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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.

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March 08, 2018

What if the DUP implodes?

Arlene Foster was in Brussels yesterday but, rather than shining over her role in the Brexit deal, she had to fend off criticism of her mishandling of the accord with Sinn Féin, which failed weeks ago. The news was that unnamed senior DUP politician gave a plausible account of the DUP handing over a draft agreement to Sinn Féin, something Foster had denied all along. In the press briefing yesterday Foster deny those claims, insisting that this was never an agreement. She also had to face critics about DUP members briefing the loyalists about the content of the supposed deal. The accusations clearly frame Foster as a struggling leader. Nobody missed the parallel to December last year, when Foster ruined UK prime minister Theresa May’s day in Brussels by delaying the draft Brexit agreement. Now it is Foster's turn for humiliation. 

It is not clear whether the briefing against Foster was because the source objected to her doing a deal or failing to do the deal, but that is irrelevant at this point writes Newton Emerson in the Irish Times. The mishandling of the negotiations with Sinn Féin gives enough reason to contest her leadership. More people are coming out with their grievances, something unheard of in the DUP. Foster’s contorted denials yesterday bordered the ridiculous and turned the handling of the deal into a farce, writes Emerson. But there is no obvious candidate in the DUP to succeed her. 

Outside pressure on the the DUP is also rising. A poll published this Monday, conducted in late February after the Stormont talks fiasco, showed DUP support falling while Sinn Féin’s continues to rise – both parties are once again neck-and-neck.  

Looking down the line a couple of questions come up immediately: what happens if the DUP implodes over this? What are the implications for the UK government? And what does it mean for the Northern Ireland question in the Brexit negotiations? At what stage would new elections become unavoidable? And what would then happen if Sinn Féin were to win those?

This episode may come down to nothing but a blip, but it teaches us a lesson of the importance of this relatively small player in the big Brexit game.

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March 08, 2018

Has Mario Draghi expropriated German savers?

Here is a nice chart by Peter Bofinger, the perennially dissenting voice in the German council of economic experts. It debunks the popular notion that Mario Draghi has expropriated German savers. 

Source: @PeterBofinger

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