Financial apocalypse, the sky literally closing down, and three amigos in Brussels - this week has seen the vacuum in the absence of formal Brexit talks filled with a plethora of Halloween horror stories.
The two day holiday in Brussels this week has meant no negotiations between the two sides, but that didn’t stop the so-called three amigos visiting Michel Barnier’s office in the Berlaymont, the cruciform headquarters of the Commission by Schuman roundabout, on Monday. Nick Clegg, Ken Clarke, and Lord Andrew Adonis visited the EU Chief Negotiator to get “a better understanding” of the state of negotiations according to Mr Clegg. Whilst an EU spokesman insisted there were only two negotiators, Mr Barnier and David Davis, the Berlaymont has welcomed a range of visitors in recent months in what some perceive as an attempt to undermine the British government. Following on from the latest damaging leak saga last week, trust between the two sides remains frayed and such attention-grabbing welcomes to Brexit opponents in Brussels do not help restore confidence.
In more relevant Brexit news, the Department for Exiting the European Union (DExEU) revealed this week that it is in the process of completing impact assessments on the effects of leaving the EU for 58 sectors of the UK economy (full details can be found here: http://www.parliament.uk/documents/lords-committees/eu-external-affairs-subcommittee/Brexit-trade-in-goods/Response-brexit-trade-in-goods.pdf). The assessments look at the implications for trade in goods, services and at both tariff and non-tariff barriers and their costs and administration.
DExEU refused to release the content of the assessments, citing the need to keep preparation work for the Brexit negotiations confidential, and it is true there have been no similar releases from the EU side, although the Commission is understood to have undertaken some scoping exercises on these issues. What this week’s information release to the Brexit committee in Parliament does show is that behind the scenes the government is undertaking serious and comprehensive preparations for leaving the EU, including for a no-deal scenario.
Halloween morning dawned bright and crisp with the kind of story that could have been written by Martin Selmayr, the ‘monster of the Berlaymont’, from his lair on the 13th floor of the Commission HQ. The Bank of England has allegedly warned that 75,000 financial services jobs could be lost by the exit from the EU, and asked banks and financial services firms to provide it with contingency plans in the event of a no-deal scenario. The City has always been the area of the economy most concerned by Brexit, and even if the 75,000 figure is not an official statement from the Bank, it reflects a pessimism within the financial sector that whatever the outcome of the Brexit talks there will be job losses. The American Chief Executive of Goldman Sachs recently joked he would be spending a lot more time in Frankfurt. There has long been a view in the square mile that with the UK leaving the EU, the British government will no longer be able to protect the sector from avaricious rivals in Frankfurt and Paris.
A no-deal scenario could be hugely damaging for financial services, as it may mean UK firms losing ‘passporting rights’ to operate across the EU and the imposition of location specific requirements for trading in Euros. Both would mean many jobs being forced to relocate to the continent, but it is worth stating that even with 75,000 jobs lost London would remain far and away the largest financial centre in Europe, with over a million people employed in financial services. London’s sheer size acts as a protection, and whilst neither side wants a no-deal scenario, the EU needs London arguably as much as the City wants continued access to EU markets. There is no better place to raise capital than London, and the UK’s common law system is also attractive to financial businesses. So both sides need and want a deal encompassing financial services. This week’s headlines are merely about the Bank of England doing its regulatory job in ensuring that firms are preparing for all scenarios. Since the financial crash the Bank has generally been more proactive in requiring banks to prepare for economic changes, keen to avoid a repeat of the shocks of 2008-9. Even those who are gloomier about the impact of Brexit on the City also see new opportunities, with the chance to develop bespoke financial services for the world’s fastest growing emerging economies in areas such as East Asia and the Middle East. The City’s trademark through the last few centuries, from the first modern financial crisis of the South Sea Bubble to the present day, has always been its resilience.
Another major industry seriously concerned about Brexit sought to play down apocalyptic visions of empty skies this week. Aviation is an area of the economy in which a no-deal scenario theoretically would lead to immediate chaos. All flights within the EU are governed by an open skies agreement, essentially allowing air carriers almost unlimited flying rights within the EU. Furthermore, all aviation agreements the UK has signed with non-EU countries over the last 40 years have been signed as a member of the EU. So technically in a no-deal scenario almost all the UK’s flying agreements, apart from a few ancient 1970s deals struck before we joined up to the European Open programme, would fall and planes would not be allowed to take-off. Both the airline industry and the government have been playing down fears of such an outcome in recent days. Transport Secretary Chris Grayling reaffirmed his commitment to continuing an open skies agreement with the EU whilst airline chiefs said customers buying their tickets for the post-Brexit era (which will go on sale in the new year) could be confident their plane will take off. Aviation is similar to financial services in that the mutual interest in continuing a functioning relationship is too strong to allow a no-deal cliff edge to play out.
So this week has seen continued fear of a hard stop no-deal driving the news agenda, and in so doing showing once again that such an outcome is unlikely to be palatable or practical for either side.