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On paper, at least, the agreement this week of a “memorandum of understanding” on EU-UK financial services co-operation could have been a significant waypoint on the road to a stable future relationship, but as things turned out, it came and went with barely a whimper.
On the face of it, that should be surprising, given the importance of the City of London to both the wider UK economy and services exports as well as the EU’s capital and financial markets, but the prospects of a substantial agreement had long since passed.
Over the past three years, both sides have pared back their ambitions as the UK under Boris Johnson prioritised its “sovereignty” and the right to diverge, while the EU responded to the threat by appealing to its own nations’ “strategic autonomy”.
Go back to March 2018 and the-then chancellor Philip Hammond was making an impassioned case for financial services to be included in any free trade deal and arguing in his HSBC speech that a standard third country “equivalence” regime would be “wholly inadequate for the scale and complexity of UK-EU financial services trade”.
At that time, officials recall a meeting at the Bank of England when, as talks got under way, they were firmly told that “if all we can get in this negotiation is another talking shop, then we don’t want it”.
Fast forward three years and that is precisely what has been agreed. The EU and the UK have completed a trade and cooperation agreement (TCA) with no chapter on financial services and are still to agree a broad-based equivalence regime.
And what’s more, as Mairead McGuinness, the EU’s financial services chief, has made clear the EU side is in “no rush” to move on this front, apparently content to retain equivalence as a negotiating lever as the wider relationship takes shape. As she put it last week: “I think what we will be doing is perhaps on a case-by-case basis rather than having a basket of equivalence granted immediately.”
All this is glaringly apparent in the text of the MoU itself, which one financial analyst witheringly characterised as about as useful as a “chocolate teapot”.
It provides for a twice-yearly forum to discuss areas of regulatory co-operation and a “bilateral exchange of views” on supervisory issues and equivalence discussions, but the document goes to almost comical lengths to advertise the new talking shop’s toothlessness.
It notes that the forum “will not restrict the ability” of either side to implement regulatory measures they consider appropriate, and then adds “in the interest of clarity” that the MoU “does not create rights or obligations under international or domestic law, nor will there be financial obligations resulting from its implementation”.
And just to be triply clear: “This memorandum of understanding is not intended to interfere with co-operation outside of its framework, nor with co-operation between supervisory and resolution bodies.”
None of this tells us a great deal, therefore, about the future shape of the City vis-à-vis the EU, which will be determined over time by a complex mixture of broader international market forces alongside more local EU mercantilism on issues such as euro swaps clearing and investment management.
The MoU does, however, tell us something about the inevitably frictional nature of the EU-UK relationship, which will be driven by the centrifugal forces of the UK’s “sovereignty first” agenda reinforced by Brussels’ determination to use Brexit as both an opportunity to drive business into the single market and bolster the political worth of the EU itself.
This does not apply just to financial services but across the board, whether gradually forcing electric vehicle supply chains and distribution hubs to set up inside the single market or entrenching the reach of EU bodies that certify medicines, chemicals or medical devices. The EU has never made any secret of the fact that it will not allow the UK to become a financial, legal or manufacturing and certification “hub” off the coast of the EU.
Michel Barnier, the outgoing EU chief negotiator, spelt out that vision one last time this week before leaving his job at the European Commission; his valedictory speech to the Churchill Europe Symposium delivered more-in-sorrow-than-anger, like a headmaster dishing out necessary but painful correctives.
No Brexiter could ever listen to that speech without their blood quickly coming to the boil, which is why — despite hopes that it will settle down — the EU-UK relationship looks set to be structurally adversarial for the foreseeable future.
Some might argue that things will settle down when gravity takes over; when EU exporters face the same checks as UK exporters, when the lack of a mobility chapter kicks in but I fear that might be optimistic, overlooking the political incentives on both sides.
Ultimately the economic asymmetry of the relationship means Brexit will always hurt the UK more than the EU, and even on the UK side, where economic pain is visible in some sectors, it is not at all clear that it will shift the political narrative any time soon.
And of course Europe has politics too. During the four years of negotiations the “unity of the EU27” narrative that Barnier cleverly stoked and stroked underpinned its approach to talks.
While there were divisions, ultimately preserving the unity and autonomy of the EU always justified taking a tougher line towards the UK, in many areas giving worse terms than other more distant trade partners whose “size and proximity” did not present the same threat.
The signing of the EU-UK TCA does not make that autonomist reflex go away, and this is true for both sides. Autonomy, whether on financial services equivalence decisions or more broadly, is just as seductive a political concept in the EU as it is in the UK.
Brexit in numbers
To date, the effects of Brexit are necessarily anecdotal, often with some very small sectors — like the bivalve mollusc industry, with total exports of £70.7m in 2019, according to industry body Seafish — getting relatively disproportionate amounts of media coverage.
This isn’t to say individual cases of businesses going bust aren’t heartbreaking for those concerned, but with total UK-EU exports worth £294bn in 2019 the overall costs of the new structural barriers to trade (once teething problems play out) will be felt across a much broader front and are still to be fully divined.
The negative trade numbers in January were stark, but only tell us so much because of Covid-19, pre-Brexit stockpiling and a lack of comparative data sets to work from. What is murkier, and ultimately more important, is the long term picture.
John Springford at the Centre for European Reform has done some fascinating modelling showing that UK trade was £16bn in January lower than a “synthetic” UK that remained in the single market and customs union. (This after Brexit had already led to a 10 per cent reduction in total UK goods trade since the referendum in 2016 to the end of last year).
He says these are indeed “very significant” effects that will feed through into the real economy over time, even though such modelling doesn’t tell you about local effects (where clusters of particular hard-hit industries are affected disproportionately) or how individual business will react.
The extra friction and higher prices caused by trade barriers will affect UK consumers differently but predicting the interaction of these is also difficult. Some consumers will absorb higher costs on premium brands (to buy, say, a smart German car); some will look to cheaper UK substitutes (Somerset Brie, perhaps, instead of French Brie) and some will just cease activity altogether by not making some purchases at all.
UK exporters will face a similar range of forces. A premium brand, like a Brompton bike, might find EU customers willing to absorb higher prices and delivery issues caused by customs and VAT, while a Scottish salmon farmer or Welsh mussel producer may find their EU clients simply decide it’s easier to purchase from Norway or Spain.
How all this plays locally and politically, only time will tell, but the overall numbers on Springford’s models are significantly negative.