March 08, 2018
EU will not offer UK a financial services deal
The UK's political establishment has been massively complacent about the EU's willingness to offer a continuum of choices on the future trading relation. In reality is there are only two groups of deals - some combination of customs union/EEA agreement, or an FTA. The UK is now shocked, shocked, to learn that the EU will not offer an agreement on financial services as part of a broader trade deal. Of course the EU would not. The UK's decision to leave the customs union and the single market means that Brexit will be hard.
The European Council yesterday set out its negotiating position. It makes clear that there can be no selected access to the single market and its agencies, as the UK has chosen the route of an FTA. The guidelines say that the FTA will be negotiated after Brexit, and will comprise the following:
- trade in goods, covering all sectors, with zero tariffs and no quantitative restrictions;
- customs co-operation;
- restriction of technical barriers to trade;
- trade in services, but under host-state rules and with an agreement on the free movement of people;
- mutual access to public procurement markets;
- an air transport agreement and an aviation safety agreement (i.e. no membership of the European aviation safety agency as requested by Theresa May);
- possible participation by the UK in the EU's research and innovation programmes;
The paper contains further provisions in other areas, but the above are the most important and most controversial.
When it comes to financial services the EU will offer the UK no more than the existing equivalence regimes, which would give UK financial firms market access for so long as the UK adopts the EU's rules. Philip Hammond yesterday rejected those, and suggested that the UK would sign no trade deal without a financial services component, which the EU has now explicitly rejected. He did not explictly threaten a veto, but said this:
"It’s hard to see any deal that did not include financial services can look like a fair and balanced deal."
Hammond cited an estimate by Oliver Wyman that a hard Brexit would add $30-40bn of extra capital requirements to European financial institutions, but we don't think that the EU will be impressed by these numbers. We see no chance whatsoever of a deal on financial services beyond regulatory equivalence. Access to the EU's financial infrastructure would have required nothing less than EEA membership.