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January 08, 2018

Getting real on Brexit

As the UK and the EU agreed the main substance of the Article 50 withdrawal agreement, time is now running out for eccentric solutions. For the UK to join the EEA or Efta would have our preferred solution, and we carried an article last week by George Yarrow who argued that it was still possible for the UK to change its mind on this.

But Andrew Duff reminds us of the reality of the situation. There will be no last minute surprises, but an orderly process towards a transition, followed by an association agreement that regulates trade as well as other important (in our view, more important) policy areas, like co-operation on foreign and security policy.

In his long essay, Duff goes into all of the outstanding issues in respect of the final agreement. We would like to focus on the more immediate issue of the transition. There is no doubt that the transition will be tough. He writes that the UK will have to conform to the whole EU acquis on the internal market, the customs union, and the common trade policy, incorporate all agreed legislation into UK law, and respect the rulings of the ECJ. 

One issue is that the EU's international agreements will, however, no longer apply automatically to the UK since it will not be a member any longer. The replication of these trade agreements for the UK will be subject to the EU's discretion. 

The single biggest open issue is the time limit of the transition. Michel Barnier is demanding that the transition ends in December 2020, to coincide with the expiry of the EU's current multi-annual financial framework. Duff says the proposed length of the transition - one year and nine months - is convenient for the Commission, but too short for the UK. More importantly, he argues the case for allowing renewals. 

"For the British this schedule seems too short and tidy, but they will have to accept that any European council decision to extend the transition must adhere to the spirit of article 50, namely that it could only be taken at the request of the UK government by unanimity and with the consent of the European parliament. Any such extension will be renewable but not indefinite, and clearly time-limited until the final partnership deal between the EU and the UK comes into force. It would also come at a proportionate financial cost to the UK."

We can see the logic of this argument, but there is a political constraint. The possibility of indefinite renewal of the transition could lead to a revolt from the government's back bench. There will have to be some finiteness to the process, for otherwise the EU and the UK may never agree a deal in the first place. One possibility would be a deal to include a one-time renewal option. Duff also argued that the time limit should not be governed by the ratification timetable, but by the agreement on provisional application of a future association agreement. 

Juliet Samuel focuses her latest column in the Daily Telegraph on the final arrangements in respect of financial services. We have argued that the future association agreement will not include market access for the whole of the UK's financial sector - at most it will affect a small subsector. We were surprised to hear that the financial industry is still betting on a wider deal. Samuel makes the point that, if the EU were to offer no deal, then this would allow the UK to ditch the massively complex Mifid 2 regulation for financial services companies, which she compares to a fire hose directed at a coffee cup. We would agree that the UK would probably not keep up the lot of EU financial regulation for sectors that are not subject to the association agreement, and we see a large likelihood of gradual regulatory divergence in those sectors. 

Samuel makes the point that Mifid 2 

"represents a shift in regulatory philosophy from an Anglo-Saxon model to a French one, in which stopping market abuse is more important that letting legitimate markets grow."

Her overall conclusion is that the best option would be to maintain market access and accept the EU's regulatory system. The cost would be for some business to be driven off-shore. On the other hand, if the EU were to offer no deal, the UK would be mad to subject itself to its regulatory regime. 

We see no possibility of a deal on financial services without a general agreement on free movement of labour. This is what limits all service-sector market access agreements. If the UK accepted free movement of labour, then surely it would make sense to join the EEA/Efta, at least for a long transitional period. But if the UK restricts free movement of people, the EU will have to restrict free movement of (most) services. The two go together.

A possible compromise would be an immigration regime in which the UK voluntarily refrains from imposing restrictions on EU citizens. And the UK would have to translate EU legislation into domestic law indefinitely. We fail to see how this can work politically. The most likely scenario is one for a comprehensive customs and free trade agreement, and some limited agreement on service where there are obvious interests on both sides - like aviation, and nuclear materials. Finance is not in the same category.

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January 08, 2018

Macron in China

Emmanuel Macron has recently been turning his attention to foreign policy, and his visit to China comes with high expectations. The carpets are rolled out for Macron in Beijing, even in the Forbidden City. Macron's familiarity with Chinese philosophy, as well as his pragmatism, lead many to hope for significant step in the bilateral relationship. Even his wife Brigitte is highly regarded in China, according to the Nouvel Observateur. Chinese companies already advanced the narrative of a win-win situation for both economies. On the agenda are the big topics of trade and climate change.

There is a strategic interest on both sides to advance their ties, especially after the "America first" policy of Donald Trump's administration left a leadership vacuum in international trade and cooperation. There are also pragmatic reasons for cooperation. China and France are the world's second and fifth largest economies, and have strong bilateral ties (China is France's second most important exporter, and eighth importer). 

But there are obstacles too. Will China agree to lower its trade barriers and to converge on standards? Will its desire to expand trigger EU resentments and fears?

France expects China to lower trade barriers and offer a warmer welcome to European investment. Beijing on the other hand expects France to clarify Europe's position on its monumental New Silk Road programme, a gigantic infrastructure programme of roads, ports, and railways between Europe and China. 

The problem will be to find a common stand in Europe on this. Some Eastern European countries already embraced the idea. Viktor Orbán welcomed it as an opportunity, and China already invested billions in a railway link between Belgrade and Bucharest. Greece is open to Chinese investment, too. But some of the northern EU countries are more sceptical and see this as a way for China to extend its global influence.  

Zaki Laidi argues in his op-ed for Project Syndicate that this can only succeed if Europe speaks with one voice, otherwise Europe will become a casualty of China’s efforts to bend the multilateral system to its own will or, worse, Trump’s efforts to dismantle it altogether.

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