Get­ting a Brexit deal

Bri­tain will have to com­pro­mise on state aid to reach an agree­ment

The Daily Telegraph - Business - - Front Page - Jeremy Warner

What­ever hap­pened to Brexit? Don’t worry, it’s still tick­ing away be­neath the hys­te­ria of Covid-19, even if for now it is a largely for­got­ten side­wa­ter of the pan­demic-dom­i­nated, rolling 24-hour news agenda. Yet the tran­si­tion is fast ap­proach­ing its end, and one way or an­other, Bri­tain will be fully out of the EU’s sin­gle mar­ket come Jan­uary 1 next year. Like it or not, we’ll soon be talk­ing Brexit again.

A deal on the fu­ture re­la­tion­ship needs to be agreed in the next 12 weeks to stand any chance of be­ing rat­i­fied by par­lia­ments be­fore the tran­si­tion runs out. There are few up­sides from Covid, but luck­ily for the Gov­ern­ment, our one-time ob­ses­sion with the po­ten­tial eco­nomic costs of Bri­tain’s EU di­vorce has been ren­dered al­most wholly ir­rel­e­vant by lock­down, which for the UK threat­ens to knock any­thing be­tween 8pc and 16pc off GDP this year.

Just to put that in per­spec­tive, at the time of the ref­er­en­dum, the Trea­sury said that a vote to Leave would re­sult in GDP be­ing 3.6pc lower than oth­er­wise af­ter two years; and in the case of a “se­vere shock”, with the UK leav­ing the sin­gle mar­ket on World Trade Or­gan­i­sa­tion terms, 6pc lower.

At the time, these “sce­nar­ios” were dis­missed as scare­mon­ger­ing non­sense by Leave cam­paign­ers – part of Re­main’s “Project Fear” – yet now they would scarcely seem to mat­ter amid the car­nage of Covid-19 even if they did come to fruition. If there are ad­verse con­se­quences, they’ll get lost in the wider eco­nomic im­plo­sion.

Mat­ter it does, how­ever, and it is one of the rea­sons why banks have been re­port­ing rather worse credit loss pro­vi­sions for the UK this year and next than for much of the rest of the world. In an­nounc­ing a truly dire set of re­sults this week, Ewen Steven­son, fi­nance di­rec­tor of HSBC, at­trib­uted the bank’s deep­en­ing sense of gloom not just to Covid, but to “the out­look for Brexit – big events that we ex­pect to have clar­ity on over the next six months”.

To leave with­out any kind of a deal would be to pile Mount Pe­lion on Mount Ossa, yet for now, it still seems all too pos­si­ble. Ma­jor dif­fer­ences re­main. That so many Con­ser­va­tive back­benchers now want not just a clean break Brexit, but to re­nege on the With­drawal Agree­ment too, be­liev­ing that what they agreed to less than a year ago in it­self cedes too much sovereignt­y and on­go­ing li­a­bil­ity, makes mat­ters more dif­fi­cult still.

Per­son­ally, I con­tinue to think it more likely than not that some­thing will be ham­mered out over the next sev­eral months, and that when it is, it will be trum­peted by both sides as a tri­umph – a win-win for all.

I doubt the re­al­ity will match the rhetoric. The EU is in no mood for favours. Bri­tain’s level of ac­cess to the sin­gle mar­ket will be dic­tated not by what is eco­nom­i­cally best for both par­ties, but by the UK’s will­ing­ness or oth­er­wise to agree level play­ing field terms on labour rights, the en­vi­ron­ment, and state aid, as well as re­cip­ro­cal rights on fish­eries.

What­ever the out­come, much more strin­gent cus­toms pro­ce­dures to­gether with dual prod­uct cer­ti­fi­ca­tion pro­ce­dures – one for the EU and one for Bri­tain – are bound to have some ad­verse ef­fect on trade.

As for fi­nan­cial ser­vices, UK ne­go­tia­tors seem to have given up on the “en­hanced equiv­a­lence” they once sought and re­signed them­selves to the EU re­tain­ing com­plete con­trol over the equiv­a­lence regime. The City will no doubt find a way; it gen­er­ally does. But for Euro­pean mar­kets, its po­si­tion will be ren­dered sub­op­ti­mal, and it will be dam­aged ac­cord­ingly. All the same, some sort of a deal should be­gin to take shape over the months ahead. If the two big stick­ing points are state aid and fish­eries, it ought to be pos­si­ble to trade one against the other. For the UK, state aid is most ob­vi­ously the is­sue on that con­ces­sions can be made. The EU af­ter all no longer de­mands that Bri­tain re­mains sub­servient to its own regime; only that it sets up some­thing sim­i­lar.

Yet ei­ther de­lib­er­ately or be­cause ad­vis­ers don’t re­ally know what they want, no pro­pos­als have yet been pub­lished, and that’s what is caus­ing the prob­lem. If es­sen­tially much the same as the EU regime, so that there is no ob­vi­ous at­tempt to gain com­pet­i­tive ad­van­tage through state sub­sidy, then it shouldn’t be much of an is­sue.

For the life of me, I can­not see why the UK should not agree. It’s not just the EU that wants to know what the Gov­ern­ment in­tends. Com­pa­nies also need cer­tainty; no­body is go­ing to in­vest in the UK if they think the Gov­ern­ment, on a po­lit­i­cal whim, is go­ing to start back­ing par­tic­u­lar com­mer­cial in­ter­ests over their own.

Un­der­stand­ably, min­is­ters don’t want to tie their hands; the EU sys­tem is far too rigid, le­gal­is­tic and open to ma­nip­u­la­tion by mem­ber states. We don’t want to end up agree­ing a tougher regime than the EU it­self prac­tices. But re­gard­less of the EU, com­merce ob­vi­ously does need some sort of a level play­ing field guar­an­tee that it can be con­fi­dent will be free of po­lit­i­cal in­ter­fer­ence. Is the Gov­ern­ment re­ally pre­pared to go to the bar­ri­cades in de­fence of the right to do things that pre­vi­ous Tory ad­min­is­tra­tions would have re­garded as fun­da­men­tally un­sound?

Politi­cians have a par­tic­u­larly poor record when it comes to back­ing win­ners. Van­ity and pork bar­rel pol­i­tics all too fre­quently in­struct their de­ci­sions. In any case, there seems to be some sort of a trade off, or at least com­pro­mise, to be made be­tween state aid and fish­eries.

To sur­ren­der flex­i­bil­ity on state aid for the sake of the eco­nomic ir­rel­e­vance of fish­eries might seem a poor bar­gain, but since when did Brexit have much to do with eco­nomics? Fish­eries would be the big pop­ulist win, rich in the sym­bol­ism of re­claimed sovereignt­y. The es­sen­tially pro­tec­tion­ist busi­ness of grant­ing state sub­sidy to favoured in­ter­ests would make a cu­ri­ous start to the UK’s “Global Bri­tain”, free trade pre­ten­sions.

Bri­tain’s fu­ture lies with be­ing made an at­trac­tive place to in­vest, not as a home for state hand­outs and po­lit­i­cal van­ity projects.

All at sea: to sur­ren­der flex­i­bil­ity on state aid for the sake of the fish­eries might seem a poor bar­gain, but since when did Brexit have much to do with eco­nomics?

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