Jeremy Warner and Editorial Comment:
The PM is seeking an ambitious free-trade deal while Michel Barnier is blinkered by ideology
To the outside world, Brexit looks ever more chaotic; the dual admissions this week that there has been no serious discussion at Cabinet level of the “end state”, and that nearly nine months into the process there have still been no proper impact studies on the sectoral consequences of leaving the European Union, have served further to enhance the sense of drift and muddle. EU negotiators throw their hands up in the air, and lament a nation apparently led by bewildered amateurs.
As I say, that’s the outside view. The reality is somewhat different. Since the Prime Minister seems quite incapable of communicating what form of relationship with the EU she is trying to achieve – presumably because she prefers the “extend and pretend” language of “constructive ambiguity” to the unvarnished truth – let me do it for her. The goal is, in fact, a perfectly clear and rational one, even if the EU continues to have some difficulty in accepting its legitimacy.
It is Michel Barnier, the EU’S chief negotiator, and his masters in Berlin and Paris, who have their heads buried in the sand, not us; at every stage, they see problems rather than solutions. If the strategy is to wear Britain down, so that once the country fully appreciates how wretched and ignoble its position really is, it can be walked back in, then from their point of view I suppose it might have some merit. But I don’t think it’s that. Brussels has already come round to the view that it is better to have Britain outside than in. Rather, their approach is instructed by an ideological and blinkered determination to play by the book whatever the consequences.
The challenge for our diplomats, negotiators, financiers and industrialists is to break the prevailing mentality in Brussels and open Europe’s eyes to the possibility of mutually beneficial, friendly cohabitation.
There are two types of relationship a non-member can have with the EU. It can either be “internal”, such that the country substantially accepts the rights and obligations of the single market, as Norway, Switzerland and other members of the European Free Trade Association do; or it can be “external”, the relationship everyone else has. Yet plainly there are degrees of externality. China, with no trade deal with the EU, does not enjoy the same rights of market access as the new Comprehensive Economic and Trade Agreement (CETA) will give to Canada.
What Downing Street aspires to is a much closer relationship with the EU than any existing model of externality – sometimes referred to as CETA plus plus: a free-trade agreement (FTA) in goods that is extended to cover services, and particularly financial services, our biggest export. This is important because there is no pre-existing model for licence-free access in finance.
Why should the EU cede such a prize? Proximity and size are part of the answer. Once outside, Britain will be the EU’S largest external trading partner, surpassing China and the US. What is more, unlike most FTAS, where the ambition is for laws and regulations to converge and align over time, we start from a position of complete alignment.
There would obviously be little point in leaving if it didn’t allow scope for divergence. Britain would not want to be damned forever to regulatory “equivalence”, or needing to mirror all European law making. This would be a master-servant relationship, with the EU as master. Nonetheless, there may well be scope for the rules to remain essentially synchronised with Europe subject to broad principles and goals, a concept similar to the “alignment” proposed as a solution to the Irish border issue. This model could also be applied to industries other than finance.
Is having flexibility that we have agreed not to use not something of a sell-out? And will not synchronising our regulation with the EU compromise our ability to do trade deals elsewhere? Possibly, but in all FTAS, there are trade-offs that have to be weighed.
All this, as some hardline Brexiteers suspect, may be fantasy, with Brussels unwilling to offer any more than a plain vanilla trade deal that seeks to degrade London as Europe’s primary financial centre. This seems to be the attitude of France’s Emmanuel Macron, who hopes to use Brexit to steal a march in finance. Good luck with that; Paris is a relatively small city by global standards, lacking in many of London’s international attributes. The Balkanisation of finance around Europe would, moreover, be at odds with the bloc’s drive for superpower status. To meet these ambitions, Europe needs a credible global financial centre. It is therefore necessary to think of London not as a uniquely British asset, but as a pan-european one which happens to be merely hosted by the UK.
Contrary to how Brussels likes to portray things, Britain does have a clear “end state” in mind. If Britain is leaving the EU to pursue free trade, then these negotiations really are the best chance we are ever likely to get of borderless trade in financial services. It’s at least worth a try.