Brexit Briefing No.58: Gibraltar deal sealed as Brexit talks restart in earnest

Despite the late hour, there was little in the way of Brexit negotiations this week. Olly Robbins, the UK Prime Minister’s Europe adviser, was in Brussels for talks with the EU's deputy Brexit negotiator, Sabine Weyand. In Brussels speak, these are known as “technical meetings” - negotiations where advisers try to find possible paths forward before bringing back proposals to the politicians.

UK politics focused on the annual Budget speech by Chancellor Phillip Hammond, while Europe digested the news that the German Chancellor Angela Merkel was standing down as leader of her party, making it clear that she would end her leadership of Germany at the end of her current mandate, in theory not until 2021. She also had to deal with the fallout from the European Commission’s rejection of the Italian government’s budget. Meanwhile, Theresa May was in Norway trying to secure post-Brexit relations with ETFA countries in the case of a “no deal” Brexit. 

The Brexit negotiations have been stalled for several weeks so the technical meetings were at least a sign that both sides will make further attempts to broach the divide over Northern Ireland. In another sign that talks continue to progress reports of a deal on UK financial services access to the EU sent the pound soaring overnight on Wednesday this week, even as details remained sketchy as to whether it was an enhanced equivalence relationship that the City had asked for, as opposed to standard equivalence the EU offers to third countries.

The talks this week came shortly after it has emerged that the UK and Spain have agreed a deal on Gibraltar, ensuring that the Spanish will not hold up the withdrawal agreement or the transition period over whether or not Gibraltar is included in it. This had been a big worry for the negotiations, that at the final moment, when everything else has been agreed, the Spanish would then raise the issue of the sovereignty of Gibraltar.

The recent change in government in Spain may have helped. The previous centre-right administration, led by the Partido Popular, had been far more hawkish on Gibraltar. In June however, Pedro Sanchez, a socialist, took over as prime minister after his predecessor, Mariano Rajoy, lost a vote of no confidence. The Socialist Party has traditionally been less hostile on the issue of Gibraltar.

This gave the UK a window of opportunity to negotiate with the Spanish government and they recently agreed the protocol on Gibraltar that essentially preserves the status quo. It drops Spanish demands for joint sovereignty of the airport and covers the right of non-British citizens who live in Spain but work in Gibraltar. There are also memorandums of understanding (MoUs) covering a number of issues of concern to the Spanish. They include the environment, taxes, tobacco smuggling. All of which have previously caused problems in Gibraltar’s relationship with Spain. 

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Similar protocols are expected to be negotiated regarding Northern Ireland and the British military bases in Cyprus. However, they only come into force if the overall withdrawal agreement is approved. This is the old EU rule of “nothing is agreed until everything is agreed” 

This all relates only to the withdrawal deal. Gibraltar may become an issue again when the future trade negotiations start as Spain, like all EU countries and some regions, will have a veto on the trade deal which will be agreed after the UK has left the EU. 

However, the Gibraltar deal doesn’t hold the key to solving the Northern Irish border. The two are very different given the history of sectarian conflict in Ireland and the often-overlooked fact that Gibraltar is not in the EU customs union and therefore, in theory, tariffs can be applied on everything entering and leaving Gibraltar.

Gibraltar doesn’t really produce any manufactured goods so it doesn’t pose a threat to or risk undermining EU tariff policy nor does it itself impose significant tariffs on goods coming into Gibraltar, which applies EU rules on standards.

This, together with the small size of Gibraltar (around 32,000 inhabitants), means that in practice the border runs smoothly, although there is a very hard border with customs controls. There are also ID checks as Gibraltar is also not part of the Schengen zone.  As a result, the border is always at threat of being shut or clogged up by random checks, which happen sporadically.

This would not work for Northern Ireland. In part, because of the history of conflict which means that the notion of a hard border would fatally undermine the key tenets of the Good Friday agreement, but also because Northern Ireland is substantial in size. It has 1.9 million inhabitants -- larger than three EU member states and fractionally smaller than two more - and a substantial manufacturing sector with both significant cross border agricultural trade and significant manufactured exports to the rest of the UK.

Gibraltar is therefore an anomaly which can be tolerated by the EU given its size, but Northern Ireland is not and that remains the root of the problem with the negotiations.

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There were also somewhat erroneous reports that a deal had been sealed on financial services. This refers to the fact that the EU has confirmed that the UK could have access to EU financial services markets post Brexit through its “equivalence” regime. This is open to all third countries which have rules which are deemed equivalent to the EU financial rules. It is important for the UK to have this equivalence status in as many areas as possible but it is not a specific breakthrough for the UK. The regime is open to all countries, is dependent on UK rules continuing to be equivalent with future EU rules and can be withdrawn by the EU with as little as a month’s notice.

The City had asked for an enhanced equivalence relationship with longer notice periods and more say in the rules, as opposed to standard equivalence that would mean the UK was simply a rule-taker and vulnerable to a Franco-German pincer movement sewing up financial legislation in a way that was disadvantageous to the UK. Given that from the start the EU has seen reducing the dominance of the City of London as a Brexit dividend significant concessions seemed unlikely, however The Times reported that there was agreement that neither side would unilaterally deny market access without independent arbitration and without a notice period “significantly longer” than the 30 days set out under the equivalence rules. Of course, the ultimate authority beyond any independent arbitration would likely be the ECJ given equivalence is something the EU grants unilaterally to third countries.

Any more comprehensive access in financial services can only be negotiated in the future trade deal which will come after the UK has left the EU.

Elsewhere, the UK Prime Minister visited Norway and promised that Norwegian citizens living in the UK, along with citizens from other European Economic Area (EEA) countries, would retain their right to stay in the UK even in the case of a no deal scenario. The Brexit impact on the non-EU- EEA countries (Norway, Switzerland, Liechtenstein, Iceland) has often been overlooked in the negotiations even though they apply EU rules and regulations, including on freedom of movement. 

In Brussels, heads were turned by Angela Merkel’s decision to step down as head of her party (CDU), marking the probable end of the era of a politically strong Germany at the centre of the European project. A poor showing by her party in the regional elections of Hesse was seemingly the final straw for CDU loyalists, after their sister party the CSU lost votes in a similar poll in Bavaria back in September. It remains to be seen what impact - if any - Merkel’s announcement will have on the future direction of the European Union, her typical strategy has been to postpone difficult decisions rather than take decisive leadership, however German politics looks less stable and more fractured than it has for a generation. Merkel will likely leave her successor with a challenging in-tray, her announcement comes at a time when Europe is facing more challenges than ever, with Brexit, the migration crisis, a resurgent Russia and the unresolved Euro crisis all threatening the unity of the block.

The Euro crisis reared its head again this week when the European Commission rejected Italy’s proposed budget and gave Italian ministers until the 13th November to come up with a new draft. This episode highlights the unresolved problems with the Eurozone. A single currency won’t work without political union yet political union is unachievable without transferring significant domestic powers to Brussels. This is something which populations around Europe are staunchly against, both in Germany, who would need to fund spending in poorer parts of Europe and in the rest of Europe, who would have to accept the restrictions on domestic spending, policy choice and taxation policy that would bring. Sooner or later Europe will need to address this and until it does spats between national governments and Brussels like the Italian one this week, will continue. The next serious financial downturn will bring these problems to the fore even more, but given leaders failed to grasp the nettle even post-2008 and with the uncertainty in Germany, it seems unlikely significant changes will happen anytime soon. 

All this underlines why it is important for both sides to move towards striking a deal in the coming weeks. The hope is that an agreement will be struck before the end of the year if the EU27 is willing to accept the UK’s concerns about the Irish backstop. December’s planned EU summit, which will be Merkel’s last as CDU leader, though not at the moment as Chancellor, is looking like being the crunch summit. It is now only 6 weeks away.