The British government has been doing its best to ignore the derailment of its Brexit strategy.
By this point in time, EU and UK negotiators were supposed to have completed two intensive negotiating rounds and to be poised for a third next week. Instead, the coronavirus pandemic has restricted both sides to seeking clarifications from a distance.
‘’The UK and EU have shared legal texts and informal discussions with the Commission are ongoing,” said a UK government spokesperson this week.
But the reality is that the hard work of hammering out compromises is on hold. It never even really had a chance to begin. Michel Barnier, the EU’s chief negotiator, has tested positive for Covid-19; David Frost, the UK chief negotiator, self-isolated earlier this month after developing mild coronavirus symptoms.
Even the EU’s ultimate coronavirus-fighting backstop, video conferencing, has not been able to come to the rescue. Attempts to re-establish negotiations this way have been hobbled by security concerns and by the sheer scale of the talks, which involve more than one hundred officials on each side.
This is not just a diplomatic inconvenience; it is a big additional source of anxiety for businesses at what is already a pulverising time.
As things stand, Britain will exit the EU single market and customs union at the end of this year, when its post-Brexit transition period expires. Without a future-relationship deal, the UK would be trading with a market of 445m people on basic World Trade Organization terms, complete with tariffs.
The European People’s Party, the EU parliament’s powerful centre-right group, took the bull by the horns on Monday by calling on the UK to do the “responsible thing” and seek an extension. Brussels is increasingly asking itself when Britain will bow to the inevitable.
Officially, there is no U-turn. “The transition period ends on 31 December 2020, as enshrined in UK law, which the Prime Minister has made clear he has no intention of changing,” said a UK spokesperson on Monday.
But officials on both sides of the Channel know that an extension is needed — in the name of economic sanity, if nothing else.
Phil Hogan, the EU’s trade commissioner, warned last month that businesses and public authorities were underprepared for the sea change in trading conditions that the end of the transition period would bring even if there were a future relationship deal. Companies would be faced with the creation of a hard regulatory and customs border for trade in goods, complete with new checks, formalities and queues.
Pre-pandemic, Boris Johnson and David Frost had acknowledged the inevitable new “frictions” as a price worth paying for an independent trade policy. But that logic looks much more suspect in a world where businesses are desperately trying to stay afloat and where the watchword is not opportunity, but survival.
The EU has additional motivations for wanting Britain to extend. A longer transition means more British money for the EU’s coffers, something that could help unlock a deal among EU governments on the bloc’s next seven-year budget. Brokering that budget deal has become even more of a priority given the crisis.
Britain’s EU withdrawal treaty specifies that an extension would require a British “contribution to the Union budget” that would need to be negotiated before the prolongation is formally agreed.
It’s not clear at this stage exactly how much money would be involved, although Brussels is already doing some sums.
The UK’s average net contribution to the EU budget during the final years of its membership was almost £9bn per year. This figure factors in funds that flowed back to British companies and public authorities in the form of farm subsidies and other EU support.
But an extension would not be a straightforward continuation of the status quo. The start of the EU’s next budget cycle in January 2021 means that Britain would no longer be comprehensively covered by EU programmes. The UK would be buying its way into the single market and customs union.
One certainty in all of this is the deadline: the EU-UK “ joint committee” that administers Britain’s Brexit deal has until the end of June to agree on an extension of up to two years.
After that, the possibility expires. The pressure to act will only grow between now and then.
Chart du jour: Exponential growth
The graphic shows which countries have managed to put a brake on the epidemic — straying away from the straight line — and those that are still fighting to do so. (graphic via FT)
Weapon of choice
Finance ministers will have a lengthening menu of options on the table when they discuss their collective coronavirus response next week, write Sam Fleming and Jim Brunsden. A number of EU institutions are in on the act — spurred by criticisms of the EU’s response to the approaching economic slump.
The European Stability Mechanism, the euro area’s €500bn bailout fund, will propose rejigged lending facilities. The so-called enhanced conditions credit line would come with limited conditions, as spelt out by Klaus Regling, the ESM managing director, in an FT interview this week. The ESM will be hoping the changes win over Italy, where use of the bailout fund would be politically hazardous.
The European Investment Bank’s options will also be up for discussion. The Luxembourg-based lender has said it could mobilise financing of up to €40bn at short notice. Its president, Werner Hoyer, has called for additional guarantees to be teed up by member states, allowing it to further boost support for finance for small and medium-sized enterprises.
On top of this comes the European Commission’s newly prioritised plans for an unemployment reinsurance scheme. As reported by the FT on Tuesday, the commission has decided to accelerate a proposal for a lending facility worth €80-100bn of firepower, supported by national guarantees. The scheme could be quickly pushed through in Brussels, although the guarantees could require parliamentary approval in some member states.
At the same time the commission has started an attempt to rework its draft budget proposals for the upcoming seven-year period, refocusing the plans on kick-starting economies after the worst of the pandemic has passed. As the FT reported on Monday, some officials think trillions of euros of investment could be mobilised if the budget is dramatically overhauled.
None of this will quell demands for so-called coronabonds by member states seeking more radical displays of EU budgetary solidarity. Northern states led by Germany and the Netherlands have expressed their opposition to this course of action. On Tuesday Charles Michel, the European Council president, insisted the door had to remain open to ideas that are “outside of the box”.
The Netherlands’ veteran prime minister is facing down a chorus of criticism from his own government for opposing ambitious EU fiscal measures to fight the pandemic. A contrite Wopke Hoekstra, finance minister, on Tuesday admitted The Hague had shown a lack of “empathy” for the plight of southern economies. Rob Jetten, leader of the Dutch liberals who serve in a four party-coalition, warns the country’s “book-keeper bluntness threatens to cause a major diplomatic disaster” in the EU. (FT)
Test of resilience
Germany is bracing itself for a sharp rise in unemployment despite efforts to avoid mass lay-offs through its famed “Kurzarbeit” programme. The number of German workers applying for government wage subsidies has surged to around 500,000 in March. (FT)
European powers have agreed a deal to export medical goods to Iran, in the first transaction under a new financial channel set up to shield lines of trade with Tehran from US sanctions. The mechanism, known as Instex, “successfully concluded its first transaction”, Germany’s foreign ministry tweeted. The first deal concerns around €500,000 worth of medical equipment. (FT)
The UK government said it is unlikely to reach its target of 25,000 daily tests for coronavirus before late April. Boris Johnson, the prime minister, said on March 18 that the UK was closing in on the higher figure, but a Downing Street spokesman said on Tuesday that the target would not be reached until “mid to late April”. (FT)
Taiwan has pledged to donate 10m face masks to countries hit hardest by the coronavirus pandemic including EU member states and the US, in a move that has been branded by the local media as “epidemic prevention diplomacy”. The move is likely to anger China and highlights the geopolitical dimension of the pandemic. Discussions are at an advanced stage for a donated cargo likely to exceed the 2.2m masks Beijing pledged to Brussels last month, people briefed on the matter said. (FT)
Don’t mention my name
Brussels stopped short of criticising Hungary’s imposition of indefinite rule, even as Viktor Orban’s autocratic government faced growing accusations of making a power grab under cover of the coronavirus crisis. European Commission president, Ursula von der Leyen, warned that emergency pandemic measures enforced by the bloc’s governments should be “strictly proportionate”, but failed to mention Hungary by name. (FT)