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Hanover - Uncertain Times Require Uncommon Sense

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12 Jul 2018

The Brexit White Paper is published in a context of political turbulence. In advance of publication, two cabinet ministers resigned and a significant number of Conservative MPs stirred. Importantly, pro-European Labour MPs were as critical for different reasons as hardline Conservative Brexiteers. Because of this stormy context and the inevitable concerns that the EU will raise when it considers a detailed response, businesses should read the White Paper with some caution. The document must be regarded as Theresa May’s detailed statement of intent rather than as a precise guide as to the final form that Brexit will take. No one, from Theresa May downwards, knows what form Brexit will finally take.

Even so, the White Paper is a significant stepping stone in some respects. For businesses it offers a degree of clarity about what May hopes to achieve. In general terms, the document confirms that May hopes to secure continued access to the single market for goods and not services. She proposes a ‘Facilitated Customs Arrangement’ as an alternative to membership of the (or a) customs union. The White Paper is emphatic that freedom of movement will come to an end.

But there are many more qualifications in the detail than there were in the three page Chequers’ statement. Timing on key elements is vague. It is not clear when the Facilitated Customs Arrangement would be implemented in the event of the EU agreeing to the complex proposal. In the Commons this afternoon, the Chair of the Brexit Select Committee, Hilary Benn, asked for clarification on the timing. The new Brexit Secretary Dominic Raab could not be precise. The proposal partly depends on technological innovation that is not yet in place. The White Paper suggests the arrangement would be “phased in” up to eighteen months after the implementation period. There is no information as to what would happen between the end of December 2020 and when the arrangement was ready.

In relation to free movement there is more nuance in the document compared with the emphatic assertion that it will end with Brexit. The White Paper suggests businesses should be able to move “their talented people” from the UK to the EU – and vice versa – after Brexit. The document also says the government is prepared to allow EU citizens to travel freely without a visa in the UK for tourism and vaguely defined “temporary business”, and allow EU students to study in the UK. This is included partly to meet the demand from farmers and many other sectors for continued access to relatively cheap labour. Although the means are vague the document says it will be necessary to recognise the “depth of the relationship and close ties between the peoples of the UK and the EU”.

The White Paper confirms a looser relationship between the UK and the EU on services, which represent 80 percent of the British economy. This includes financial services. The White Paper argues defiantly that Britain would seek the “freedom to chart its own path” on services, but acknowledges that with regulatory autonomy would come a significant problem: “There will be more barriers to the UK’s access to the EU market than is the case today”.

A four-page section details to a very limited extent proposals for a new “economic and regulatory agreement” on financial services. They scrap May’s former plan for a system based on “mutual recognition”, where the UK and EU would have recognised each other’s rules covering banks, fund management groups and insurance companies.

From May’s perspective the White Paper has a logic to it. She needed to find a set of proposals that avoid a hard border in Ireland and protect the supply chains of manufacturers trading goods and, crucially, the parts for goods. Equally she feels an obligation to deliver her interpretation of the referendum result, which means she must end free movement of labour and have some ammunition to claim that the UK is no longer under the jurisdiction of the European Court. At the beginning of her leadership, when under the influence of her former adviser Nick Timothy, it is thought she told the Chancellor Philip Hammond in one of their rather strained regular meetings that financial services were less of a priority for her, regarding Brexit as an opportunity to recalibrate the UK economy. That was long ago. More recently she agreed with Hammond that she must seek equivalence to current arrangements for financial services. She now accepts that such an objective cannot be met from an EU perspective without the UK accepting free movement and ECJ jurisdiction. She has also been swayed by the Trade Secretary Liam Fox who is confident that many new markets await UK services and financial services post Brexit.

But there is currently no majority in the Commons for the White Paper. Number 10 hope to woo pragmatic Labour MPs, but MPs such as Hilary Benn and Chuka Umunna are alarmed that services and financial services are being treated differently to goods. They have no faith in the customs facilitation plan. The Shadow Brexit Secretary, Keir Starmer, has said the White Paper fails his so-called ‘Brexit tests’. If there was a vote tomorrow on this White Paper, May would suffer a defeat.

Of course the vote on the deal will not be until the autumn or perhaps later. There will be many twists and turns by then. But one of the twists is that the proposals will have been altered after the negotiation with the EU. It is greatly in the EU’s interests to secure a deal. It will respond politely at first to the White Paper before responding with more forensic detail. Even, so from my conversations with senior German officials and with officials close to the Commission, I sense unswerving opposition to one set of rules for trade compared with services and scepticism about the practicalities of the customs facilitation plan.

The dynamics in the UK Parliament have changed. Now pro-European Conservatives are being fairly supportive of May, while hardline Brexiteers are fuming. But over the next few weeks the big test for this White Paper is the reaction of the EU and whether May has any political space to make concessions.

There is no parliamentary majority for ‘no deal’ and currently not one for the White Paper. The prospect of parliamentary paralysis and the need for more time – either by seeking an extension to the Article 50 deadline or a longer transition – is much talked about by pragmatic MPs from all parties. Some less expedient Tory MPs speak of the need for May to go. But most Tory dissenters are focused more for now on stopping her Brexit vision. They are not sure yet how to do either, remove her or change her Brexit plan. The Conservative conference this autumn will be highly charged, another of its annual gatherings overwhelmed by Europe. Number 10 is briefing intently today that this is the only realistic route towards Brexit. It may be right, but if enough Tory MPs disagree in a hung parliament, it is being unrealistic too.

Whatever happens there will not be an early election. The perverse impact of the Fixed Term Parliament Act is too easily overlooked. When a government is imploding, MPs from the governing party will not vote for an election in which they face possible defeat. Only when a governing party is popular would they do so, and in those circumstances there is usually no need for an election.

For business the White Paper answers a few questions but raises many more. The next few months will be epic in political terms and with as yet unknown consequences.