July 20, 2016
For us the biggest disaster before June 23 was the mis-selling of the EU by those who purported to support it. The biggest disaster after June 23 is the inability by the same group to focus on what the country should do now. The deep causes for all of this is variable geometry - an EU without the euro and Schengen is extremely hard to sell. And those who try are now finding that the needs of the eurozone severely constrain the political options.
In this context we noted an article by Vernon Bogdanor, a man whose knowledge about the British constitution is surpassed only by his ignorance of EU treaties. Like so many Brits he finds it hard to understand why continental Europeans care so much about free movement of labour. If the EU were to change the freedom of movement principle, this would open the door for a second referendum in the UK. Another option would be simply to violate the principle, just as countries violate the stability and growth pact. We wish him good luck with a treaty change to abolish free movement of labour. You might as well call for the simultaneous abolition of the euro and the single market.
We have been saying for some time that Britain has essentially three categories of choices: membership of a vanilla EEA, with no control of immigration; a free-trade agreement similar to that of Canada, but perhaps more comprehensive; or a hard Brexit. The latter two allow full control of immigration. It is a political choice for Britain to make. John Springford goes into the details of the various EEA agreements, how they differ, and why none of them will be offered to Britain. There are various reasons why the EU is going to be tougher on the UK than on Liechtenstein and Norway: Britain is leaving after all, and the EU does not want to give a leaver a cherry-picking deal; for a tiny city-state like Liechtenstein, an emergency brake on immigration is understandable for purely physical reasons.
"...the UK will have to put all of its diplomatic effort into a two-pronged strategy: maximising market access in goods, and ensuring that there is no damaging hiatus between leaving the EU and the start of the bespoke trade agreement...the second prong of the UK’s strategy must be to try to convince the EU to give enough time for a comprehensive agreement to be negotiated, perhaps by being a member of the EEA until the trade deal is agreed. But, if there is one thing that the Norwegian, Swiss and Canadian 'options' tell you, it is that Britain does not have a lot of options."
Zsolt Darvas takes a look at the financial contributions of the EEA states and notes that Norway's contribution to the EU budget is higher than the UK's as a percentage of GDP but lower on a per capita share. On the other hand, the UK's contributions are lower than that of other EU members, including even of Italy, due to the rebate. There is no way the EU would offer Britain a rebate for EEA membership of course.
Frankfurter Allgemeine has an opinion poll among German company chiefs according to which a majority want to penalise Britain on Brexit. The polling institute noted that the support for penalising the UK was even stronger among German politicians. We note that Angela Merkel will try to keep a level-headed approach, but the UK should be under no illusion about the limited appetite even in Germany for a soft deal. We don't think the EU would deny Britain a vanilla-type EEA agreement, but we should not think this is in the bag.
And finally, we noted another article in Frankfurter Allgemeine, citing an internal memo of Deutsche Bank, according to which Frankfurt will not benefit much from Brexit. Other than Deutsche, not many banks will shift staff to Frankfurt. Citigroup, Barclays and Bank of America are looking to expand their operations in Dublin while Goldman Sachs is currently debating whether to enlarge their offices in either Frankfurt or Paris. Deutsche Bank said the big constraint on any expansion is the lack of qualified personnel. DB expects the UK to have third country status - as a result of which the UK operations will have to be fully capitalised after Brexit.