Britain wanted an amicable divorce from Europe – but the spurned partner is in an unforgiving mood, writes Victor Hill.
Britain has now been a “third party”, that is to say a non-member of the EU, for two months and, whatever your stance may have been on the Brexit drama, three things have now become clear.
Firstly, although the final deal with Brussels was a free-trade deal with zero tariffs on goods traded between the UK and the EU, non-tariff barriers in the form of additional bureaucracy and compliance procedures are disrupting trade. British exports to Europe of foodstuffs have been particularly beset by obstacles. The word is that some British exporters have given up and are instead concentrating on the domestic market or selling further afield. In general, it does not seem that Britain has reciprocated by obstructing the import of European goods so, all things being equal, it is probable that Britain’s exports to Europe will decline this year – already undermined by reduced demand caused by the pandemic – while Britain’s imports from Europe are likely to remain stable. That would mean that our trade deficit with the EU is likely to get worse before it gets better. That is not something that the Brexiteers (myself included) envisaged or desired.
Second, the new dispensation in terms of trade between Great Britain and Northern Ireland is proving to be a huge headache. Northern Ireland is an integral part of the UK and yet remains within the EU single market. As we know, that was designed to avoid a “hard border” on the island of Ireland which would have been against the spirit of the Belfast/ Good Friday Agreement (1998). But the outcome is now that there is a de facto trade border down the Irish Sea. Tesco’s outlet in Belfast has been unable to sell British sausages. Northern Irish supermarkets are substituting British goods for European ones because the trade flows are less problematic. Amazon is supplying its customers in Belfast from its warehouses in Dublin rather than from the UK. This is not a situation that is sustainable and there will be political consequences. Numerous parties, both in London and Belfast, have proposed modifications to the Northern Ireland protocol (part of the Withdrawal Agreement that was signed back in January last year), but the Europeans have signalled that they would be loath to amend it.
Third, the City of London has not been granted equivalence and as such London-based banks and other financial institutions are unable to transact business directly in Europe. While the trade deal finally clinched on Christmas Eve last year was overwhelmingly concerned with the trade of goods and not services (the EU single market is about goods – there has never been a European single market in services) the working assumption was that UK financial institutions would be granted equivalence, as US and Australian ones are. There are on-going negotiations which might come to fruition in April, but it seems that Brussels (or perhaps more accurately, Paris) wants to keep the gates to the European financial markets tightly shut. There will be a price to pay for that by both sides.
Furthermore, the sorry tale of the slow rollout of coronavirus vaccination programmes across the EU has further undermined relations between London and the major European capitals. Frau von der Leyen’s abortive move to instigate Article 16 on 29 January will not be forgotten soon either side of the Irish sea.
As I write, Britain has vaccinated (first dose) over 20 million of its citizens while in France only about 1.5 million people have been vaccinated. There can be no return to “normality” until about 80 percent or more of a given population have been vaccinated; Britain will therefore emerge from the pandemic paralysis before our European neighbours. The Governor of the Bank of England believes that the UK economy will regain its pre-Covid levels by Q1 2022.
Part of the reason for the slow rollout in Europe has been the unjustified and unscientific animus against the Oxford (AstraZeneca) vaccine propagated by, amongst others, President Macron. Frau Merkel has publicly refused the Oxford jab even though it has been approved for all ages by the EMA. France’s Europe minister even criticised Britain’s policy of waiting 12 weeks between jabs. There is plenty of the Oxford vaccine available in Europe; but many Europeans have persuaded themselves that it is a no-no. When an old friend was vaccinated with the Oxford jab in the south of France last week, the sensible French lady doctor muttered: C’est toujours les politiques.
Government finances in both Britain and much of the EU have been hammered during the coronavirus pandemic. The UK Office of Budget Responsibility (OBR) reckons that the UK debt-to-GDP ratio will hit 105 percent later this year – up from about 85 percent pre-Covid. But the situation in most of Europe’s treasuries is even more dire. Italian, Portuguese and Spanish sovereign debt will have to be restructured later this year or next. In contrast, the UK enjoys the longest debt maturity in the G-7 and still maintains privileges as a reserve currency. Britain may yet emerge from the crisis not as the sick man of Europe but as the fit guy across the Channel.
Those of us who argued that there was a strong economic case for Brexit (as well as an even stronger political one) nevertheless believe that none of these problems is insurmountable given good will and pragmatism on both sides. The EU is likely to remain our largest trading partner for the foreseeable future, so we have to find ways to work together while building a renewed alliance of the English-speaking peoples (CANZUK) and forging new alliances in dynamic developing economies (such as Vietnam, Malaysia and Mexico). Britain’s expected accession to the CPTPP (which could happen as early as next year) will be in important step in this direction. If the CPTPP could find ways to welcome the USA and India in its embrace, then it would become a trading bloc far larger than the EU.
In early January, I wrote a piece for Master Investor entitled Brexit: Game Over. As soon as I submitted this article to our editor, I realised that the title was presumptuous. Britain’s relationship with the EU will continue to evolve over the years – I hope for the better. Right now, however, we are living with churlish neighbours, and there will be more disagreeable behaviour to come.
New frictions at the frontier
The EU’s treatment of British exporters of foodstuffs has been aggressive and unjustifiable. French customs officials require triplicate forms completed in black ink while their Dutch counterparts will only accept forms completed in red ink. Such paltry practices would not be accepted in the African Union. One of the consequences of this is that Britain has accelerated its campaign to clinch trade deals with major trading powers the world over. The Secretary for Trade, Ms Truss, has been clocking up the air miles just as most of us have been subjected to an extreme travel diet.
In late January it became clear that the EU had, de facto, banned the sale of British shellfish in the EU. Dutch trawlers can take whelks from the seafloor 12 miles off Southwold (Suffolk) and then sell these East Anglian molluscs as European products; but the products of East Anglian fishermen’s labours are rejected at the frontier on the ground that they do not meet EU standards.
The folly of the Northern Ireland Protocol
Mrs May’s disastrous Northern Irish backstop was replaced in the Boris-bodged Withdrawal Agreement with the Northern Ireland Protocol. At the time, such was the stasis in the state of UK-EU negotiations, and such were the machinations of the Remainer elite who sought to sabotage Brexit altogether, that our plucky PM seized the day and did the deal. Except that it was a fundamentally flawed one. Martin Howe QC wrote in the Sunday Telegraph last weekend:
The EU’s intransigence during the trade deal talks worsened the Protocol’s impact because the EU has refused to give the same recognition to UK rules, inspections and certifications as it gives in its other trade treaties.
The Protocol imposes all the EU single market rules on Northern Ireland, including, for example, those for medicines. That means that the people of Northern Ireland are subject to rules and regulations on which they have no chance to express an opinion, but which are simply arbitrarily imposed by a foreign power. Currently, medical devices cannot be sent to Northern Ireland from Great Britain suppliers. Seeds and bulbs are outlawed too. And one cannot take one’s dogs from Great Britain to Northern Ireland either without elaborate paperwork.
Goods travelling from Great Britain to Northern Ireland must meet country of origin formalities ensuring that a particular percentage of their contents derive from Great Britain and not from any other third-party state. It is impossible to imagine that any other EU state would accept a customs border within its own territory – but this is what we have. Would France accept a customs border imposed by Brussels between Corsica and Marseilles?
In pure economic terms, trade between Great Britain and Northern Ireland is about five times the volume of trade between Northern Ireland and the Republic of Ireland. And yet the north-south trade has been prioritised for political reasons over east-west trade.
Martin Howe thinks that London should impose the UK Internal Market Act (that was the legislation which some people said last year broke international law). Such unilateral action might force the EU to the negotiating table. Since the European Commission abortively triggered Article 16 of the Northern Ireland Protocol that makes the UK government’s option to take the same option easier. There will be assembly elections in Northern Ireland in 2022 and they will effectively be a referendum on the Protocol which all unionist parties oppose. And the Northern Ireland Assembly will be allowed to vote on the Protocol in 2024 – though that may be too late to save many businesses.
Supermarkets, other food retailers and parcel couriers were offered a grace period under the Protocol up until the end of March. The EU Commission has signalled that this grace period could be extended by mutual agreement. The appointment of Lord Frost as a cabinet-level minister with responsibility for European relations effective 01 March represents a more head-on negotiating style.
On Thursday (04 March) the UK government unilaterally extended the grace period on border checks until 01 October. The EU immediately retaliated, threatening swift infringement proceedings. The Irish Foreign Minister said the UK “cannot be trusted”. As this article goes live there is an almighty row brewing and neither side seems in the mood for compromise.
From the inception of the Brexit talks in June 2017 the EU made a point of singling out Northern Ireland as a special case in order to preserve the peace process. In retrospect, that looks like a cynical ploy to make life more difficult for the British negotiators. In any case, most Europeans are oblivious of Unionist sentiment in the province. The Belfast Agreement was predicated on the idea that the status of Northern Ireland may not be altered without the consent of all its people. That principle has now been violated.
The City spurned
The EU’s refusal to grant equivalence to British financial institutions, which it has accorded to many other major countries including Switzerland, Canada, Australia, Hong Kong and the USA, could be in breach of Article VII of the General Agreement on Trade in Services under WTO law. Article VII states that members “shall not accord recognition in a manner which would constitute a means of discrimination between countries”. Moreover, the Political Declaration (part of the aforesaid Withdrawal Agreement) commits both parties to “balanced arrangements”. The UK signed the (goods) trade deal last Christmas on the supposition that the EU would act in good faith on services. That supposition now seems unwise.
The EU recognises Brazil as equivalent even though it is not evident that standards of financial regulation in Brazil are markedly superior to those in the UK. Indeed, the UK was ahead of most European countries in terms of the implementation of the Basel III accords on bank capital adequacy and can correctly claim to be already in full alignment with all EU financial regulations. Frankly, many of the EU financial regulations were first initiated in the UK anyway.
Incredibly, the UK has granted the EU equivalence across 28 sectors, but Brussels has so far refused to reciprocate except in two domains. One of those is counterparty clearing – most probably because failure to have done so might have caused European bond markets to seize up. But even here, the ground may be shifting.
According to the Financial Times, Amsterdam surpassed London as the busiest bourse on the European continent in January. An average of €9.2 billion of shares changed hands in Amsterdam against €8.6 billion on the LSE. That is partly a product of Brussels’s banning EU-domiciled financial institutions from trading in the UK and partly because January was a quiet month in the London market. In reality, equity trading as such (as opposed to underwriting) is not particularly remunerative; London still dominates all European financial centres in terms of currency trading, pension fund asset management and derivatives.
In late February, Governor of the Bank of England Andrew Bailey accused the EU of seeking to seize a slice of London’s lucrative derivatives clearing market in a controversial legal challenge. Brussels has long resented the City’s dominance of the Euro clearing market, given that about $1 trillion of swaps and futures contracts are settled in London each day. Brussels is now considering laws that would force European banks to clear transactions within the EU. In that case the UK might want to work more closely with the USA since between the two leading financial universes they would command about 75 percent of the global clearing market. “Nylon” (NY-LON) is the new buzz word in the Square Mile.
Some City luminaries believe that it is no good agonising over business that is already lost to the EU – that is history. Instead, the City should rejoice in its new-found freedom and go full pelt to compete in an era of truly global finance. The UK is already a global leader in fintech and has advantages in terms of AI research and life sciences that feed into fintech. The Kalifa Report on UK fintech, published on 26 February, was bullish on the outlook for this increasingly important sector. London is also ahead of the curve in green finance and cryptocurrency trading. There is currently a push to reform listing rules so as to attract more tech start-ups to the London market which is still excessively weighted towards old world industries such as mining. One proposal is to introduce dual class share listing which would enable founders to retain control as their company expands. (I’ll have more to say on that shortly). Now is the time to jettison lumbering European regulatory burdens such as MIFID II and GPDR.
Brussels’s aggressive attitude is likely to raise transaction costs within the EU and to restrict liquidity as it cuts itself off from the world’s deepest capital market – things which will do nothing to allay the financial challenges of the highly indebted European south. Once again, however, it seems that no one in the European elite in Brussels, Berlin and Paris is listening.
Back in December I argued here that there could be no decent trade deal precisely because the Withdrawal Agreement, initiated by Mrs May but finally signed in revamped form by Mr Johnson, was intrinsically disadvantageous to the United Kingdom. In my January piece, I said that we would not know if the trade deal was a decent one for some time. In fact, the deficiencies of Brexit diplomacy are already abundantly apparent…
And yet, and yet – the reasons for our suing for divorce in the first place also become more apparent by the day. The good standing of the EU’s leadership and institutions has been badly shaken by the vaccination rollout – and I foresee that there will be further acrimony as the EU’s €750 billion Recovery Fund is implemented. The EU does not behave like a mature global citizen, let alone a superpower. It signs investment treaties with Beijing even as China intensifies its policy of suppressing the people of Xinxiang (and let’s not forget, Tibet); and it coddles Putin’s Russia with pipeline contracts and much more.
There will be costs to Brexit – we are already paying them. But as time goes by new opportunities will present themselves; and because we are a resourceful, energetic and canny people with deep financial reserves we shall profit from them mightily.
In the unlikely event that Boris should read this, I hope that last sentence makes him smile.