The lines are drawn for the biggest battle in Brexit: the inclusion of financial services in a UK-EU trade deal. To date, the focus of negotiations has been on the treatment of goods post-Brexit. But it is rapidly reaching the point where financial services must take centre stage.
This is big money and there is a great deal at stake. It’s true that Brexit is a threat to both sides, and the scale of the threat has been reflected in the markets recently. Public companies exposed to both the UK and EU have seen their shares slide as investors bet on a bad Brexit outcome.
London is the world’s leading financial centre. The Z/Yen global financial centres index (GFCI) 2017 puts the city at number one despite Brexit uncertainty, with rivals Frankfurt at 11 and Paris down at 26. Services account for 45% of total UK exports; financial services exported from London account for 13% of that total and more than one-third of UK services exports have destinations within the European Union.
The EU Is Digging In
But is there a way forward? And as time grows short, and exhaustion sets in, will sense prevail? Despite the bluster, there is enough common ground to reach a deal that, while unsatisfactory to some, will allow UK financial services to function within the EU, and vice versa.
Of course, it is still early days and the mentality on both sides remains defensive. Michel Barnier is digging in his heels, insisting that financial services cannot be part of any EU-UK deal: “There is no place [for financial services]. There is not a single trade agreement that is open to financial services. It doesn’t exist.”
Backing up this stance, Stefaan de Rynck, chief adviser to Barnier made a speech at the London School of Economics this week. In it he made clear the Eurozone’s current position on financial services: “The EU has moved away in the wake of the financial crisis from mutual recognition of national standards to a centralised approach with a single EU rulebook and common enforcement structures and single supervisory structures.”
The EU is a political entity with clear objectives, rules and regulations – and anyone that doubts this determination to stick with the programme need only to listen to President of the EU Commission, Jean-Claude Juncker: “We need a budget to achieve our aims. The budget for us is therefore not an accounting tool, but a means to achieve our political goals.”
Convergence Not Divergence
This lack of creativity and fluidity should come as no surprise to UK negotiators. Economic alignment is an integral part of the future of the EU, and the only way the bloc believes it can deliver on its priorities. According to a reflection paper on the future of EU finances published last year:
“Reducing economic and social divergences between and within Member States is crucial for a Union that aims for a highly competitive social market economy aiming at full employment and social progress. It is of vital importance for the euro area, where divergences put at stake the sustainable development of economic and monetary union in the medium term.”
But this insistence on rigid control and unstoppable convergence has not played out in the EU’s favour and has increasingly led to questions about mismanagement by unelected institutions. As Francesco Fici has written on Market Mogul in the past: “Furthermore, the poor mismanagement of the Eurozone by unelected institutions such as the ECB, European Commission and IMF has reinforced a long-standing view of the EU as a technocratic and unthinking bureaucracy.”
This view is widespread and puts a positive complexion on the British attitude to finding a solution rather than digging in their heels. For example, today UK Chancellor Philip Hammond will insist that financial services must be part of the EU-UK deal: “I am clear not only that it is possible to include financial services within a trade deal but that it is very much in our mutual interest to do so.”
CETA is the Trade Template
The inclusion of financial services rests on the precedent set by the Canada-EU deal, CETA. The document lays out the results of that negotiation and, uniquely, dedicates a whole section to the inclusion of services, accepting that “[w]ith regard to services and investment […] CETA constitutes the most comprehensive trade agreement the EU has ever concluded. It contains commitments on both sides with regard to discriminatory measures and quantitative restrictions across all sectors as well as broad regulatory provisions on key sectors such as financial or telecommunication services.”
The CETA agreement is far from perfect. It allows limited access both ways, does not include any form of ‘passporting’ and is largely based on World Trade Agreement standards. But to dismiss CETA out of hand misses the point. The very fact that services are mentioned at all sets a precedent that cannot now be ignored by the EU, or the UK. In fact, as the EU itself acknowledges, CETA is the most comprehensive services deal the EU has ever done and it shows that the EU is willing to act on financial services when it needs to.
Many have made a career out of pronouncing that the EU is the bad guy and will never budge on financial services. But they have a lot to lose and a big hole in the EU budget to fill. They will move financial services and they will be included in the final Brexit deal. It’s just going to take a few more months to get there.
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