President Jean-Claude Juncker and Prime Minister Theresa May shake hands.
A deal has been struck between the Commission and the UK on the big lines of the so-called “divorce agreement” that should make Brexit a reality. The Commission as well as the European Parliament recommend to the Heads of State and of Government that “sufficient progress” has been achieved and to give the go ahead for the next phase of negotiations. This is generally expected to happen on Friday, 15 December.
In our industry the impatient could be forgiven to ask for going immediately to the main course (i.e. the transition period and the future relationship agreement). But according to Brussels intelligence Member States seem to prefer serving first the transition period as a “trou normand”. Indeed the EU 27 first would like to use the period between January and March to agree among themselves on additional guidance regarding the EU position in view of the future trade agreement. During that time the EU chief negotiator Michel Barnier and his team would negotiate the terms of the transition period.
These terms are very clear from an EU perspective: for the UK as a third country to transitionally benefit of a continued access to the Single Market after March 2019 it will have to comply with all the obligations of a Member State without any voting rights. A bit like the non-EU members of the European Economic Area (EEA). This means adherence to the laws and regulations, the EU Court of Justice as well as financial contributions. At the same time the UK will be a third country which means that there will be no UK delegation at the Council table, no UK MEP in the European Parliament and no UK Commissioner sitting in the Berlaymont. The UK will also have to give up its seat around the table at the EBA, ESMA and EIOPA or any other of the fortyish European agencies.
The length of the transition period will also be keenly watched by the financial services industry. But there should be no mistake: it will be as short as possible. Theresa May can’t afford a lengthy separation process, less she has a revolt by her hardline Brexiteers on the arms. Currently she seems to be thinking that two years would do the trick. Michel Barnier also wants the period kept to a minimum. In a recent speech after the above-mentioned deal, he described the period as “short and framed” to Members of the European Parliament. In financial terms a practical solution that is rumoured is that the transition period might come to an end by 31 December 2020 when the current budgetary period – with its UK commitments – expires. Nevertheless nothing is decided yet.
The so-called future relationship agreement is in itself a trade or an association agreement, like the EU has already quite a number in place with other third countries. The content of the agreement is of course yet unknown when it comes to details. But the very general lines can be guessed from existing agreements with third countries as well as what both the EU 27 and the UK have said in the past. Both agree that it should be ambitious as much is riding on the future partnership between them in Europe. Nevertheless both have also declared red lines. The UK wants regulatory sovereignty and “freedom” from the European Court of Justice as well as control of its immigration. This clashes clearly with the four freedoms and the general rule that access to the single market means adherence to EU legislation and the authority of the European Court of Justice (as repeated over and over again by the EU 27). In practice this means that UK banks will loose the EU passport to access the single market even in the most optimistic scenario. The conclusion is that the future trade agreement with the UK – if agreed and ratified – will be less than the EEA but more than simple World Trade Organisation (WTO) rules. The most referred to model is the trade agreement with Canada (CETA), the most comprehensive of its nature. For the financial industry this will not be a help. Financial services are not covered. Nevertheless it will be better than no agreement at all as sectors like data protection, IT or some staff related aspects might be included in a future trade agreement with the UK.
One could – like the UK chief negotiator David Davis- envisage a now famous “CETA plus plus plus”. Such an agreement might include financial services as the interconnection between the City of London and other financial centers and the rest of the EU economy is not negligible. As financial services are not substantially included in any bilateral or multilateral trade agreement, this would nevertheless set a precedent. In the future a more open US, Switzerland or Asian economies might invoke that precedent and the spirit of the most favoured nation clause to get their own financial services agreement with the EU. The question is whether the European Union is willing to go down that path.
Antoine Kremer, ABBL & ALFI Head of European Affairs