Thursday, January 18, 2018

What to expect from Brexit in 2018

Published on CapX 
When the EU conceded before Christmas that enough progress had been made on the so-called “divorce issues”, the Brexit negotiations could finally move on to talks about the future EU-UK relationship and how we transition from the status quo to that new relationship. What should we expect from a new phase in the Brexit talks?
From 29 January: negotiations on a time-limited transition period after Brexit
According to the European Commission, the real start of the “negotiations on transition” will take place on January 29th, when the General Affairs Council “meet in an EU27 format” (see picture). Until then, “preparatory talks at EU27” level are ongoing. The EU wants a transition period that lasts until the end of 2020, so for just under two years. We know that the EU is ready to provide market access to the UK but only if Britain sticks to all its rules – new and old – without being able to vote on them, and if it accepts the supervision of the European Commission and the ECJ, without any representation in either. Here, I explain how the transition stage is likely to look like.
According to the latest version of the guidelines that EU member states have sent to Brexit negotiator Michel Barnier, he must make sure Britain will be even more of a “rule-taker” than Norway. The UK will only be invited to attend regulatory committees “exceptionally on a case-by-case basis”. Being at such meetings is one of the main ways to influence the decision-making process without any voting power.
The EU also wants EU citizens arriving in the UK after March 2019 and until the end of the transition period to be eligible for special status to remain in the UK.
On trade during that transition stage, the EU wants the UK to have to seek “authorisation” in order to roll-over EU trade deals with third countries after March 2019.
It looks like the Brexiteers in the British government are so far ready to accept this. They may fear that Brexit would somehow be reversed and that therefore the priority must be to legally exit the EU and become a third country, even if that means accepting an undesirable transition status. Backbench Leavers are another matter altogether.
How long will transition negotiations take? The UK government is hoping a deal on the nature of the transition can be done in time for the EU summit in March. The EU’s timeline anticipates agreement at the October summit.
Interestingly, The Times reports that “EU negotiators have judged that Britain will make more concessions to obtain a transition deal and expect the government to ask for a longer period to allow business to adjust. Sources suggest that the request will remain secret until late this year to avoid a rebellion by Eurosceptic cabinet ministers and backbench MPs”. The newspaper adds that the guidelines for Barnier are not seen as “precluding” an extension at the last moment of trade talks, with one negotiator explicitly stating that “the transition will be longer…We expect Britain to ask for that.” The article even mentions “until 2022”, which would make sense as this would theoretically come just before a UK general election, which is clearly the real deadline for the UK to ditch “rule-taker” status.
By 18 October: a deal on “withdrawal” 
For all the excitement at the end of last year, a final deal on the “divorce issues” – which include the “financial settlement”, the rights of citizens and the Northern Irish border issue – is yet to be reached. Britain and the EU will continue to negotiate these questions, aiming to reach an agreement by the October summit. MEPs have already warned that there are still “phase one” issues to be resolved. And the Commission is still trying to push the ECJ as the institution that would police the application of this agreement.
From October: ratifying the withdrawal agreement which includes the deal on transition  
Assuming a deal on transition and withdrawal is finalised by October, it’s up to the 27 EU governments as well as the European Parliament to approve it. The British Parliament has also been promised a “meaningful” vote.
A “qualified majority” of 27 EU governments is needed, meaning at least 72 percent of the continuing member states representing at least 65 per cent of their population will need to agree. Failing their support, Britain will automatically leave without a deal two years after the UK government triggered Article 50.
Will there be unanimity among the 27 remaining EU member states? Probably. A deal on Brexit is so important that there needs to be a firm consensus on it. Of course, the fact that not every country has a veto means its power to force through its demands is fairly weak.
What about the European Parliament? Could MEPs scupper a hard-fought Brexit deal? Again, that seems unlikely. MEPs only have a binary Yes/No vote. They probably won’t dare go against their political masters. And the rather protectionist body won’t have to vote on an actual trade deal but instead on an agreement promising market access to the UK in return for the British giving up their voting rights. But there is the important caveat that you should never say never when it comes to the European Parliament.
Will national parliaments be involved? Most likely not, unless there are changes to some of the trade deals the EU has concluded with third countries, such as Mexico or South Korea. Initially, the UK government was planning to replicate before March 2019 up to 40 of the 750+ international treaties the EU has concluded, but now the UK government is apparently looking to ask to remain party to all of these arrangements during the transition. That will require the consent of EU member states and the external partners. Otherwise the EU would effectively be adding a country to the agreement at will. Opinion is divided to how legally and politically complex this will prove to be. It does however seem clear that the most important economies the EU has a trade deal with are likely to be flexible: South Korea isn’t waiting for a “trade fight” with the UK, Mexico has its hands full with Trump and Canada has its historic ties with Britain.
Draft EU documents that need approval foresee that the UK “will remain bound by” trade deals the EU has signed with third countries, meaning that the UK will not necessarily have access to third countries’ markets, while it will have to respect EU tariffs when receiving goods from the third country. In other words, the UK will be dependent on goodwill if those third countries. However, because some EU member states, such as the Netherlands, Ireland, Belgium, Sweden and Poland, are reportedly worried about this affecting production chains, which often have a substantial percentage of UK products in them, it can be expected that Britain will receive some EU backup if the likes of Canada, Mexico or South Korea were to complicate matters. In any case, Britain would get the right negotiate new trade deals with the rest of the world during the transition stage, although France is still holding out here.
At the EU Summit of March 22, EU countries are expected to sign off Barnier’s guidelines on the negotiations on the UK’s future trade relationship with the EU. Actually, the goal is not to have a trade agreement ready by March 2019 but a political declaration whereby both sides mainly pledge their intent to agree a trade deal during the transition stage. Because of that, we won’t have any formal negotiations this year but a mere “scoping” of what a future relationship might look like, so that the formal trade negotiation can take place during the transition stage.
Before the March 22 however, both the EU and the UK need to figure out their stance on what kind of post-Brexit relationship they prefer.
Before March 22: preparation for “scoping” of the UK’s future relationship with the EU
Theresa May plans to outline her government’s position on the future UK-EU relationship during the February Parliamentary recess. She apparently wants to agree the process of upcoming talks with the EU, what the future economic and security partnership should look like, and also how a so-called “level playing field” with the EU might look. The latter is a euphemism for the extent to which the UK – or the EU – is allowed to diverge in terms of regulations.
The Times notes that there are different stances within the cabinet on how much divergence the UK should aim for. Brexiteers Boris Johnson, Michael Gove and Liam Fox support more divergence, Philip Hammond and Amber Rudd much less, and the Prime Minister somewhere in the middle.
And how do EU27 governments see their future relationship with the UK? To say there isn’t much clarity here would be an understatement. And given that an economy equal in size to the 20 smallest economies in the EU27 is leaving the bloc, the lack of a sense of urgency is shocking.
Instead, the EU seems to be content to just wish the whole issue away. Just look at the interventions from Jean-Claude Juncker and Donald Tusk this week, in which they insisted that he UK could still change its mind about leaving. The debate on the EU’s new long-term budget may have focused minds and made some realise that Brexit actually has consequences, not least on the EU’s finances.
This is where the cracks in the EU’s united front start to show. At a recent Brussels summit, one prime minister is said to have complained that “I hope no one is suggesting that my country’s interests should be sacrificed in the EU’s name”, with The Times reporting that some countries with a high exposure to trade with Britain, such as the Netherlands, have been “angered” by suggestions that European pain will be necessary to punish Britain for leaving.
Furthermore, the Spanish and Dutch finance ministers have agreed to push for a Brexit deal that keeps Britain as close to the EU as possible. They too are concerned about the economic consequences of tariffs on UK-EU trade.
The differences of opinion don’t stop there. Another point of disagreement is the UK’s financial services sector’s access to the EU. Luxembourg’s Prime Minister has rebuffed Barnier’s claim that allowing easy access for the UK’s financial services would amount to “cherry picking”. As he put it, “while I stick to the principle that there can be no cherry-picking, I still think that we should refrain from orthodox or binary thinking”. Germany’s Financial Supervisor BaFin said last week that its first priority wasn’t grabbing business from London but to avoid disruption, stating “we try to be as flexible and as pragmatic as legally possible” with regards to Brexit, and warning that a hard Brexit with no transition period could threaten financial stability. Last but not least, Ireland’s Central Bank Governor Philip Lane has come out against ECB President Mario Draghi’s suggestion that Brexit costs will be containable and concentrated in Britain. Lane warned: “If there is a genuine shock and we have a Brexit without a transition period, then that is a financial stability risk.”
Ahead of the March summit, EU negotiators are identifying sectors of the economy where there is no EU unity. They include fisheries, aviation and financial services. Some EU officials apparently fear that in the event of a no-deal Brexit, EU27 governments could respond by unilaterally protecting their own economies in ways that would undermine the single market. In other words: the EU has a very big stake in securing a Brexit deal which avoids disruption.
From March 22, 2018: “Scoping” of the future relationship
The whole point of the transition period is to allow more time to negotiate the trade relationship between the EU and the UK. The ideal scenario would of course be that both sides simply pledge to allow free entry for products or services that are legal in the other jurisdiction, but this kind of “mutual recognition” is anathema to some of the more protectionist forces that hold sway over EU27 governments, at the expense of ordinary consumers.
It’s true that most trade deals take much longer to be negotiated than the three or four years that constitute the upper limit of the length of a transition period. But there is a big difference between a UK-EU trade deal and the agreements it is usually compared to. The two parties don’t have to convince each other to open up markets that have so far been closed. The agreement is about finding a way to maintain the status quo. In other words: when you have companies already exporting and importing without barriers getting in the way, the opposition to any trade restrictions will be far greater than when those trade flows do not exist yet. Moreover, there’s also the point made by Sam Woods, the head of the Bank of England’s Prudential Regulation body, who thinks that a trade deal with the EU, including financial services, could indeed be completed in 3 years, because “we’re fortunate in starting this discussion in the unique position in terms of having completely aligned rules and strongly aligned supervision.”
The Financial Times points out that “on even the most optimistic assumption, the process of scoping, negotiation, ratification and implementation of the new relationship will take a minimum of five years from 2018.” Maybe. But, as I’ve argued before, it’s possible to sign a trade agreement by 2021 or 2022, with terms entering into force provisionally. Parliamentary ratification could then happen in the years following. An alternative would be to let the UK exit its “rule-taker” status gradually, as and when agreement can be found on a sector-by-sector basis.
For some reason, the EU Commission may try to push talks about financial regulation as well as aviation backwards, despite the fact that the clock is ticking. The reason is a lack of unity, with one official saying: “That is where it becomes frankly complicated for our side… Once you go into individual sectors then interests differ.
At the end of December, The Times obtained information from “two of the EU’s most senior officials” on the EU’s strategy. To maintain EU27 unity, they plan to demand that after the transition, the UK signs up to a “level playing field mechanism” which would tie the UK to EU standards in return for access to the single market. The EU would like to include the possibility of penalties, such as tariffs, if, for example, a future British government subsidised its car industry or sought competitive advantage through new banking regulations.
A second part of the cunning EU plan to is reportedly to exploit “helpful rhetoric” from Brexiteer ministers to scare EU nations with strong trading links to Britain with the threat of a race to the bottom on corporate taxes and environmental standards. (Of course, those EU officials probably couldn’t imagine that EU citizens and companies might actually gain from lower corporate taxes or more sensible environmental regulations coming about due to regulatory competition between the UK and the EU.)
The whole point of all of this “scoping” is to agree some kind of a political declaration by March 2019. The first part is likely to include a commitment to negotiate a trade agreement by the end of the transition stage. This is not just to reassure Britain but also because it’s helps to comply with WTO rules which may not allow some of the transitional arrangements considered. The second part of the declaration will relate to the wider political relationship, including defence, security and foreign affairs.
Then, in 2019, the real work starts: detailing where trade between Britain and the EU will suffer disruption due to the unfortunate refusal to simply mutually recognise each other’s regulations. That – at least – is the plan.

Wednesday, January 10, 2018

Europe needs to slash its budget to survive

Published on Politico

As discussions about the new long-term budget kicked off in Brussels this week, European Commission chief Jean-Claude Juncker used a tired old argument to preempt criticism of lavish EU spending: It’s only 1 percent of GDP.
His comments are misleading. We’re talking about 1 percent of the annual wealth produced by some 511 million people, amounting to almost €1 trillion over seven years. To put it mildly, something is rotten in Juncker’s “EU Budget” kingdom.
Demanding “more money” from its members is a bad way for the EU to start its new year. At a time of rampant Euroskepticism, Brussels should be slimming down and reforming its budget, not hiking up the price tag. And yet the Commission’s solution to limit spending cuts appears to ask citizens to pay more.
The EU spends the bulk of its budget on agriculture —  to the tune of about €340 billion over seven years. Less well-known is the fact that most of those funds — more than 70 percent — are used up in “direct payments” to owners of agricultural land. Previously, cash payments were linked to production, leading to embarrassing overproduction. Now, we’re stuck in a system where banks, and even the Queen of England, receive gigantic amounts of taxpayer money simply because they happen to own agricultural land — regardless of what they produce, or if they produce anything at all.
Ending this spending would have been the most sensible thing to do — especially as Britain gears up to leave the bloc and leave a gaping hole in its coffers. Instead, Juncker reiterated that he opposes any “drastic” cuts to the program, even as he voiced his support for beefing up other EU spending projects, such as on external border control.
The second large share of the EU’s budget goes to regional spending. Research as to whether these intra-EU transfers have contributed to poorer regions catching up is skeptical, at best. A 2016 study by the Centre for Economic Policy Research even concluded that “EU structural funds [are] negatively correlated with regional growth” and “[do] not seem to contribute effectively to foster income convergence across regions.”
That’s not to say the EU has not benefited new member countries, but the reduction of trade barriers seems to have helped far more than any financial transfers.
The management of these funds is often inefficient, and even rife with fraud. Just this week, the EU’s antifraud office OLAF found “irregularities” in subsidy payments obtained by the newly elected Czech Prime Minister Andrej Babis. OLAF doesn’t publish its reports on misspending of EU funds in member countries, so we can only imagine what else is happening, especially as public authorities in EU countries only very reluctantly report cases of fraud to Brussels.
Until 2017, the European Court of Auditors refused to declare EU spending to be “free from material error.” But that didn’t stop the European Parliament — the supposed watchdog of the EU Commission — from approving the spending.
To be sure, the Commission has said it could envisage a 5-10 percent cut to these cohesion funds. That’s a good sign. But it also needs to do more to optimize the way it does spend that money.
Wealthier members currently transfer money to Brussels, which then directs them on how to spend the money in their poorer regions. Brussels does not need to act as a middle-man here — the EU should only be giving its poorest member countries regional support.
Open Europe found that this would, in fact, be in everyone’s interest, apart from a few member nations who already are on eurozone life support anyway. Net receivers would receive more money, and net payers would pay less and could help their own poorer regions directly. France would be the biggest winner of such a reform, making it politically more viable.
Administrative spending is what the EU is most infamous for, apart from perhaps the European Parliament’s travelling circus. The list is long: EU agencies duplicating each other’s work; non-Belgian Commission officials receiving a life-long tax free 16 percent extra on top of their salary; members of the European Parliament getting an “allowance” of €4,000 per month for which they do not need to present proof of spending.
The best things about the EU are inexpensive: To strike trade deals with non-members, or to weed out protectionist national rules, for example, we need the top EU Court in Luxembourg and the highly qualified officials in the Commission’s competition department — who do, of course, deserve a good salary — and that’s about it.
The worst things — excessive spending programs; burdensome overregulation — all seem to cost a lot of money. But for the EU the biggest damage isn’t only financial — it’s reputational.

Wednesday, December 06, 2017

What have the Brexit negotiations taught us this week?

Published on CapX

On Monday, the Democratic Unionist Party effectively torpedoed a draft compromise between the UK and the EU have “continued regulatory alignment [with] those rules of the internal market and the customs union which, now or in the future, support North South cooperation and the protection of the Good Friday Agreement”. 

The next day, Brexit Secretary David Davis made clear that the idea was actually to apply regulatory alignment to the whole of the UK, not just to Northern Ireland. To pre-empt criticism that this would mean that Britain becomes a “rule-taker”, he specified that “alignment isn’t harmonisation. It isn’t having exactly the same rules. It is sometimes having mutually recognised rules, mutually recognised inspection – that is what we are aiming at.” 

Many still expect there to be a deal ahead of, or at, the EU Summit on 14 and 15 December. That would mean talks could move on to the all important question of trade, and open up the possibility of a transitional deal being concluded in January. So this crisette may be forgotten relatively quickly.
Still, what have we learned from a tumultuous few days? 

Current talks on the Northern Irish border can only be settled through an empty declaration because trade negotiations haven’t been opened yet 

It was always nonsensical for the EU to count the Northern Irish border question as one of the three issues that needed to be resolved in its first phase of negotiations, which in theory would only deal with divorce and not with trade issues. The reason there is the risk of a “hard border” after Brexit is precisely because there may be a need for customs checks and restricted market access to the EU for UK companies. Those are trade issues. 

It was expected that both sides declaring their determination to avoid a hard border would be enough to move things on. That changed when the Irish government insisted that the UK explain how it was going to avoid a hard border; the rest of the EU27 had no choice but to back them up. 

Precisely because the EU refuses to discuss trade and all the details, it won’t be possible for the UK to give such hard guarantees. So either Ireland – with the support of the rest of the EU – can blow up the negotiations, risking a cliff-edge Brexit that would badly harm the Irish economy and the peace process in Northern Ireland, and leaving the EU27 to go “whistle” for their cash after all, or they agree a “a fudge that gives all sides the leeway to move on to trade talks”, as The Times described the draft deal, which is now likely to be altered a bit.  Indeed, as the Sunday Times correspondent in Brussels has put it: “The original demand of ‘no divergence’ for NI - which would arguably mean staying within the EU system - morphed into ‘alignment’. The latter can mean all things to all people. That's how the EU works, and always narrowly avoids disasters.” 

Interestingly, Irish Taoiseach Leo Varadkar has said: “’regulatory convergence’ and ‘regulatory alignment’ (...) mean the same in our view. We are happy to accept either.” So if this would have been agreed, the UK and Ireland wouldn’t even agree on what “alignment” means. If you want to talk about trade while refusing to talk about trade, you’ll end up with an empty compromise. 

The Irish government may be overplaying its hand 

The Irish government wants “firm guarantees on the lack of a hard border in any circumstances" and “regulatory convergence”. That may be asking a little bit too much. If interpreted strictly, it would mean that the UK would need to remain a full rule-taker. And not just Northern Ireland, but, as Davis has pointed out, the whole of the UK. 

This because an idea to decentralize power to let Northern Ireland decide to align with EU regulation so to minimize border friction doesn’t seem to appeal to the Northern Irish Unionists. Not our problem, the Irish may say? Well, think again. One hardly needs to be a political mastermind to realize post-Brexit Britain won’t be content with a copy-and-paste approach to all EU rules for the next few decades. The UK government is happy to do that during a transition period, but only for a few years at the most, after which a Swiss-style or Canadian-style arrangement would follow.
The same is true for the Irish demand for Britain should stay in a customs union with the EU, as this would avoid customs checks at the border. How sensible is it for the Irish government to try to force the UK to outsource its trade policy to Brussels? Again, Britain is prepared to do this for the transition period, if it is be allowed to negotiate trade deals with third countries at the same time. Asking for unsustainable solutions may well risk the cliff-edge the Irish rightly are fearful of.  

Ireland’s stubbornness on this issue is particularly ill-advised when there are alternative technical solutions that work for the EU-Swiss and EU-Norwegian customs borders and that according to both the Swiss customs chief and one of Sweden’s most prominent customs experts could a good idea for Ireland.

Irish academic Dan O'Brien put it well when he wrote: "[the Irish government] pushing too hard has come with costs. These costs could multiply if the Government's hand is overplayed." 

Many British Remainers continue to propose politically unrealistic solutions, demanding that the UK stays in the single market and the customs union

It is absolutely fair for British Remainers to advocate solutions that could help soften Brexit. The only problem is that they are formulating unsustainable solutions, like for example suggesting that the British Parliament would rubber stamp all EU rules and regulations, without being able to vote on it. An EU official already mocked David Davis’ lighter version of “alignment”, telling the Guardian that that this would mean that "the UK will not have any say on the decisions taken in Brussels and will basically implement them without having any influence.” 

Yet, that and a more radical version of it is precisely what both London’s Mayor and the Scottish government have proposed, repeating their demands that the UK should stay in the single market and in the customs union. Not only do they seem to confuse what the UK government has in mind with regards to “regulatory alignment” (which means shadowing regulation in a voluntary manner) with actual formal membership of the single market (which means being obliged to automatically impose EU regulations). They truly should stop presenting it as realistic that for the next few decades, Britain would turn into a fax democracy and sit at the kids’ table of trade policy. 

Just like the Irish government, they should understand that “tout ce qui est excessif est insignifiant.” If they are genuinely concerned about economic disruption due to Brexit, it’s time for them to come up with solutions that fall within the remit of the politically conceivable. 

The DUP matters and now the EU knows it 

Did the DUP’s intervention surprise Theresa May? Apparently, the party vetoed it during her lunch with Commission chief Juncker. The Independent’s John Rentoul describes the party as “world-class naysayers”, while making the point that this episode really “strengthens Theresa May’s position”, as it’s now very clear for the EU that she cannot just agree to anything. The EU isn’t keen to face a new British Prime Minister, as this may well be a hardline Brexiteer or someone who reopens some of the deals that the EU is keen on, for example the one that plugs the “Brexit hole” in the EU budget. It’s hardly a surprise that the DUP is using its political power. The EU and Ireland basically invited them to the Brexit party when they insisted on talking about the Northern Irish border before trade talks had begun. 

Wednesday, November 15, 2017

Europe would be mad to let Britain leave without a deal

Published on CapX
It’s hardly suprising that Brexit isn’t the top priority of the EU27 . There is the attempted Catalonian secession from Spain, Greece and Portugal have become financial protectorates of its fellow Eurozone member states, banks in Italy and elsewhere are still struggling with very high levels of bad debt, the governments of Poland and Hungary are on a constant clash with Brussels, and all over Western Europe, eurosceptic populist parties have done well in elections.
Still, as much as they may regret the British decision, the remaining EU member states should step up their game to prevent the UK leaving without a deal. Indeed, Brexit is already having a profound effect on the EU – and things, as I discuss below, can only get worse.
The “financial transaction tax” has been frozen
In 2011, the European Commission proposed this tax, which didn’t garner much enthusiasm. A limited number of member states decided to pursue the idea, with only Austria, Belgium, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain still at the table. The proposal has been widely criticised for various reasons and even before the Brexit vote led to warnings that it would endanger pensions.
Brexit has now sounded the FTT’s death knell. In July, the French Finance Minister, Bruno Le Maire, said that Brexit could bring “thousands of jobs to Paris” and that this opportunity could be lost if the tax were imposed, effectively announcing a pause.
Wolfgang Schaeuble, the then German Finance Minister, said that “quite a bit speaks in favour of the French argument to look first at how the Brexit negotiations are going”. By September, however, French President Macron seemed to have changed his mind about suspending the FTT, pledging to “relaunch” the initiative. Whatever happens now: the important thing is that it shows how future regulatory competition, which will probably only start in 2021, is already having an effect on current policy.
The rules on banker bonuses are being questioned   
The desire to lure the financial industry away from London after Brexit is not only affecting possible future legislation, such as the FTT, but also existing regulation. Ireland may revisit caps on banker salaries and bonuses at bailed-out banks, while the Dutch Economy Minister has saidthat the Dutch limit on bonuses puts the Netherlands at “a disadvantage” when attempting to attract companies from abroad. The new Dutch government has pledged to relax bonus rules in order to attract business from London.
The Netherlands has reduced its dividend taxation to 0 per cent
Dutch Prime Minister Mark Rutte has explained that Brexit is behind his government’s decision to reduce dividend taxation to 0 per cent. The logic is that when companies know that they won’t have to pay any tax on dividends they will be more likely to keep their decision making centres in the Netherlands. London-based companies may also look at the Netherlands more favourably when considering relocation.
The Northern-Ireland debate is flaring up
The Brexit referendum has given new impetus to those keen to unite Northern Ireland with the Republic. The Irish make the fair point that they didn’t ask for Brexit and aren’t wild about having a border imposed. Most British politicians, not least the Northern Irish Unionists, also want to avoid a hard border too and are keen to sort out the issue. Meanwhile, the EU Commission has showed goodwill by making the Northern Irish question one of its three priorities to make progress on before trade talks could commence.
To secure a soft border, the British government has basically agreed to Irish-European demands of a common customs union and no regulatory divergence, at least for the transition stage. Given that Ireland has been making these demands before the EU has started trade and transition talks, it does look like it won’t be possible to sort out Northern Ireland before the negotiations move on.
Naturally, Britain can’t outsource its trade policy to Brussels for ever so a technical agreement to aim for an “invisible” border when the UK exits its common customs union with the EU needs to be worked out.
A hard border in Ireland could be avoided by letting only Northern Ireland stay in the EU’s customs union, but this would effectively split the UK. It’s troubling that not only Sinn Fein, but also the Irish government and even the European Commission have proposed this.
As if Brexit weren’t divisive enough, vested interests are now trying to use it to split up the UK.
The EU’s Common Agricultural Policy is failing
Brexit could blow a 20 billion euro hole in Europe’s budget, according to the EU Commission. It’s well known that about a third of the EU’s long-term  budget, is spent on agriculture. Less well-known is the fact that more than 270 billion is spent in “direct payments” to owners of agricultural land – banks, for example, or the Queen – regardless of whether they produce or not. To put that in perspective: that’s almost seven times the amount the eurozone bailout fund used to bail out the Spanish banking system a few years ago.
We won’t have to look far to find ways to deal with the “Brexit hole”. Agriculture is an area that urgently requires pruning. The EU27 should be grateful Britain is forcing politicians in mainland Europe to finally do this.
Indeed, as Politico reports, many in Europe’s food industry expect cuts to be made to the EU’s Common Agricultural Policy (CAP) following Brexit. Propping up companies and individuals who own agricultural land isn’t high on your average Euro-citizens list of priorities.
Direct CAP subsidies have often acted as an outright disincentive for farmers to modernise. French farmers in particular have been on the receiving end here. After milk quotas were abolished in 2015, allowing more production, the French government, aided by an EU scheme, has been handing out cash to farmers not to produce milk, effectively contributing to a butter shortage in France in 2017.
Brexit and the CAP cuts it’s likely to inflict effectively reduce the EU’s scope for failing economic planning schemes like this. A new EU measure which would allow farmers more leeway before being considered as engaging in cartels in their negotiations with bigger players such as supermarket chains, has been explained by an industry source as being the result of Brexit as “the real story is about money and what happens to finance in the future. That’s really what has changed, not the debate about the supply chain”.
Fears of a cliff-edge Brexit are increasing amongst European industry
Some might be bored by the tale of the German car manufacturer who would push the German government to make sure there’s a good deal for the UK, eager to keep market access – especially as tactic was used in the British EU debate in the 1970s.
Still it’s a good example. The Association of German Chambers of Industry and Commerce DIHK just published a study revealing how a cliff-edge Brexit would result in 2.35bn euro in tariffs alone for Germany’s car industry, irrespective of the damage it would do to sales. Of course, it added that the UK shouldn’t be allowed to “cherry pick” but it’s clear who’s getting nervous here.
Ulrich Hoppe, the Director of the German-British Chamber of Commerce has stated that “an outcome without a deal would be fatal for the [Germany] economy”, explaining that “German chemicals and car industry as well as all other exporters to UK” would be hit, calling a transition very important. Also the Confederation of German Employers’ Associations has come out stressing that “we need clarity”.
Emma Marcegaglia, president of pan-EU business federation BusinessEurope, has warned after a meeting with Theresa May on Monday that “business is extremely concerned with the slow pace of negotiations and the lack of progress only one month before the decisive December European Council…”Business aims to avoid a cliff edge and therefore asks for a ‘status quo-like’ transitional arrangement with the UK staying in the customs union and the single market, as this will best provide citizens and businesses with greater certainty.”
Now guess what: the UK has practically suggested such an arrangement, but the EU is still haggling over the details of what can constitute “sufficient progress” in ongoing negotiations on the divorce bill and citizens rights. Some on the EU side assume that time is on their side, but given how trade benefits both sides, one cannot really “win” here by going against the interests of the other side.
WTO tariffs threaten 1.2 million job losses in the EU27 alone, according to one estimate by KU Leuven University. Even if this may be inflated and even if Britain may be hit relatively harder: such stats are slowly focusing minds on the Continent.
As I’ve argued before, Brexit could happen without major disruption for citizens or businesses. The UK has already made major concessions, effectively suggesting solutions that the EU isn’t likely to oppose. Now the EU side must also move if it wants to minimise the disruption that Brexit is about to inflict on the member states.