May's maiden EU meeting: guide to Britain's Brexit strategy

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at 2016.10.19
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May's maiden EU meeting: guide to Britain's Brexit strategy

Theresa May, Jean-Claude Juncker, François Hollande and Angela Merkel © FT Montage

Britain’s prime minister heads to her first EU summit this week with fellow European leaders wondering if she is finally ready to flesh out her sound bite: “Brexit means Brexit”.

They are likely to be disappointed — Theresa May has insisted she will not show her hand before Brexit negotiations start.

But during the past few weeks, British ministers and officials in Brussels have given clues, either publicly or in private, about the outline of her negotiating position. This is the FT’s pre-summit Brexit guide:

Single market

The UK position: Britain is leaving the world’s biggest market. Mrs May’s insistence that Britain ends free movement of EU workers and throws off the jurisdiction of the European Court of Justice is incompatible with single market membership.

Chancellor Philip Hammond has floated the idea of “sector by sector” deals to maintain access to the single market for key industries such as financial services and cars.

Chancellor Philip Hammond has floated the idea of ‘sector by sector’ deals to maintain access to the single market for key industries © FT Montage

Most ministers acknowledge that staying in the single market is no longer a negotiating aim; instead, the priority should be to secure what Brexit minister David Davis called the “freest possible” market between Britain and the EU.

The view from Brussels:

For the remaining 27 EU states the implications of the speech were clear: if Britain sets its own rules and shuns supranational institutions, it is by definition outside the single market. Since then, the mood on the continent has hardened. The priority is not making Brexit a success, but defending the interests of the remaining 27 states and the integrity of the EU project.

Given that, some senior EU diplomats question the sense in making compromises to sustain car production in Britain that might otherwise move to France or Slovakia.

For similar reasons, sector-by-sector “cherry picking” is seen by the EU-27 as politically unacceptable. Why would Europe help British commercial interests in sectors of its choosing, while being shut out of markets such as agriculture and construction?

Customs union

The UK position: Britain is expected to leave, even though Mr Hammond has warned that quitting the customs union will saddle companies with form-filling, delays and frontier checks and could require new north-south border controls in Ireland.

Mrs May appointed Liam Fox as international trade secretary to strike new trade deals with third countries — a key demand of Brexiters. He would, in effect, be out of a job if Britain stuck with the common trade policy of the EU.

International trade secretary Liam Fox would be effectively out of a job if Britain stuck with the common trade policy of the EU © FT Montage

Mr Hammond has mooted the idea that certain industries with complex supply chains — such as cars and aircraft manufacturing — might have customs union carveouts, with a special regime to simplify cross-border trade.

The view from Brussels:

Mr Fox’s outspoken views on trade have raised the hackles of trade officials in Brussels, who fear Britain is undermining the EU’s interests on trade before it has even left the bloc.

German and French officials scoff at the idea of keeping parts of north-east England in the EU for the purpose of carmaking. It is another pick-and-mix British model the EU says would not fly.

Even if special customs arrangements were possible, there would still be issues around the levying of VAT and rules-of-origin checks for parts that came in from non-EU countries with which Britain had separate trade deals. Some negotiators think Britain’s post-Brexit participation in the customs union could form the basis for a smoother transition. But this would limit Britain’s ability to negotiate trade deals, as it would require budget payments and full adherence to EU laws on goods.

Free-trade deal

The UK position: The most likely post-Brexit model, often floated by Brexiters during the EU referendum, is for Britain to seek a deeper version of the Canadian trade deal with the EU, to secure access to the single market for goods and services.

Mrs May has ruled out straight membership of the European Economic Area like Norway (a deal that would require Britain to accept free movement of labour) and is looking instead for a specifically British trade deal with the EU.

Foreign secretary Boris Johnson said such a deal could have a “possibly greater value” than the one Britain currently has.

The view from Brussels: Few European leaders agree. French president François Hollande said Britain would have to pay “a price” for Brexit. Indeed, some EU diplomats reckon any trade deal would be more like a “Canada minus” if Mrs May demands full regulatory autonomy.

Foreign secretary Boris Johnson claims a deal like Norway has with the EU could have a ‘possibly greater value’ than the UK’s current deal © FT Montage

A new trade deal could be complex and take years to agree. The EU-Canada deal has been in the making for seven years and is still not agreed: last week it was blocked by the Walloon regional parliament in Belgium. The EU-27 say it is impossible to imagine agreeing — let alone ratifying — a full trade deal covering services before the end of the Article 50 divorce process.

Post-Brexit transitional deal

The UK position: Given that the formal Brexit divorce talks should end in March 2019, Mrs May has told colleagues that Britain will probably need a transitional deal to cover the years until a free-trade agreement can be secured with the EU.

The Japanese government, Wall Street banks and many companies have warned that unless such a deal is in place — effectively enshrining existing trading arrangements — trade could fall off a “cliff edge” in 2019.

Without a transitional deal, Britain would have to fall back on to World Trade Organisation rules, with tariffs on a range of goods; services would be particularly badly affected. Senior Whitehall officials say some ministers are ready to do so if EU talks prove fruitless.

The view from Brussels: EU leaders are expected to demand a heavy price for extending Britain’s EU privileges after Brexit, including cash, ECJ jurisdiction, pledges not to change laws and free movement provisions. The European Parliament is expected to demand a clear sunset clause on the provisions, to ensure the transition does not become a trade deal agreed by the backdoor. In any event, Eurosceptic Tory MPs fear that such a transition deal could end up becoming permanent and will push for the certainty that the provisions will lapse.

Paying into the EU budget

The UK position: Whatever Britain’s future trading relations with the EU, it is likely to have to pay for deep market access.

Mrs May has never ruled out making future payments to the EU and ministers say the UK is likely to end up paying billions of pounds a year to Brussels, even after Brexit. Whitehall officials are looking at ways to offer bilateral support to EU member states outside the structure of the EU budget.

The view from Brussels: Britain’s Brexit settlement will probably involve not just settling old liabilities built up as an EU member — an exit bill the FT estimates to be as much €20bn — but also continuing contributions in return for trade privileges. That would probably apply throughout any transitional deal and potentially extend even after a new free trade agreement is signed.

The current net annual contribution is £7.1bn. Pro-Brexit Tories say the British public voted to end those payments and to redistribute the savings to the National Health Service. Things do not look like they will work out that way.

Immigration

The UK position: Home secretary Amber Rudd presented a plan to colleagues last week where EU workers would have to prove they had a skilled job in Britain to obtain a work permit, as part of a drive to “take back control” of the country’s borders.

A “seasonal workers” regime might be put in place for unskilled workers to ensure that British fruit and vegetable growers did not go out of business. Former Tory leader William Hague has proposed a more liberal regime, where any EU citizen who had a job offer in Britain would be permitted to take it up.

Home secretary Amber Rudd suggested EU workers should have to prove they had a skilled job in Britain © FT Montage

To try to minimise retribution from the rest of the EU, Mrs May would sell the policy as consistent with the principle of the “free movement of labour”, as opposed to the free movement of people.

The view from Brussels: The EU would see any caps — whether applied to specific sectors or migration as a whole — as contrary to free movement principles. Such restrictions would impact transition terms and potentially trade privileges, depending on the depth of economic relations. It would also affect residence rights of British nationals in EU countries.

British ministers expect Europe to, at worst, mirror the restrictions on UK nationals working overseas. But these residence rules are decided at member state level, making the negotiation potentially more complex. Reciprocating UK restrictions may not make sense to Polish or Latvian politicians, whose interest will be protecting the rights of all their nationals, not just high skilled.

Financial services

The UK position: Ministers, Brussels officials and City of London bankers accept that once Britain leaves the single market it will lose the “passporting” arrangements that allow UK-based financial services companies to operate freely across Europe.

Britain is considering paying Brussels to try to secure an alternative access deal with the EU, based on an “equivalence” regime between UK financial regulations and those in force across the 27 remaining member states.

Andrew Tyrie, Tory chairman of the Commons treasury committee, says: “There is at present no example of EU trade agreements that have included market access for financial services of the nature and scope provided by the current passporting regime.”

The view from Brussels: Brexit, to the EU-27, in effect kills the passport as it existed for UK-based companies. More significantly, the determination of equivalence is at the European Commission’s discretion. It could in principle be withdrawn, for example, if the EU regime changes, or the terms of access changed. From London’s perspective, the access provisions are vulnerable to misinterpretation or abuse.

French officials, in particular, see little prospect of the City retaining its position as the main financial centre for the euro. They expect EU rules to be calibrated over time to deepen eurozone-based financial activities, and make it more difficult to operate “offshore”.

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Published at Wed, 19 Oct 2016 03:56:15 +0000

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