May 10, 2017    5 minute read

Brexit Negotiations: Is a “Deep and Special Relationship” Likely?

High Stakes    May 10, 2017    5 minute read

Brexit Negotiations: Is a “Deep and Special Relationship” Likely?

The phrase a ‘deep and special relationship’ has become a byword for the British PM to project the view that a positive attitude will follow through in future Brexit negotiations. But can the rhetoric still hold up to the events currently unfolding?

Will the word ‘special’ signify anything more than what is currently enjoyed by Norway or Switzerland? Leaving the EU single market and customs union seems to discount that. Even Turkey is within the EU customs union, although political developments there have all but frozen out their accession application.

However, a continued UK-EU partnership is more forthcoming on military co-operation, the fight against terrorism, combating organised crime as well as cyber-crime and implementing measures to increase European and international security.

The EU’s Priorities

The EU27 met on 29th April and the scene is now set with key markers firmly dug into position. The consensus is for an orderly withdrawal but with no discussion of trade deals until the divorce settlement is substantially agreed, and the future of EU citizens residing in the UK is guaranteed.  

Chancellor Merkel, in her Bundestag speech on 27th April, stated the EU “can only do an agreement on the future relationship with Britain when all questions about its exit have been cleared up satisfactorily.”

The member states are unanimously concerned about the future rights of their citizens to reside, work, and enjoy social security and healthcare in the post-Brexit UK. The EU27 presents a united front but within this are a number of separate agendas focusing on reducing Brussels’ legislative control.

The UK’s Priorities

The UK needs access to EU markets through an advantageous and ambitious trade deal outside the rules of the single market and the jurisdiction of the European Court of Justice (ECJ). Most importantly, however, it must regain control over immigration.   

Tough rhetoric by UK politicians and the tabloid press may please a domestic electorate but does nothing for fostering a spirit of compromise among EU member states. The EU with Britain, albeit under different trade arrangements, will be the most powerful economic block in the world.

Failure in negotiations is not an option. It will not only hurt the British economy but also the economies of EU27, and in turn the welfare of all their citizens. Future generations of Europeans will not thank those in charge today for sacrificing their economic interests at the altar of the jingoistic sentiment that is so prevalent in today’s press.

London’s Fate

It is unfortunate that London, a powerhouse for the British economy and a bastion for the vote to remain in the EU, could suffer most from the decision to exit.

Lack of progress on passporting issues makes it much more likely for banks and their clients to relocate to mainland EU. The hegemony of London’s pre-eminence as a financial centre is under threat with many of its international banks preparing to set up subsidiaries and move staff to EU locations.

Some already have provisional plans to move to new headquarters. Goldman Sachs is making advanced contingency plans to move hundreds of staff to Frankfurt and Paris. Frankfurt is the preferred choice for most banks, but other European capitals such as Dublin and Paris (and Madrid) are competing for London’s lucrative business too.

The CEO of the London Stock Exchange has warned that as a result of Brexit thousands of city jobs could go. The importance of the sector to the British economy cannot be overstressed. It contributes £67bn to UK taxes each year.

European Court of Justice

Perhaps the most significant challenge lies in retaining London’s status as the clearing house for euro-denominated derivatives. The ECB and some EU parliamentarians question the location policy, particularly now that especially now that the UK will leave the ECJ’s jurisdiction.

Both France and Germany warn that London’s dominance is untenable when not based in the EU and not subject to ECJ’s jurisdiction. Ironically, it was the very support of the ECJ, in a landmark 2015 legal case, which found in favour of London against an attempt by the European Central Bank (ECB) to force the relocation of EU big clearing houses to Eurozone countries.

The potential loss of this role would be devastating, and cost many thousands of jobs to the London economy. There is already fallout from the Brexit effect seen in the London property market: one that is tempered only by the effect of the sterling’s steep decline on the foreign exchanges.

Departure of the EMA and the EBA

In addition, two prominent agencies could lose their London headquarters: the European Medicines Agency (EMA) and the European Banking Authority (EBA) are both currently based in Canary Wharf. Competition to host these agencies comes from a broad group of EU states, including Romania, Bulgaria and Croatia, all seeking to take the headquarters and its 900 highly skilled staff. 

The new locations could be decided by June with Germany, France and Italy also hoping to grab guardianship of these prestigious agencies.

Looking Ahead

Brussels and the champions of the European project will be bolstered by Emmanuel Macron’s win in the French presidential elections, which gives impetus to the sense of renewed stability, which is perceived as critical to the future of Europe.

Precisely how this will affect the stance of the EU27 in the forthcoming Brexit talks remains to be seen.

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