Transcript - Episode 5: Triggering a change

Gaenor Bagley: Hello and welcome to our fifth Beyond Brexit podcast. Although we call this series Beyond Brexit, this particular podcast should be called ‘Brexit has begun’ as we move into a new era in Europe. To discuss this I am joined today by Kevin Ellis, Chairman and Senior Partner of PwC in the UK, Neil Sherlock, Head of Reputational Policy and Andrew Sentance, PwC’s Chief Economic Advisor.

So Neil shall we start with you. Now you have had a chance to reflect a bit on Theresa May’s speech on 29 March, what were the key takeaways for you, what new did we learn?

Neil Sherlock: I think very interestingly it was a very conciliatory tone, it reached out to people in Europe and indeed within the UK as well, I will come back to that point in a moment, but I think very interestingly the tone was; we want to reach agreement, we want to do a deal, we want to avoid a cliff edge, we want to find a new arrangement with you, consistently in both the letter and the speech and the follow-up interviews, the Prime Minister’s talking about - I use of phrase that she used ‘a deep and special partnership’, kept repeating that phrase, kept reusing that, talked about our closest neighbour, very much trying to land the message I think in Brussels and in the capitals, and of course she had spoken to many leaders overnight, but this is about working together, this is about finding a new relationship because we have so much in common and reuse that phrase she has used before ‘that we are leaving the EU but we are not leaving Europe’.

Gaenor: Yes absolutely.

Neil: But the tone was important.

Gaenor: Yeah, the tone was really really important, very clear, and what about … what did we learn about the next steps from here?

Neil: Well there is a range of things that will happen, Donald Tusk who chairs the European Council set out there will be some broad guidelines that will be landed in the next few days, so probably in the days to come, that will ultimately lead with a lot of sort of European engagement to the end of April, the European Council meeting at a summit and agreeing the sort of mandate that will allow Michel Barnier to start negotiations with David Davis from the UK side, and that will probably start … might start sort of in and around the beginning of June and that will sort of open up the sort of key discussions. Obviously there is an overlay which is not to be missed out which is the French elections. And the French go to the polls four times between the end of April and the middle part of June, two presidential rounds, two parliamentary rounds, so that will be … that could be a really serious moment depending who wins, and then of course in September there is a German election. So that will all play into the mix of how do the talks go and how do the talks start, and the Prime Minister and the government we hope in the conciliatory tone is reflected on the other side, and it clearly is the issues which will be … which could be difficult around the Brexit Bill, and that will be interesting to see how that is dealt with early on.

Gaenor: But that means the Great Repeal Bill.

Neil: Well, the Great Repeal Bill, yes the government has … the government will be putting out a consultation paper about how that will work and will be seeking to put into the UK law all the European law that we agreed as a member, and in fact interestingly the letter was using that as a further example of conciliation, i.e. we are going to have the same law, therefore the gap isn’t very big, therefore being able to agree is very narrow in terms of compromise. I think that is an interesting sense which we perhaps haven’t always heard frankly from either side.

Gaenor: Yes, yes, yes, so interesting. There is still quite a lot of bumps along the road, but more information is going to start coming out.

Neil: Yes, absolutely, and I think it will be … Michel Barnier has talked about a greater transparency on the European side, so I think a lot  of these discussions, talks, and whether they are near an agreement will be relatively visible to people and in so far as people are coming close towards an agreement I hope that will underpin businesses being able to plan for the future and not everything waiting towards the end which is the historic way that agreements have been done in Brussels, so this could signal … could, could, because it is obviously not absolutely set in stone, but it could signal a way where there is some transparency, it is clear people are agreeing and hence businesses can say – given that’s broadly agreed we can plan on that basis.

Gaenor: Yeah, so that would be helpful. Kevin you are running a business and you are talking to clients running businesses all the time, what was your reaction?

Kevin Ellis: I think business will be pleased that they have been listened to.  I think like the speech at the time this was announced, there was definitely a lot of comfort that the fear of a cliff edge had been adverted by the use of the word ‘transitional’ period, so I think that is pretty important. I think this time round as Neil said, the phrase ‘conciliatory approach’ has been kind of laboured heavily across both the speeches and on the letter itself.  I think that is very comforting, because anyone running a business at the moment they want certainty and anything which leads to a cliff edge, that won’t play to certainty, and I think that’s been picked up and I think has come across. So I think from that point of view that is a key thing. But at the end of the day there is uncertainty, because as Neil said, we don’t know, this is an untrodden path, this is a historic moment, no one’s been there before and we don’t really know what the outcome will be, and that uncertainty you can feel it in any conversation I have with my fellow leaders across the PwC network in EU, you know phrases around uncertainty, what will be the impact on trade, you know the major export market for Europe is the UK, what happens with currency movements which have obviously been quite significant so far and during this process of uncertainty could move around quite a lot, that volatility creates a further level of uncertainty, what will our industrial strategy lead to, and also the overriding thing is; will this lead to a downturn in Europe? Europe has been … the economies of Europe have been improving over the last few years, this could be a headwind, and that is a concern as well.

Now I think the final point that everyone is talking about is the free movement of people because we have been used to it, our children have grown up with it, we have been used to it for over 30 years, and that’s not just from a business point of view of getting the top talent in the right place which is important to all of us, but also from a tourist point of view which is a major source of wealth and funds not just for us as a country but other countries as well, and if that again becomes an impediment that has an influence in many different ways for countries.

Gaenor: Yes, yes. So that’s interesting. So we do liaise with our European counterparts because this is a European issue not just a UK one. Anything surprise you from the reaction of the European leaders?

Kevin: Certainly I think we are all pretty shocked by the outcome whichever way you are coming from I don’t think anyone knew that we were going to … you know, the outcome being that we are going to leave the EU, and the first reaction from most of the European leaders that I spoke to was one of shock and actually a kind of feeling that the UK was divorcing them. So it was quite a strong reaction at that time.  I think time has passed,  I think the fluxion of time has led to a more understanding of; this is the decision that has been made, but as the Prime Minister said, ‘we are leaving the EU we are not leaving Europe’, and I have noticed it from both the trading we are doing with each other, the conversations we are having, there is a kind of feeling of how we are going to manage our way through it, not that this is the end of the road, and I think that kind of coming to terms with that has been really important. We have even seen it from our trading, our pipeline which is quite a good indicator started to build back up in December having been really quite tough over the summer months.  I think that was because business dealers were seeing Brexit as the backdrop rather than the main event and that’s been seen across Europe as well. So I think there is a kind of feeling that this is something that we need to manage and get through, it is not the end of an event.

Gaenor: Which it feels as if the conciliatory, let’s get on with this and make the best of it tone, feels like that will go down really well in Europe. So Andrew when we have spoken before you have been really clear that your prognosis will be dependent on a sensible trade deal. Has your view changed? Are you more optimistic, less optimistic having heard the announcement?

Andrew Sentance: I don’t think we can change our view at this time. I think the basis for the view that we will get some sort of sensible trade deal is that it’s in the interest of both the UK and the rest of the EU. The rest of the EU needs access to our markets, particularly in manufactures where we have quite a significant trade deficit. We need access to their markets both in manufactures and services where we are very strong. There may be some more push back on the services side particularly financial services. But I think at this stage, this is the beginning of the beginning and we need to wait and see how everything progresses.

Gaenor: Do you see any particular sectors that may be impacted more than others?

Andrew: Well I think the key trading sectors in the UK are manufacturing and certain parts of the services sector particularly financial services, but also IT & communications, ourselves in professional services we do quite a bit of trade.  I think the manufacturing industries are likely to be to some extent safeguarded and protected because there is a mutual interest on both sides. But financial services I think is going to be quite a battleground in these negotiations. Many other European countries are quite envious of the position of London and our financial services industry, and so that is going to be something that they are going to be targeting, not necessarily correctly, but it is a natural instinct to try and target and try and benefit perhaps from their own national interest, and try and attract business away from us, so that is going to be an important battleground in the negotiations.

Gaenor: Yeah, yeah. Neil I think there … what was interesting about the announcement was a very clear statement about what will become the devolved territories, was that what you were expecting is that significant what Theresa May said?

Neil: I think it is very interesting that that was given some prominence in the letter and in the subsequent announcements. I think it reflects that relations are tense across the UK. The Prime Minister was very clear that we are negotiating as the United Kingdom, but clearly there are views from the Scottish government, there’s a difficult issue to try and get an executive to be formed within Northern Ireland, and there’s some issues in Wales that the Welsh government have put in as well, so therefore very interesting for that, and rather powerful that the Prime Minister made the point and reemphasised the point that actually as powers come back from Brussels there will be a sense that those don’t go just to Westminster but there should be more powers for each of those places to make more decisions, and clearly the government sees that as a way to try and show that there is a benefit to governments in those countries for more powers to take decisions themselves. How that plays and whether that has an impact in terms of some of the noises and some of the senses of change that come from those countries, we will have to see, but very interesting those prominence given.

Gaenor: Yes, and devolution’s come back further up the agenda hasn’t it?

Neil: Yes, absolutely, makes that point.

Gaenor: So there’s been a lot of speculation as to where this process is going to end Kevin so I’m going to put you on the spot. So based on what you heard on 29th do you think the kind of worst case scenario will be trading on WTO terms, do you think that is a likely outcome or would you see another outcome?

Kevin: I think as we have spoken about over the course of the last 15 minutes, there is a real business need for a deal. So I think on balance, yes there is always a risk and I think the fact that there is a risk, the fact there is a cliff edge of WTO in a way means it is more likely that you have got to avoid it …

Gaenor: Yes.

Kevin:  …when you’ve got to avoid something then I genuinely believe that there is the mood here for a deal.

Gaenor: Yes, a pragmatic commercial deal is what I’m hearing there.

Well that feels like a really good place to end so thank you to all three of you for some great perspectives. I am sure we will carry on this conversation in future episodes.

You can find all of our Brexit content our website on www.pwc.co.uk/Brexit including a link to our forthcoming webcast on 27 April where we will take some more time to analyse what is likely to happen from here.

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