Thursday, August 06, 2020

Europe is finally coming to terms with Brexit

Published in The Spectator

In article in the Dutch, left-leaning newspaper Het Parool led with the headline ‘Despite Brexit, multinationals prefer London over Amsterdam or Paris’ this week. The piece reports that ‘the feared exit [of companies] from Great Britain is not happening’ as expected, and highlights the fact that Unilever decided to:

Become fully British, scrapping its dual [Anglo-Dutch] structure [which has been in place for 90 years]. Its headquarters will be London and not Rotterdam, despite the avid attempts of Prime Minister Mark Rutte.

Reportedly, the opportunity offered by London’s capital markets trumps any risks resulting from Brexit, an element that could also play a role in Shell possibly moving its headquarters from the Netherlands to the UK.

The article goes on to point out that despite relocations by some major companies (such as Dyson, Honda and Panasonic) firms have not rushed to leave Britain. At least 1,441 companies have even recently moved to the UK, according to official statistics published in November.

Goldman Sachs has recently decided to build a new £1 billion headquarters in London and city firms are less worried about Brexit, ‘having spent millions of pounds on precautions for any negative consequences’. Before the pandemic, the IMF issued a prediction that the UK economy would outpace the eurozone for the first two years after Brexit, concluding that despite the risk of no deal, ‘Great Britain remains a magnet for capital, even in the eye of a storm.’

Notably, the article adds that:

The presence of Prime Minister Boris Johnson is reassuring, despite his actions during the pandemic that are a cause for concern. As opposed to his predecessor, Theresa May, he does get along with business. He is opposed to regulation and for free trade. Multinationals now also fear the Labour party less, since the moderate Keir Starmer was chosen as its leader.

Analyses like this demonstrate that mainland Europe is now finally coming to terms with Brexit, based on facts on the ground.

There is, however, an import caveat: it still matters what kind of trade arrangement the UK agrees with the EU before 1 January. Will the UK manage to reconcile regulatory and trade sovereignty with maintaining access to Continental markets? Will it manage to compensate the unavoidable loss of a degree of market access with competitive measures, such as the creation of freeports? We need to wait to find out.

An outstanding question in the ongoing negotiations is to what extent the EU will drop its insistence on ‘level playing field’ minimum standards for UK regulations, in return for continued market access to UK businesses. A ban on state aid is part of the ‘level playing field’, but the EU has just signaled some flexibility on this.

Given the way the EU Commission often reinterprets tax breaks as ‘state aid’, this is a welcome development. A compromise could be the creation of a ‘dispute resolution mechanism’ on any state aid granted to UK companies, instead of obliging London to follow EU rules straight away. This concept should perhaps also be applied to market access more generally. The UK could agree that after December, it will continue maintaining all EU rules it has taken over in domestic legislation, but pledge to notify the EU every time it intends to issue divergent regulation. This concession should of course depend on the EU granting a lot more market access than it has offered so far.

In this way, cliff edges, tariffs and economic damage could be avoided at the end of the year. Involving the EU in the British legislative process could also help inform UK lawmakers about how they can minimise the loss of market access when diverging from EU regulation. When it comes to chemicals, the UK government may simply opt to shy away from different standards for chemical products, due to the importance of the EU market. While on digital innovation, the UK may decide it isn’t worth constraining British innovators with GDPR and other similar innovation-killing regulatory straitjackets, and diverge from the EU.

In July, the UK compromised by accepting an overall governance framework, rather than a patchwork of sector-by-sector deals, and the EU side moved – at least according to Brexit negotiator David Frost – on the role of the European Court of Justice. If the two sides manage to sort their ‘level playing field’ issues, only fisheries access remains as the last big sticking point. An EU diplomat has told Reuters that ‘fisheries won't wreck the whole thing’, which is probably right, if only because the UK wouldn’t be able to consume all the fish it is entitled to catch in its own waters.

With all of this out of the way, both the EU and the UK can then focus on recovering from the massive and ongoing damage inflicted by the pandemic.

Now that Europeans are finally coming around to the idea that Brexit won’t be the complete disaster many of them originally predicted and that post-Brexit Britain won’t be the desperately dependent and helpless island they envisioned, they should be more willing to engage in the talks.

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