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Glimpsing the world beyond Brexit

Image: Mick Garratt

Among the more foolish Tory delusions around Brexit was the belief that securing a trade deal with the EU27 would be simple.  As International trade secretary Liam Fox told BBC’s Today Programme two years ago:

“The free trade agreement that we will have to do with the European Union should be one of the easiest in human history.

“We are already beginning with zero tariffs, and we are already beginning at the point of maximal regulatory equivalence, as it is called. In other words, our rules and our laws are exactly the same.”

The conceit here – one which has marred the Brexit debate – is that the UK has had little or no influence over the regulations that govern the workings of the EU Single Market.  This simply isn’t true.  Successive British governments have had a major role in framing EU regulation; especially in setting the framework for financial services.

It is true that at the moment the UK leaves the EU, the two entities will have exactly the same regulations.  And in an unchanging world, it would, indeed, be simple enough to negotiate a favourable trading arrangement.  But this assumes that the EU27 is happy with the regulatory environment that has been at least partially foist upon it by UK governments; especially in relation to financial services.

The EU27, though, are not happy with the current regulatory framework, and have already begun the process of developing a new regulatory framework that will no longer be subject to the largely destructive interference of UK government ministers.  And the – extremely – bad news for the UK is that the first area of the Single Market to be reformed is financial services.  As Huw Jones at Reuters reports:

“The European Commission is working on its biggest regulatory push on banking since the 2008 financial crash that could curb Britain’s access to the bloc, according to an internal draft document seen by Reuters.

“In the 12-page strategy document, EU officials outline provisional financial services plans for the bloc’s executive body, which sets the legislative agenda, and is due to have new people taking over the top jobs this year for a new five-year term. Officials are pulling together ideas that could become more formal policies later in the year…

“The document makes clear that there will be an acceleration of financial regulation, after many years when little has happened following a spate of rule-making after the financial crash…

“The list of planned legislative changes will also examine how to make the EU less dependent on Britain and London, the region’s preeminent financial center.

“’Following the departure of the UK, there will be significant work to manage the relationship between the EU27 and the UK in the field of financial services, which will be a source of risk,’ the document said.”

These behind the scenes moves, which make it impossible for the UK’s primary economic sector to maintain “regulatory equivalence” with the EU27, would seem to explain why Sam Woods, the UK’s top banking supervisor has made a plea to government to ensure that the UK continues to set the rules for banking and finance in Europe.  According to Caroline Binham at the Financial Times, Woods told a conference in Switzerland last month that:

“A scenario in which our future relationship with the EU takes a form that means we stick with a system which looks exactly what we have today […] is not ideal but we have largely shaped that system through our membership of the EU and we make it work well currently.  However, this would be undesirable if it came with the prospect of becoming a rule-taker in financial services with all the risks — both prudential, and as a matter of industrial policy — that entails.”

According to Binham, any deal that the UK government may arrive at with the EU27 may not be worth much in the longer-term:

“The government last year dropped the idea, pushed by the BoE, the FCA and the City, of securing access for financial service companies to markets in the UK and the EU by so-called mutual recognition of one another’s rules. Instead, following pushback from the EU, the government replaced it with a pledge that some form of equivalent regime would be included in the UK’s long-term relationship with the bloc.

“Equivalence already exists in certain areas for countries outside the EU, but is patchy and can be revoked at any time.”

The EU27’s direction of travel is also clear from the decision to relocate the European Banking Authority from London to Paris last month.  As Frances Coppola at Forbes reports:

“Yesterday, May 30, an important part of London’s influence in the European financial world quietly slipped away. The European Banking Authority (EBA) closed its Canary Wharf office. There was no press release, no news report, only a statement on its website giving its new address. On Monday, June 3, it will re-open in Paris, France…

“The U.K. tried hard to hang on to the EBA. The Department for Exiting the EU (DexEU) claimed that its future was ‘a matter for negotiation.’ But the EU negotiators saw it differently. The EBA is a Single Market institution operating under EU law. No way could it remain in a country that was leaving the Single Market and repudiating the CJEU’s jurisdiction.”

Despite being a large part of the UK economy, and keeping the UK in the G20, the needs of the City of London are unlikely to carry much weight with that part of the UK electorate that voted for Brexit.  As Coppola notes:

“British realpolitik is largely to blame for politicians’ lack of attention to financial services. London is by far the richest part of the U.K.; many of those who voted to Leave blame the vast GDP per capita gap between London and everywhere else on its close connection with the hated EU. Books such as Nicholas Shaxson’s ‘The Finance Curse’ argue that the U.K.’s dominant financial services sector drains resources from other sectors and prevents the economy from diversifying. And people haven’t forgotten the financial crisis, the bank bailouts and the austerity imposed on them to pay for it all. There is a widespread view that cutting the bloated City down to size wouldn’t be a bad thing. Protecting banks from Brexit is thus a much harder sell than protecting car manufacturers and farmers. Unsurprisingly, politicians have concentrated on softening the impact of Brexit on goods exports, and largely ignored services.”

This said, the EU27’s apparent hostility to a regulatory framework that favours the City of London indicates that the UK will have a much harder task securing a favourable post-Brexit trade deal with the EU than Tory ministers have claimed.  The reality – which largely explains why Britain has now lost two Prime Ministers to Brexit, and why parliament is incapable of agreeing how to go about leaving the EU – is that there will never be a more favourable trading relationship with the EU than the one Britain currently has by being a member.

Given the horrors that await humanity in the coming decades, Brexit may simply be Britain’s way of following John Michael Greer’s advice and getting our collapse in early to avoid the rush.  Indeed, from an environmental standpoint, the forced contraction of the UK economy and the rolling back of our ability to engage in damaging activities like travelling abroad or importing goods is probably a good thing.  But, despite ministerial claims to the contrary, the one thing that the UK most certainly will not be after Brexit, is better off.

As you made it to the end…

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