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Open Europe’s Vincenzo Scarpetta looks at the leaked City of London memo published today by the Financial Times, and argues that the most significant news is the Brexit Secretary’s frankness about Britain’s likely relationship with the EU’s single market rather than his views on any transitional deal.
9 December 2016
The Financial Times has this morning published a leaked memo drawn up by a City of London Corporation representative after a meeting with David Davis, the UK’s Secretary of State for Exiting the European Union. Most of the attention has focused on the fact that, according to the memo, Davis told the meeting that he was “not really interested” in the discussion around possible transitional arrangements to bridge the ‘withdrawal agreement’ that will be negotiated under Article 50 of the Treaty on the European Union with the broader deal that will underpin the future relationship between the UK and the EU-27.
However, the memo contains a potentially more significant piece of news – that is, Davis suggests the UK is unlikely to retain full access to the single market because of the approach taken by the EU-27 on the indivisibility of the ‘four freedoms’ (the free movement of goods, services, capital, and workers). This is a crucial point.
As I wrote in a recent op-ed for Prospect, many, on both sides of the Channel, still seem to work on the assumption that the upcoming Brexit talks are going to be a mere replay of David Cameron’s renegotiation – with the UK looking to change the terms of its EU membership or trying to rewrite the rules of the single market. If this was the case, the UK would face a high risk of a car crash with the EU-27. But it really isn’t. The UK is on its way out of the EU and the point of the negotiations is to build a brand-new relationship.
According to the memo, Davis dropped a pretty clear hint that the UK will no longer be a full member of the single market after Brexit and pointed at CETA, the EU-Canada free trade agreement, as an illustration of the alternative. This still leaves a wide range of bilateral possibilities to reflect upon when the UK sits at the negotiating table with its European partners, but should at the same time help us move on from constantly going around in circles regarding the ‘four freedoms’.
One final point on Davis’s views on a possible transitional deal: it should really come as no surprise that Brexiteers see this option as politically unpalatable and ideally something to be avoided. Therefore, the challenge for the Government is to make sure that any transition remains (and is seen by everyone as) such and does not turn into the ‘new normal’. Any bridge must lead to a clear and ‘final’ destination. Interestingly, the European Commission’s lead Brexit negotiator, Michel Barnier, made just that point earlier this week.
Furthermore, Davis himself was more open to the idea of a smooth transition in his statement to the House of Commons last week – which, incidentally, is more recent, given that the memo is dated 15 November.
The debate over a transitional deal is still very much open – just like many others.
Most common car in the EU is Nissan Qashqai.
@Rollo_ No it is not. It is a top 10 seller so far in 2016 #8, and that makes it the best sold UK made car in Europe. The best seller is the VW Golf (and has been so for quite a while.
@Rollo_ Rubbish VW 24% of the EU market
Nissan 4.6% of EU market
A lot of argument in the posts that Britain has an upper negotiating hand in negotiations are based on economic growth, low unemployment and high trade deficit with the EU27!
This article that nearly 3.6 million people show the real statistics. Being employed and being in poverty is worse off than living off benefits in a EU27 country. If really add this to our official unemployment rate, we will hit a over 15% unemployment rate.
The trade surplus has increased in spite of significant drop in the value of sterling against both the dollar and Euro (another statistic often ignored by the leavers!). In fact the drop against the Euro on an average is more than any average tariffs that EU imposes under WTO! A classic example is the car industry. Significant imports to Britain are coming from the likes of BMWs of Germany which have a strong Brand recall (i.e, people willing to pay more for the brand), strong roots in Germany and a management that has been very good at off-setting global uncertainties including the likes of Brexit! Also the supply chain for BMW has very limited component in Britain
Whereas Nissan from Britain doesn't have the same brand recall, by no stretch of imagination can be called as a British company or said to have strong roots in Britain (France can easily give more incentives to shift production to the French plant) and is highly wired and dependent on a lot of component supply chain from EU27 and the continent!
Majority of the exports from EU27 to UK is on this branded item category, i.e, German cars, French Champagne, etc., very difficult to fight with tariffs without really hurting the British consumers (especially the lower end!).
Ditto for a lot of the Aerospace industries. If the EU27 wants, they can even give us a free trade deal and force the likes of EADS/Boeing to slowly start excluding Britain out of their supply chains!
A significant part of our growth is coming from a large flux of migration nearly to the tune of .5% of the population per year (if translated to workers probably well over 1 to 1.25% of the work force). This is due to the English language, low levels of entry requirement for the various professions and freedom of movement from EU27! Once this stops, I expect practically the growth to come to a standstill or be even negative (i.e, net migration below the 10s of thousands!). The rest of the growth is being fueled by the growth of the debt in the system, i.e, central bank pumping money into the system and personal debt increasing, etc.,!
In such a scenario, it is even foolish to debate whether the EU27 economies are fragile or not, but rather worry about us!
Leavers accuse remainers of not accepting the result and suggest that we should wait till Brexit happens and then start a campaign! I will like to remind them that when Britain joined the EEC (formerly EU), it joined by a valid and legitimate legal and constitutional process in Britain, i.e, the British parliament enacting ECA 1972. The "leavers" at that time could not accept that legitimate process and "invented" a new "concoction" called "referendum" which was alien to the British/English democracy of more than a few centuries! Off-course the "Leavers" of that time badly lost in the new concoction! A second referendum is a much less of a concoction and best of all, we may even defeat the leavers handsomely in such a second referendum!
Great articl, thanks for posting that. It highlights clearly the devastation wrought by rising housing costs through population growth through immigration outstripping housing supply.
Some of the conclusions you draw from the report make less sense to me.
the EU refused to join the Brown stimulus plan in 2009. It was essential to the UK posto crisis recovery and despite rhetoric is something subsequent governments hve continued. Inot a block with freedom of movement people will always be attracted to where there is work whether it's is East European. Greek Spanish, French... The UK has and is stimulating much of the EU with debt, well beyond its means. By together time we leave debt will hve risen from 6o% to over 90% of attracted GDP now inflated with low paid jobs that the government has to subsidise through in work benefits. Without this uneconomic attracted no unsustainable GDP debt will be well over 1oo% and in PIGS territory.
This as been the cost of being inside the EU with its four freedoms and mismanaged and currently in manageable euro.
Leaving will be damaging, it will expose the damage that has been done since 2010. Remaining however, without major EU reform, would allow the damage to get worse until it a as the UK going cap in hand to the IMF and having Greek tylere austerity imposed
I read in an article today:
"The Chancellor is saying one thing, promoting a longer Brexit with transitional arrangements, while the Foreign Secretary is encouraging a final deal within a two- year time-frame."
I wonder when it will dawn on politicians and the media that this is an entirely false dilemma; there would be nothing extraordinary about a final agreement being made within two years but including transitional provisions which extended for certain periods after the agreement has come into force.
@Denis_Cooper Absolutely but that is not what the fuss is about. The problem would be a transitional agreement while the UK failed to secure a definitive regime and would still be negotiating after the two years would have passed.
@Qianlong @Denis_Cooper As long as after two years or thereabouts we have a treaty in force which clearly and immutably fixes the correct final destination for the UK then I won't be too bothered if it also lays down a longish timetable for the UK (and also the other countries) to gradually get to that final destination. We've been entangled with the EEC/EC/EU project for nearly 44 years, with various transitional entry provisions at the start, and I doubt if in another 44 years anybody will be much bothered that it had taken a similar period for us to get completely disentangled from the EU through analogous exit transitional provisions. I absolutely agree with those who want a clean break, but I don't think the instant clean break that some demand will be at all practical. What we do need to very carefully avoid is getting permanently stuck in some unsatisfactory transitional state, such as the EEA or a similar arrangement.
@Denis_Cooper @Qianlong The problem would be if the disentanglement translates into decline an ever increasing decline initiated by Brexit but fueled by events yet to be experienced thinking exit is empowerment is a delusion
@pdscaz @Denis_Cooper @Qianlong Thinking that we will go into an ever increasing decline after leaving the EU is a bigger delusion.
@Denis_Cooper @pdscaz @Qianlong pdscaz's post neede decyphering but now you have done that I can only agree with him
@Qianlong @Denis_Cooper @pdscaz
You don't have to agree with him, you can choose to think for yourself.
@Denis_Cooper @Qianlong Just imagine what you just said: "after two years...destination". That is the problem, it is unlikely that there will be sufficient precision in whatever is agreed (as long as it differs from an absolute break, so that only mutual legacy obligations are honored (even tose could be terminated with mutual consent) and then the transitional arrangement carries the potential of future "mutations".
There are three possible outcomes (ignoring a purely unilateral act by the UK):
1. a definitive agreement in effect before the end of the 50 period (as extended where necessary) certainly containing normal transtionary provisions
2. a transitional arrangement with an outline of the "destination" but not enough specifics to be enforceable and in that case probably stating that EU jurisdiction etc will continue to apply until the transitional arrangement is superseded by a definitive arrangement (stay or leave with specifics)
3. No agreement on transitional or definitive arrangements (failure to negotiate a replacement regime within the 50 period and without an extension
I guess that (1) is difficult to achieve unless there is a material change in circumstances , (2) is probably the transitional regime Brexiteers fear and Hammond anticipates and (3) would indicate a slowly failing process of discovering the sort of common ground necessary for a replacement arrangement. The process itself would probably not happen in secret hence there would be increasing anxiety from the (inevitable) losers and a high level of economic uncertainty.
This is all in shorthand unfortunately, a proper treatment would take quite a bit more language
@Qianlong @Denis_Cooper I don't say that any of it will be easy; it wasn't easy when we joined and it won't be easy four decades later when we leave. However I think it would be perfectly possible to agree to your outcome 1. if both sides wished to do that. Of course different people have different views on what the final destination should be; some propose what I view as an unsatisfactory solution but to gain support for it suggest that it would only be transitional state to give us time to prepare to move on to a next stage, when in fact they would be happy if there was never a next stage. That approach is not on, really, on that I am in rare agreement with Verhofstadt; we should come to our national conclusion about where we want to end up on an honest not a misleading basis. If it takes a little longer than others hope to finally get to the right destination then so be it; this is a long term project, a historic change in direction for our country and a few years here or there are of little account.
@Denis_Cooper @Qianlong To boldly go where no man has gone before like Don Quixote no plan not knowledge of what come next or how to do anything I do like an optimist
@Denis_Cooper @Qianlong @pdscaz rational thought at last same it stilted
@Denis_Cooper @Qianlong The whole Tenance has changed perhaps there's no need for a third runway at Heathrow planes will over fly as we have moved to Europe's periphery our trading partners from the third world will not eye the major EU market from our shores but as certain as knight follows day they will not be ignoring the lucrative EU for their prosperity
@Denis_Cooper @pdscaz @Qianlong pray tell how you think a walk into the unknown is not delusory with our baggage
That's called an interim arrangement rather than transitional. Interim, whether agreed in Art50 under a qualified majority, or as a precursor to a final trade deal under WTO (like 2 parties agreeing zero WTO tariffs as prelude to impending trade deal must in both cases be temporary. Extending them indefinitely is against EU rules on the first instance and against WTO rules in the latter
Or is what you saying a delusion Denis? If you are not going to substantiate such are claim you can hardly expect people to take it seriously
@IronGrill No need to the proof of the pudding is the pound down inflation up employment leveling look at the charts I wonder what could be the cause
@pdscaz @IronGrill IMF stated the GBP was 15% overvalued just before the referendum. It has since lost 15% against USD but only 10% against EUR which continues to lose value as the ECB fails to get a handle on the Euro Debt crisis. Inflation ois still below 2% target and well below wage inflation, so things are still improving.
@IronGrill @pdscaz tell that to the petrol pump the food trolley raw material imports holidays the pound in your pocket the journey has just begun
I can't see how talking to inanimate objects helps. ON PETROL or take it you don't follow the markets. Oil is going up in USD becuase of production cuts announced by OPEC and more recently by non OPEC'S producers. This is not related to Brexit.
Despite this, OBR measurement of annualised inflation is currently 1.2%, 0.8% below target. Around 2% below wage inflation. On average people are better off, not worse.
@riennevaplus @Denis_Cooper And at the end of it be in a worse position than the start a better one is an impossibility
@Denis_Cooper @pdscaz @riennevaplus further explanation required on the land of milk and honey that's just around the corner
This comes as no surprise since this whole thing (Brexit plus future status) is far to complicated to do in one quick move. On the one hand, one sees cabinet politicians test the waters for something different from a very hard Brexit (Qianlong happens to believe that there is no feasible halfway house, not even a transitional one, hence wonders what might be the true motivation) to see what damage that might do to Tory popularity, especially now the UKIP thing looks more and more like a Farage-dependent movement and has peaked. On the other hand, there is no one on the other side (the various EU institutions plus the dominant EU countries individually) who sees clearly what (1) the UK might want specifically, after transition and (2) what they could offer within the existing treaty and given the natural diversity of preferences in the member countries.
So indeed, a transitional agreement makes sense normally only if one has an agreement of the ex-post situiation, which means that instead of just the ex-post situation, also the transition would have to be negotiated. Discussing a transitional agreement without a clear definition of what the transition would lead to is nonsensical, especially given the lessons of the Eastern European transitions post Communism.
I guess that the logic behind the current talk about transition (even from a strong brexiteer) stems from an intention to now introduce a period of political debate among traditional (non-populist) politicians, supported by experts, leading to either a design for bespoke agreement or a set of UK demands not too different from Cameron's negotiation goals (which he did not achieve) yet still acceptable to the Western countries of the EU, upon which then the Western ones (donors) might massage the Eastern ones towards a different migration regime and make Brexit redundant. Non-populist government has had enough time to explore the alternatives and should be able to start working in the interest of the UK economy. A transition path might well demonstrate to the UK public that remaining is cheaper than leaving. That would not satisfy the "nationalists" and romantics but they do not represent more that maybe 20%. The key is to educate the ex-Labour Kippers about economics and especially expose the various bits of disinformation. Meanwhile that would probably harden the minority not susceptible to any economic argument into a stance that most Britons would disagree with. That would be proper, British, politics.
Of course this scenario presupposes that the domestic audiences in the EU countries do not radicalize themselves (UKIP-friendly media in the UK often portray the situation in the EU as one where anti-EU populists are about to take power, while the share of the vote of these populists is still fairly low (in most countries about as high or lower than the former leftist movements (incl communist parties - Le Pen still lower that the communists in the 1960s, Wilders lower than a combination of leftist poarties in Holland in the 1970s) and those movements never had a lsating influence on politics, beyound assisting centre-right parties to convince voters that extremism is bad politics. We now have a fresh crop of polical entrepreneurs preying on the disenfranchised with equally (but not similar) irresponsible ideology
@Qianlong 50 will be triggered what will UK trading position be in 2020 alot depends on what we want and get left or right parties in eu so what they are not the issue now we're going to say by by to EU and open the door into what ?
@pdscaz @Qianlong Those parties in the EU are important because that may narrow or widen the policy space for the EU negotiators. My reference lo leftist parties in the past was just to illustrate that the phenomenon of extremist parties with significant (but never dominant) followings in postwar Europe is not new. In the 60 and 70 the extremeists were on the left and now they are on the right. However the continuity is centrist, which is a normal phenomenon in poportional voting (and necessarily coalition-type, unless undemocratic) regimes. The extremism on display in the UK (not meaning that all Leavers are extremists, on the contrary) exists in a different political context from Europe, where similarly extremist groups may claim they want to leave the EU but probably not manage to swing a majority of the electorate (remember only 40% of those eligible to vote in the UK voted in favour of Brexit , a country much easier to disentangle than for instance, Belgium). All opionion polls en European countries indicate that similar referenda there would result in large majorities in favour of remaining. Even in angry France, there would not even be a mojority in favour of a referendum, let alone that a referendum (assuming fairly designed) would result in exit.
There is another issue of course, that the UK is not fully integrated and hence not indispensible. It is unlikely that the UK would form a new customs union with her neighbours (Ireland, France, Belgium, Denmark, Norway, Iceland). In the case of a French or German exit, (from the EUR, followed by necessary exit from the EU itself) new unions could be structured among more similar economies (for instance Germany with the Benelux, some of the Nordics, Austria and maybe Poland etc). The UK has no useful companions in Europe, as evidenced by recent statements from leading Anglophiles in Sweden, Denmark and Holland.
You are quite right that whatever you will get in 2020 (or earlier, if negotiations fail and Brexit is triggered) depends on what both parties want, and more importantly, what they are able to GET. You do not always get what you want and for some reason the UK government has not openly admitted that that is the case.
@Qianlong Davis was very clear in the Sect comittee today. He thinks 2 years is enough time to agree and end point. He doesn't have an issue with a transitional period between the end of Art50 and full implementation. He was clear to separate this from an interim agreement which is some sort of continuation while a new trade agreement is The negotiated where there is no clarity at the end of 2 years as to where this is going. Government is looking for a high degree of certainty form the Art50 negotiations, something both sides are asking for.
@IronGrill @Qianlong An endpoint ? The Brit problem for the EU is we are leaving its not their choice we want out it will be worse out than in simply to close any contagion no blame its our choice what we do know Nissan has a secret deal so when it gets down to it & EU says no the Taxpayer pays out Nissan. C E O's should be lining with their Smith & Westons to the government's head pre transition for a good deal money in the bank pre a W T O deal Art 50 is the exit not the deal that comes after all exit ends tied up
You are just making stuff up now. There is no financial compensation that could compensate Nissan if tariffs were introduced on parts and finished products.
UK has an extremely strong hand in negotiations. we could easily offer bilateral on cars and if EU was particularly intent on doing as much mutual damage as possible (highly unlikely). UK can declare a WTO rate of 0% on components. The exchange rate has already disadvantaged imports from EU compared to UK manufactured vehicles. As UK does trade deals with other car manufacturing countries (US, Korea, Japan, India), EU manufacturers will be further disadvantaged and be looking at loosing a sizeable chunk of their largest single EU market. Protectionism and inability the mange the Euro crisis is responsible for EU being the slowest growing economic block. Attempts to damage the UK my be successful but will further compound EU troubles and create yet more tensions between employees, industries, their governments and Brussels. Wahaat you allude to is not only economic madness but ultimately political madness too. Even the EU is not so stupid
@IronGrill can't you read ? Nissan has a no harm deal for the new car models it has commissioned for the Sunderland car plants the government refuses to disclose the details the uk can declare a 0% on goods entering the uk pretty pointless as that's the same as no tariff. Tarrifs are imposed WTO or not on goods entering a country. None WTO tariffs also apply out of WTO control and can be more damaging your exchange rate comments clearly shows the failure of your point imposing a tariff and price hike from devaluation its the same thing does that put BMW buyers off ( or are you making a case for a complete Ban the WTO would have something to say on that )a case could be made for the reverse ( look at me i'm rich) major world car manufactures have major production lines in the EU Indian owners of Jaguar Land Rover are expanding their plant in Slovakia (along with Kia & VW ) soon to overtake us in vehicle production Pray expand the UK position of superiority over EU ( if we had 10% of one month's of Germany's balance of payment surplus would be a crowing from the roof tops ) a long hard look in the mirror is needed do your really think the EU is quaking in its boots because were leaving and will be given the best deal they can or will the reverse happen any damage to the UK will be all home grown as Brexit labours on
Please show evidence of this alleged 'no harm deal'.
You didn'the understand my comment on component tarriffs. Tarriffs cam be declared unilaterally. The most damaging aspect of tarriffs on auto industry is paying a tarriffs on an imported component and then see it exported asako finished product with tarriffs added again.
In the event of a reversion to WTO this is something the UK could unilaterally implement to protect auto manufacturers from the worst impacts of tariffs.
Apart from reassurances the we will do our best to to minimise any hindrances to trade (subject to immigration control etc) I am sure all we have offered is the normal government subsidies and grants to amllssustssuts with the expansion and introduction of amllssustssuts new model.
I would be more worried as a French car worker about auto ndustry setting up manufacturing plants in Slovakia and Czech Republic. Imagine what happens to Le Pens election chances if this does happen? MINI hav e already opened a manufacturing plant in Holland which can handle the 25% of mini lroduction that is sold room EU. 25% goes to UK and 50% to US. US and global sales are increasing, EU falying. It is more likely the UK gets a trade deal with US than the EU making UK much more attractive for non EU production
@IronGrill read the press Nissan went ahead with a goverment guarantees Private Eye (and others) have tried unsuccessfully to get the details but your reasoning is nissan went ahead anyway is implausible to say the least
I have explained a plausible and legal offer on the lines made room all car manufacturers when they move or expand. no politician or journalist has uncovered anything room support this conspiracy theory you adhere to. Usee some common sense. The govt cannot afford to compensate Nissan to enable it it reduce prices byb10% to offset export tarrifor to EU. It's a not legal under WTO or economic.
Why tariffs? The
arrangement would be either WTO rules both ways; or an agreed set of tariffs
both ways. Either way, this tariff wall would have 50% more stacked up behind
it on their side than on our side. There would be a wheelbarrow full of Welsh
Lamb on our side; and a million liters of French milk on their side. If there
are 3 million jobs involved in EU trade on our side, there are 6 million jobs
on their side at risk. Why do we go cap in hand and make concessions: all we
say is that any tariffs are reciprocal both ways. German Industry would simply
forbid the building of this tariff wall; so would French and Spanish
agriculture. World food prices are 15% lower than EU prices, even though the EU
prices have been subsidized. It would be suicide for EU to build a tariff
wall. And what about services, the only bit of our economy with a positive
balance of trade with the EU? They are not even in the single market.
@Rollo_ Suggest to read up on international trade.. Theoretically the UK could unilaterally abolish all tariffs (pity the poor farmers etc)and in that case one would be in the world described by the Economists for Brexit. The leader of this group is an eminent theoretical economist but with a world view that is rather different from your typical UK. Minford's world has a UK that after a long (and probably painful transition period (similar to what happened in Eastern Europe in the 1990's and before rebuilding under the EU umbrella began (compare that to non-EU Ukraina), become a very competitive economy (but with average incomes much lower than now (if converted into a basket of international currencies. The main mechanism of this transition would be high inflation combined with corrective devaluations, resulting in the almost complete disappearance of manufacturing (foreign firms would probably leave selectively since supply chains do not like this type of environment). Of course the unions would have a field day if this ever came about, one of the reasons that Minford never became more than an inspirational figure for the wise mrs Thatcher.
@Rollo_ how wrong we import more than we export a BMW would be surcharged on entry would that put BMW owner off perhaps a Sunderland Micra would do instead while our milk is surcharged in france making to more expensive than the locally available stuff the point you've lost is a BMW is a BMW milk is the same old where ever it is
@Rollo_ "It would be suicide for the EU to build a tariff wall" Why? The output going to Britain can be redirected, for instance. German industry is not going to forbid anything. They might protest and lobby but that would be it. Besides, no one knows what the new situation would be hence what would you know about possible responses to an unknown situation. Tariffs are only a small part of trade friction.
@Rollo_ What do think the WTO is
A Country can declare unilaterally to set 0% tariff on a type of product legally within the WTO. In a WTO scenario, this is something the UK government can do to significantly mitigate the costs for auto manufacturers, having them not hve to pay tariffs in imported components.
Why does OE never tell us the facts about the single market deficit, freely available on the ONS website? Or has OE never looked at the facts, just like every remainian in the country?
Davis should make no concession to have access to the single market, which shows a deficit running at £127 Billion per year. They should be paying, very substantially, to have access to our market. Surely ha must have learned from the Cameron School of Negotiation, which is to give everything away before you start, ask for precious little and get less?
@Rollo_ would wto tariff costs greater than our present contribution to the EU be an acceptable option or is that cutting of your nose to spite your face
I have only 1 simple question: in what would consist the final destination? Thank You
@laral as brexit means brexit nobody will ever know
@laral Expensive from here we're on our own
This quote comes from the UK2020 speech made by Owen Paterson, in November 2015. 'It is critical to remember that the economic SM and the political EU, are not one and the same thing. We are perfectly at liberty to pursue participation in the SM, without being saddled with the EU, as a political project'. What is surprising is that no one, not even Open Britain, has taken him to task on his flip flop, in disavowing the EEA route out of the EU.