Transcript - Episode 10: The EU point of view

Gaenor Bagley: Welcome to the next episode in our series of Beyond Brexit podcasts. Today we’re discussing the EU 27 view of Brexit. I’m Gaenor Bagley, PwC’s Head of Corporate Purpose.  On all the previous episodes of these podcasts, we have talked about the impact on UK business of various Brexit scenarios, but of course the outcome of any negotiation will depend on the views of both sides.

Today, I’m joined by Ray Taylor of our Corporate Affairs Team. Ray is based in Brussels and his job is to keep us all appraised of EU developments on Brexit and regulatory issues; Brian Polk, who is a Director in our European Financial Services and Regulation Team; and Michael Moore a former politician, who’s one of PwC’s strategic advisors on Brexit.

Welcome gentleman. Ray, I’m going to start with you.  Can you just give us a bit of a flavour about what is the mood in Brussels as we build up to the Leaders’ Summit?

Ray Taylor: I mean, obviously we’re heading to the summit in the middle of December, and as people will have seen from the press and press reporting, this is viewed as being a very critical time both for the EU 27 and also for the UK - in that, obviously the UK is desperate to get to a decision by the 27 on future progress.

I think it would be fair to say that there are still a number of stumbling blocks that still need to be resolved between the UK and the 27.  One of those is obviously money; the other citizens’ rights, this we seem to be moving a lot closer to agreement on that, which doesn’t mean that we should have false confidence that that’s going to be found, but most probably of all of the three areas, it’s the one that we are most probably slightly closer to agreement on.

From an EU 27 side, certainly from the, over the decade that I have been dealing with Brussels and with Europe, and also in my, sort of, conversations with other, sort of, EU watchers in Brussels, I think the thing that we find very surprising is how closely aligned all the 27 member states are, how closely aligned the European parliament is, and how closely the EU commission is around the singular focus of these three exit requirements from the UK.  It’s unprecedented, it’s unheard of. And I think that if I was the UK at the moment, I think this harmony that there is between those three organisations, would actually cause me a lot of concern, particularly in accepting that this is a negotiation.  One could argue that the only institution that has actually bent so far in the negotiation is the UK, either by finding more money, either by compromising on citizens’ rights, and conceivably also compromising on the Irish issue.  And actually the EU has done very little compromising so far.

So, you know, I think for the UK, the UK may need to give a little bit more if it wants to get to a decision in December.  I think it would be safe to say that if there wasn’t a decision in December, that in itself isn’t fatal - there is another summit in February – but, of course, the longer this goes on, it compresses the period of time you have to discuss future arrangements.

So, you know, I think for a whole range of reasons, I think the UK is obviously desperate for a decision in December - and at some level, I think, a lot of the EU 27 also are accepting that they wouldn’t actually just give things away for that to happen.

Gaenor: I was, on the one hand, interested that we’ve got, kind of, good alignment on the EU 27 around, the kind of, let’s say the detailed exit points, but you were hinting, that perhaps when we get to the next point, which is the future arrangements, we may not get alignment.

Ray: Well indeed, and you know, I think it’s obvious that certain member states - their relationship they currently have with the UK economically is far greater than other member states. So it’s the, you know, the Netherlands, Belgium, German relationship is obviously more economically important for them than maybe the relationships that countries like Bulgaria and Romania economically have with the UK, and for that reason, therefore people have more skin in the game with regards to getting a good trade arrangement with the UK.

I think the one thing we are starting to see, and it became very, sort of, visible last week, is that, the EU 27 and the Commission are starting to think about, if we do get to a future arrangement discussion, what are the sort of areas that we would want to be raising.  I think it’s becoming clear that, single market access is not going to happen, as far as they are concerned - what they see is a trade agreement and something that closely mirrors what the EU the currently has with Canada.

So, it’s a slightly more extensive trade agreement than a lot of the others that they have agreed with other countries around the world, but it goes nowhere near as far as the UK would want it to go, but that is because and it’s a phrase that has been used a lot is, you know, the EU views the UK as becoming a third country after March 2019; and as soon as you become a third country, that imposes a number of requirements with respect to customs controls, the control of people going across borders, with regards to tariffs, with regards to all those sort of economic issues

Brian Polk: The famous passporting for financial services companies as well, you know, becomes part of that -  if you are a third country, by definition, you don’t have passporting rights into the European Union.

Gaenor: And so that’s really important to get the business view on that, so that’s again - Ray has given us the political view, what businesses’ view? When they look at that crystal ball, what’s their mood?

Brian: I think businesses are looking at the politics right now, that Ray has, kind of, quite helpfully summarised, and saying, well, you know, we are hearing actually quite different messages from, so the UK is out in the market, if you will, the market of ideas giving assurances that, you know, this is where we are aiming in terms of a future relationship.

So, David Davis spoke on the 14 th of November at UBS, and he talked about how London has always been an important financial centre in Europe, that there were big risks to fragmentation, you know, if we don’t get this right going forward, fragmentation of the global industry, costs, and you know, and alluded to the importance of a transitional arrangement as well.

So, you know, people in the city, kind of, you know, would listen to that and say: well, you know it feels like kind of the UK is going in the right direction perhaps, you know, the contingency plans to move many things to the EU, perhaps we should wait, perhaps we should think again on this.

But the very next day, you know, The European Central Bank, you know, the Head of Supervision for the European Central Bank was out saying, you know: very important that we don’t just have, kind of, brass-plated financial services institutions in Europe; we want to see moves in substance; we want to see, you know, the ability of management done in the EU, what will be the EU 27 to manage risks within their businesses and not from, sort of a, London headquarters.

To back that up again, you know, Michel Barnier was in the market for ideas again three days after that to say that UK-based businesses really needed to scale down their expectations of potential access to the EU as a third country.

So we are seeing, you know, it’s a time of, sort of, quite big divergences between what the UK is asking for and, you know, and what it appears the EU 27 is going to offer, and therefore there is, you know, there is a big amount of uncertainty there to manage on the behalf of businesses.

Gaenor: Yeah, and interestingly, you know, when I talk to you and others, who advise Financial Services, I’m wondering was either of those statements actually a surprise to them?  It always seems to me that they know what they’re doing, they’re running a business, they’re just getting on with it... Would that be a fair assessment?

Brian: I think people understand roughly that that’s where the, you know, where the positions are.  I think that what businesses have been looking for is, is there any coming together of these two quite different points of view.  You know where have they moved over time, there have been some subtle shifts actually in the way that the European Central Bank has talked about, kind of, managing risks on the continent going forward; and sort of a grudging acceptance that some, you know, some acceptance of the model approvals that had been done in London, you know, could be grandfathered for a period of time in Europe.

So we are seeing some, sort of, small moves by officials on the ground and I think, you know, I have no doubt that there are, kind of, senior officials in both the European Commission and in the UK Treasury, who could  sit down and design a deal for financial services that would preserve financial stability, but it needs to be done within the context of an overall political negotiation and what we are seeing at the political level still is quite big divergences and we are not yet at the point where either side would be willing to pass the, you know, the detail of  finalising a deal on to, sort of the officials, who really know the industry well.

Gaenor: Okay, so that’s really evidencing the point that the sooner we can get on to talk about future arrangements, the better for financial services, but in fact all industries that want to, kind of, work out a pragmatic deal going forward

Ray: Well, I mean, one of the fundamental problems at the moment is that the UK Government doesn’t seem to have a specific clear vision of what that future agreement actually is, and there may be a number of internal political reasons for that, but until the UK can alight on what it wants that future agreement to be, it’s very difficult to negotiate that. And I understand the reasons why the UK doesn’t want to publicise that at the moment, in part because it sort of, they view, it would weaken their negotiating position.

But, I think it does also demonstrate, and we have seen this with withdrawal, is the EU 27 is already ahead of us to a degree.  They’ve already started to think about what they see the future is like.  So it strengthens their hand in future arrangement.  So, you know, I would say the first challenge for the UK is actually working out what we want, but also something that is realistic, because I think it is very clear that, you know, as soon as the UK indicated that it was going to be leaving the single market in the customs union, we gave up an awful lot of the trade benefits that we got from those two mechanisms.  Frankly, anything that you get as an alternate to that, is going to impose an element of friction and is going to impose an element of cost.  So, those are the things, you know, that business is going to have to, sort of, get its head around - and is starting to in certain sectors.

Brian: I think what Ray has said to me, that is really important is, is not just the, you know, the UK needs, you know, to develop its position, but you know in your first discussion, you talked about the differences of view within the EU 27 as well.  So, there is really, kind of, you know, both sides, if you will, to these negotiations are not yet clear in terms of what they want from this negotiation.

Gaenor: So I’m going to bring Michael in now. So, Michael – I’m asking you to look into your crystal ball, and kind of, what do you see as the kind of key milestones, because there are quite a few elections, and other electoral uncertainties in the picture amongst various EU states…  So, what can you see as the key milestones that businesses needs to look out for going forward?

Michael Moore: I think what our discussion so far has highlighted is how much the continental politics or non-UK politics plays a role in all of this, and why businesses really need to be following a whole series of developments, not just what’s happening here at home. But, the difficulties in Germany as a result of the recent elections, which have not produced the government as people had expected it, and perhaps also in the last few days we’ve seen it in Ireland too - these throw up some big challenges to the whole process.

My reading of the German situation at the moment is that they are going to extraordinary lengths to avoid another election or to ensure that there is some kind of stability and I don’t think anybody is questioning their ability to contribute to the Brexit negotiations on the basis that they need.  What has been striking; however, is how the Irish issue has rocketed up the process in the last couple of weeks.

Now, we are all very acutely aware of the historical sensitivities and challenges to relationship, but that’s also a reality that our economic relationship with Ireland is amongst the most integrated in the whole of the EU; and therefore to take it apart has to be done very carefully, and so you see the debates within the island of Ireland, North and South, about what an acceptable outcome might look like.  And you see again in the UK, some red lines being drawn, the Ulster Unionists and some others saying, “no there is various other things that we will not tolerate.”  Partly this goes to Ray’s earlier point, that until the UK has decided what its future trade relationship is that it wants - and asks for it - people cannot then workout relative to that, how Ireland will work.  But into that political sensitivity; that economic, you know, complexity that we have, you run now some domestic politics in the South of Ireland, you have a new Prime Minister, The Taoiseach who, probably at some point, will want his own mandate.  There are problems that he runs a minority government, whereas major opposition party supports him and there is some issues about whether, how long, that support will last.

So, Ireland has some challenges of its own (doesn’t every country?) but has been worried that its own issues, the degree of integration on Ireland has not yet been given enough seriousness. I think in the end, where this ends is that the UK and others will have to demonstrate a stronger commitment to finding the solution, but I doubt they are going to make major breakthroughs at this summit, while the overall trading relationship with the UK post Brexit remains so unclear.

Gaenor: Okay, well I think what I am hearing from all three of you so far is, “complexity”.  There are few lines in the sand that actually give me grounds for optimism.  I think there will be some pragmatic negotiations going on, once we can get over some of the hurdles that are in place right now. So I’m going to ask all of you, just as the last question: if you have one message for business, what would that be?

Ray: Well, I think, the thing that’s becoming very clear is that, and this is true, I think for both the UK Government, but also for EU 27 governments, and certainly the EU Commission, is they are not interested in hearing from business an argument that is just, you know, “please don’t do anything to hurt us”, “please help”, these sort of “no change, please” arguments.

Yeah, as I said, I think this is about expectation management and I think this is also about assisting governments to reach the right decision; and the way that business, I think, can do that, is by making well-reasoned arguments supported by evidence.  And then be prepared to keep on labouring those points, don’t just work on basis that once you said it once, it’s listened to and understood, that you need to keep on engaging, keep on making those points.

Michael: If I can chip in with an experience from politics: it’s only when a politician gets bored hearing themselves speak a particular message that there’s any danger that message has got across, so keep repeating is critical.

Ray: Yeah, but also, and for, sort of, our clients’ perspective and for business, is - if you have got multisite European operations to think about using those messages in all those places rather than just in one or two, because at the end of the day, any decision that is taken on future arrangements, will be a decision of 27 countries, and whether it’s an economically important country from a UK side, like the ones we’ve already mentioned, or maybe an EU 27 member state that slightly does less with regards to the UK, they all have the same vote.

You know, I would look at this in a way which is, you know, if it’s economically important to you, put the investment in now, so that you at some point, you would hope to get the return back.

Gaenor: Yes, so engage and the governments will listen, perhaps eventually, but they will listen.

Brian: And engage on both sides of the channel. So, you know, within financial services we have seen a lot of businesses in the UK have contributed to something called the International Regulatory Steering Group - that’s, you know, a body that’s part of the City of London Corporation.

But this is the time of maximum impact as the EU 27 are trying to develop their negotiating framework for Brexit for the future trading arrangements.  This is, sort of, an unpreceded time for businesses to be working, you know, permanent representatives in Brussels and the governments in other territories, where there is an interest, you know where they have an economic interest - making the arguments, as Ray says, don’t assume you’ve been heard the first time you make these arguments.

Gaenor: That’s very good - “now is the time” I heard there.

Michael: There’s a really important role for advocacy, but there’s also a really important role just for general engaging on the topic and understanding what’s going on and moving from the engaging point bit to the planning piece.

I think it’s becoming increasingly obvious that with fewer than 500 days to go until the UK formally leaves the European Union, there’s not a lot of time left, and not all of the uncertainty’s going to be removed. And, in some areas, it’s beginning to look like the divergence between the political timeline, where critical decisions are being taken, and a business timeline, where critical mitigating decisions could be taken, alternative strategies adopted; that divergence means that the thinking and the planning has got to be done, so that when the moment comes to implement, business are not being caught out.  It may mean as they weigh up their options against ‘no deal’ or a ‘full deal’ – they’ll have very different outcomes - but it’s good to be in the position where you know what it is you want to do depending on those outcomes

Gaenor: Absolutely, right I think we’re going to leave it there. Thank you very much to all three of you for a very interesting discussion and thank you to all of you for listening.  You can find all our Brexit-related content including other episodes of the podcast on www.pwc.co.uk/brexit

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