In light of last night’s developments, as Parliament starts to consider what would make for an executable framework for much of the UK’s economic future, one thing has become clear: the Withdrawal Agreement must be changed – renegotiated.
For that to happen, the enduring interests of each party, the UK and the EU, must be recalled so that a politically viable outcome can be reached. For its part, the UK seeks a deal on services which account for 80 per cent of its economy. By contrast the EU seeks a deal on goods, to protect its valuable surplus. Both parties want the benefits of as frictionless trade as possible. Beyond trade, wider collaboration is sought in certain areas, such as security.
But for the UK, the current draft Withdrawal Agreement falls short of what is needed on two key counts: sovereignty and trade.
The Agreement gives away sovereignty, leaving the UK with no say over any of its laws during a transitional period, and then no say at all over chunks of laws thereafter. Restoring constitutional sovereignty was a referendum decision and must be respected if any agreement is to take off.
For trade, the draft Withdrawal Agreement cannot work if EU interests for a quasi-customs union are prioritised along with elements of the Single Market for goods, but only warm words are offered for the UK’s interests in services, including financial services.
In the Political Declaration, which was a simultaneous but non-binding declaration of intent, the parties stated their wishes for a wide-ranging trade deal, involving mutual recognition on services and enhanced equivalence for the financial sector. Yet the current proposal to put services ‘on hold’ to be negotiated in a transitional period, would bring uncertainty and dangers for all. During that time the UK regulators would be without the powers often needed to change rules dynamically to protect taxpayers. Though such a transition period may be workable for goods, it cannot be for services. So though we see good intentions for services trade, the execution falls short.
In fact, a viable overall arrangement in skeletal form can be agreed even now without the need for the alternative of a managed no-deal. Perhaps inevitably, this reflects the EU’s typically last minute way.
How could this be achieved? The concept of Enhanced Equivalence is one which I set out in detailed legislative form in July 2017. This would provide financial businesses with what they need, enabling them to operate across Europe under one set of regulations and subject to one supervisor, replicating the status quo. It would avoid the costs of setting up duplicative regimes which are charged back to consumers, to the detriment of businesses and savings within the EU27.
Under Enhanced Equivalence, when the parties’ laws achieve equivalent outcomes, businesses can provide services in the other market under their home jurisdiction’s regulations and supervision. We already have executable text, providing for exactly that and achieving procedural certainty for the granting and withdrawal of equivalence in each financial sector. Temporary recognitions could tide the parties over for four months to finalise any details. A similar approach would work for mutual recognition in other services. The reality is that each party would be starting with not just equivalent laws, but they often move even now in a similar direction.
In practice, the EU’s artificial mantra that no trade deal can be negotiated until the UK is a third country can be circumvented for services by a mutual recognition agreement rather than a free trade agreement.
There are good reasons for the EU to agree. The eurozone needs the UK to continue to treat its member state government bonds as sovereign for regulatory purposes, ignoring a proper application of international regulatory standards and avoiding crippling costs. To assist, the UK needs full, dynamic control over all other protective regulatory levers. Enhanced Equivalence achieves just that. Also, the UK cannot be expected to agree to every other aspect of the deal so favourable to the EU unless the EU reciprocates.
The practicalities are close to the intended agreed position anyway. In financial services, the EU is already making unilateral declarations of equivalence across key areas such as cleared derivatives, allowing a continuation of current arrangements even on a hard Brexit. More declarations are likely, preserving the competitiveness of continental EU financial institutions and the ability of EU citizens to obtain access to cheap finance.
As the negotiations inch their way towards a system that can work, the UK’s whole economy must be brought to the fore. That means services must be covered and constitutional essentials recognised. Otherwise, nobody ends up with what they want.
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