the EU to safeguard a smooth border over there, the European Union suddenly seems much less interested in preserving smooth cross-border movements during the transition – at least as compared with the passion it (rightly) shows for EU citizens in Britain. Are the 10,000 people – including many EU citizens – who cross from Spain to Gibraltar to work every day not worth the attention?
Of course, Spanish politicians are aware they aren’t going to manage to use Brexit to negotiate Gibraltar out of British hands and overturn the 1713 Treaty of Utrecht. Actually, Spain is one of the EU member states most friendly to Britain, given the importance of the UK for its tourism sector. Then, haggling over Gibraltar during Brexit talks constitutes a political posturing opportunity that may be hard to resist for any local politician. Possible Spanish demands mayinclude joint control of the airport and ending what Madrid sees as Gibraltar’s status as a tax haven.
The arbiter
Although Britain has agreed to selected supervision by the EU’s top court, the European Court of Justice (ECJ), over aspects of the transition, for example EU budget law rules, it is still refusing to agree to letting the ECJ be the ultimate arbiter over disputes relating to the withdrawal and transition arrangement, especially as the EU is proposing that the ECJ can impose penalty payments as a remedy.
Is the prospect of a transition period working to avoid disruption for businesses?
According to the Chartered Institute of Procurement and Supply, one in seven European companies with UK suppliers has moved part or all of their business out of the UK. Of course we don’t know to what extent this is due to Brexit – it may well be have to do with the Bank of England’s devaluation. Also, we don’t know for sure if certain economic developments would have been much different in the absence of a transition deal. In any case, business federations are loudly proclaiming their desire to have a transition deal agreed as quickly as possible, so their concerns should be listened to. At a time when the US is experimenting with dangerous protectionist policies and the European Commission is clumsily responding with tit-for-tat threats, businesses shouldn’t have to worry about the EU’s obsession with imposing its own arbiter on a deal or inflexible politics in Northern Ireland and Gibraltar.

Wednesday, February 28, 2018

How long will the EU’s Brexit inflexibility last?

Published on CapX
While the debate rages about the European Commission’s draft treaty setting out the terms of the Brexit divorce and transition period, we’ll soon learn more about the UK’s vision for its future relationship with the EU.
On Friday, Theresa May will make yet another big speech on Brexit. She will set out in more detail how the British government sees UK-EU relations after the transition stage, which is due to end by January 1, 2021 and the terms of which still haven’t been agreed.
Thankfully we already know, in general terms, what Theresa May will say. The proposal has been dubbed the “three baskets approach”.
The first basket contains sectors in which Britain would be happy to voluntarily take over EU regulations. These are areas where this is needed to prevent supply chain disruption. Aviation, car manufacturing and chemicals are three salient examples. Would the UK really want to insist on having different standards for steering wheels?
Then again, the “voluntary” part is also key. Britain would be happy to avoid damage for supply chains by taking over EU rules, but ultimately it shouldn’t be forced to do it automatically. What if the EU were to come up with an onerous update of its costly REACH chemicals regulation, which faced a lot of protest when being drafted? It’s known that the EU regulatory process is, to put it mildly, not always science-led. The European Parliament in particular has demonstrated a fondness for the more superstitious side of things. In such cases, Britain may find it useful to be able to refuse to simply copy the EU’s rules, instead raising the issue at a joint committee where both sides can then try to find a compromise in order to avoid the UK losing market access and supply chains being disrupted.
The first basket, then, is basically what Switzerland negotiated with the EU after it voted against single market membership in 1992. But in other areas Britain would refuse to import EU rules. Instead, it would try to obtain a declaration from the EU that UK rules are “equivalent”. This is the second basket.
A good example of this approach would be clearing houses. It’s quite realistic for the UK to obtain this status given that the EU grants US clearing houses access to the EU market and that blocking UK clearing houses from offering their services to EU27 clients would fragment the clearing market and badly affect finance opportunities for companies in mainland Europe.
Of course, in many cases, the EU will refuse to declare divergent UK regulation to be “equivalent” and deny market access, even if this harms EU27 consumers. After all, Trumpist economic thinking is alive and well in the EU27. Special interests and powerful exporters will come before consumers, even if that flies in the face of economic orthodoxy.  Hence the need for the “third basket”, for sectors without equivalence.
Is this UK government approach realistic? The short answer is yes. Brexiteers like Boris Johnson, will be very keen on the ultimate UK right to say no, but are sympathetic to industry’s concerns about supply chains, so to take over 99 per cent of the EU’s rules is fine, as long as Britain can say “no” when EU rules really don’t make sense. The Swiss approach squares that particular circle.
Where there are no supply chains, why should the UK government take over EU regulation rather than merely try to get its own rules to be declared “equivalent”?
Many will say that, however reasonable such an approach sounds, the EU will not agree to it. I don’t think that is the case. Why would the EU refuse the UK’s offer to copy and paste many of the EU’s rules, while only asking in return that for the sectors where it does that, the EU offers market access?
Brussels will be flattered by the thought that others are importing its own regulations; and EU companies with supply chains between the UK and mainland Europe will also push very hard for this.
Therefore, it is surprising that the initial EU reaction vis-à-vis the “three baskets approach”, even before its official unveiling on Friday, has been quite so negative.
The first reaction came in the form of slides published by the European Commission, which claimthat the approach would amount to cherry-picking and represent a “risk for integrity and distortions to proper functioning of [the] internal market”. This claim ignores the fact that the EU has such a deal with Switzerland. That, apparently, doesn’t endanger the internal market.
Furthermore, European Council President Donald Tusk called the approach “pure illusion”, describing it as “cake philosophy”. Irish PM Leo Varadkar also felt the need to mention cake, saying it was “not a significant move away from having your cake and eating it”. Even Dutch PM Mark Rutte, one of Britain’s friendliest neighbours said: “I told [May] we don’t like cherry-picking and that it’ll be difficult to come to a bespoke deal along the lines some in the UK are suggesting.’
Despite the fondness to dismiss “picking and choosing” or “having your cake and eating it”, EU leaders are well aware that the EU did close such a deal with Switzerland and that even within the internal market, the opening of markets has been selective. Germany has for years obstructed opening its insurance market, in spite of the fact that doing so is a Treaty obligation.
In reality, the EU truly is one big festival of picking and choosing. But, of course, it’s possible that such flexibility will not be granted to the UK. That however would impose a very high cost to both sides, with estimates of up to 1.2 million job losses for the EU27 alone in case of a cliff-edge “WTO” Brexit.
Behind the scenes, things look less inflexible. A Swedish government report makes mention of the Swiss deal, internal Belgian Foreign Ministry deliberations are looking at the arrangements foreseen in the proposed TTIP trade deal between the EU and the US, and some more market-friendly German commentators are openly dismissing Barnier’s “no pick and choose” approach. Warnings that Brexit woes are hitting German businesses in the UK hard and outlooks are growing increasingly pessimistic, focusing some German minds on the economic consequences of inflexibility.
Even EU Commission chief Juncker has admitted that he thinks EU unity is unlikely to survive the second phase of the Brexit talks once big business starts pressuring capitals to accept British proposals on cherry picking. He fears that “in the end we’ll have several extras, several exceptions that will make Europe a mess”.
It is a fiendishly complicated negotiation, but the one big advantage is that, unlike in other trade talks, there won’t be talks on which sectors should be opened up but instead on which sectors should face restrictions. This is likely to lead to warnings from industry that will hopefully avoid most of the damage. And, as the UK government has pointed out, it’s of course a great advantage that Britain will have implemented all of the EU’s rules already, a big difference with Japan and Canada, and a reason why some optimism is warranted.
Former UK deputy PM Nick Clegg does offer some fair criticism of the UK government’s approach, when he writes that under this Tory plan, “the state anatomises a sophisticated economy into three discrete zones and gives each a different regime”. That’s correct, but it’s also the case for Swiss-EU relations. Moreover, it’s mainly the EU side demanding market restrictions, so perhaps he should focus his wrath on them.
In practice, it may be that only two sectors are identified: goods and services. That avoids the legal complexity involved in defining which exports belong to which sector. As the EU’s Single Market in services hasn’t been opened up properly, the UK also has less to lose here from demanding the right to have divergent rules and lose some market access.
It is regrettable that for now the EU is effectively refusing the UK’s offer to voluntarily copy EU rules in selected sectors to get market access there. Clearly, the EU instead wants Britain to copy its rules in all sectors. That is to choose self-harm over the kind of flexibility the EU has already offered Switzerland. Let’s hope that after Theresa May fleshes out the UK government’s approach in more detail, that rigidity starts to disappear.