Getting a Brexit deal
Britain will have to compromise on state aid to reach an agreement
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?