Transcript - Episode 6: The new negotiating landscape

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Gaenor Bagley: Hello and welcome to our sixth Beyond Brexit podcast. Since our last episode in March a lot has happened. An unexpected General Election with an even more unexpected result, and the start of the negotiations from the UK to exit the European Union. I’m joined today by three of our experts to help us consider the political landscape, some international perspectives and the free movement of labour.

On our panel we’ve got Neil Sherlock, our head of Reputational Strategy, who has held a number of governmental advisory roles, including being special advisor to Deputy Prime Minister, Nick Clegg, where he covered business issues and political reform.

Julia Onslow-Cole, head of Global Immigration and Legal Markets leader who has been advising various governments on European immigration and the refugee crisis. She also sits on the Mayor of London, Sadiq Khan’s, Brexit Expert Advisory Group.

And thirdly Ray Taylor is from our Public Policy and Reputational Affairs team and is based in Brussels.

So Neil, shall I start with you? So perhaps you could just give us an update on the political landscape post the General Election. Has anything changed?

Neil Sherlock: Well as you rightly said it was an unexpected General Election because we had a fixed term Parliament and the Prime Minister called a vote which led to the election. The assumption was from people in every party, all the pundits, all the pollsters that there’ll be a big Conservative win and then when we saw the exit poll from John Curtis we knew what was happening and in fact the Conservatives lost seats, Labour had gained seats and therefore we had a minority government and within that situation in a way it’s a bit sort of back to the future, the future being 1976, 77, 78 when government kept going by doing deals with other parties in order to ensure it can win votes in the House of Commons and, in that sense, the government, after quite a long period of time, ultimately did a deal with the Democratic Unionist Party of Northern Ireland. So I think where we are now is that the government is in a position where there’s lots of voices that are, in a way, replaying some of the arguments around government before the government triggered Article 50, seeing quite a lot of business voices, seeing quite a lot of former Prime Ministers, seeing quite a lot of senior Cabinet people re-opening the arguments.

And the government is in a weaker position in the sense of being able to stop that happening but this point, although there’s some clearly different tone from people, and people saying things privately that are somewhat different and some public speeches, that the overall policy at this point hasn’t really shifted and that’s probably something that people should just hold onto at this point.

Gaenor: Because there is a sense that given it’s a minority government then surely Parliament is going to play a bigger part and surely that will be sort of temper down a maybe more of an extreme position - I hesitate to use the word hard Brexit rather than soft. Do you think, do you not sense that that’s been any movement in that direction?

Neil: Well Parliament, yes will play an important role, for example we saw just on another issue that Stella Creasy, a Labour backbencher, got the government to change policy on people in Northern Ireland coming to England to have abortions. The government agreed that can happen and found some money so yes MPs matter. I think the business just has to be a tad careful for this reason. People will be listening to the voices that argued overwhelmingly for remain in the referendum and argued that around the government of Theresa May but didn’t really win the argument and yes those voices will continue to make those sorts of points around transition and other things which I think are being listened to more but just remember there are still, particularly on the Conservative side, behind the Prime Minister on the benches, a serious number of people who are very, very committed to the policy the government set out, very committed to leaving in March 2019 and won’t want to see very much change so the Prime Minister in a weak position will be having to balance those, that opinion and other opinions around change.

So there’ll be some nuance - there is an opportunity, because the door is open for business to make some case and that’s clearly happening, but people should just be a tad cautious about overplaying it and particularly I think those voices who say ‘Well do know what? It may not happen’, I just think that is being overplayed too much as well.

Gaenor: Yes, I agree, so I think the message for businesses, I think there has been a change of tone in that business is being listened to so there is an invitation, in fact almost a responsibility, to engage in that debate but also probably it’s got a bit late for wait and see, it’s coming and perhaps we should all be now starting to do proper contingency planning.

Neil: Yes, and it’s well worth remembering, and Michel Barnier says this every time he has a speech and Ray will no doubt make some comments on that, but we are 4 months, 4 months into the negotiation period - but there is a fixed period of 24 months and already 4 of those have gone of which there has been one substantive meeting and no doubt now a number of side meetings but there is a need to recognise the end point and the moment to influence is day by day in order to ensure that both the British government here, business voices and others and indeed that one makes those points to the 27 and the Barnier team as well. Both sides is still important and we mustn’t ever lose sight of that.

Gaenor: Absolutely. So we’ll come back to that when we have a conversation with Ray but since you touched on a Northern Ireland issue, we felt it was important to get not just a kind of London or England perspective and Paul Terrington, who’s our Regional Leader for Northern Ireland wasn’t available to join us live today but earlier this week I asked him a year on from the announcement of the UK’s exit from the EU, how are businesses and sectors in Northern Ireland responding and here’s what he had to say.

Paul Terrington: A year ago, at the announcement of the Brexit referendum outcome, I think it’s fair to say that business in Northern Ireland was shocked – and that shock coloured and categorised how we reacted. There was a lot of despondency at the uncertainty and the prospects that lay ahead – particularly the issue of the land border in Ireland was one that vexed Northern Ireland companies with the Republic of Ireland as our number one destination for exports, beyond actually the kind of trading issue, the issue of the border felt like it had been settled some time ago, it’s virtually non-existent as a physical entity so the issues of identity associated with it felt like they were issues of the past and people are concerned if those things are resurrected. At the same time as time has gone on, I think we’ve seen the local agri-food and tourism sector get a bit of a boost on the exchange rate issues. We’ve seen at the same time investment in hotels and A grade office accommodation in Northern Ireland and the continued success of investment in Northern Ireland in attracting foreign direct investment to this part of the world. We also have continued to see the growth of Belfast as a key financial services centre so when you look across those things I think that the resilience that business in Northern Ireland has had to exhibit over many years of adversity is coming to the fore, albeit I think people still see that there’s quite some distance to travel.

Gaenor: Well that was really good to hear about the resilience of Northern Ireland businesses and Julia, Paul mentioned a border and it’s just really good to bring you back in at this point. I’m going to ask you the same question I asked Neil, in fact - do you detect any change in the government’s policy on immigration?

Julia Onslow-Cole: Yes, I mean I really echo everything that Neil said and I think that there is some sort of chink of light in terms of, you know, some softer immigration policy, particularly around the net migration target and taking students out of the net migration target, I think we, hopefully we’ll have a White Paper before Parliamentary Recess which is only in a couple of weeks’ time, but I don’t expect to see much in there by way of policy at this stage and I think that the government will try and sort of coalesce around a House of Commons’ view on future immigration policy because of all the differences of opinion that Neil has alluded to.

Gaenor: So the government’s made an announcement about EU citizens - what’s your take on that? Is that a final offer? Are we going to see more movement from there?

Julia: Well we’ve made an offer, the government’s made an offer for EU citizens and the offer, I think it might be helpful if I just clarify what the offer is.

Gaenor: Yes, that would be helpful.

Julia: So basically there will be a date and that date hasn’t been set so it could be the date we trigger Article 50 or it could be the date that we exit, and before that date if you’ve been exercising treaty rights for five years, then under EU law you’d have permanent residence and then you would have a path to settled status and for people who are here exercising treaty rights before that cut-off date, you could continue to exercise them until you get settled status. For people coming in from the EU after the cut-off date, we’re not sure what the policy will be at the current time. But there are some, sort of, sticky points.

Gaenor: And still a little bit of unclarity still. And what was the reaction from the EU? Didn’t sound like we were going far enough from an EU perspective.

Julia: Yes, well it’s very interesting, Gaenor, because I gave evidence as an expert in the European Parliament on this whole point and Guy Verhofstadt, the chief Brexit negotiator for the European Parliament was there and the one point that was very, very clear was that from the EU 27’s perspective they really want the European Court of Justice to be the final court of arbitrating on EU citizens’ rights and I think the differences that we, and the government see it very much as an immigration issue whereas they see it very much as a citizens’ rights issue so I think this is the major sticky point.

Gaenor: It’s almost like it’s even more important than the free movement of people, it’s the ECJ point of view of that as well

Julia: Yes.

Gaenor: And that’s very interesting. But you did say you were a bit more optimistic - so what are you seeing businesses doing at the moment, say, with their people? Are you detecting any change of approach?

Julia: Well, as you said earlier on, I think business now feel that now’s the time that they have to make preparations and we’re certainly seeing a continuation of impact studies you know looking at the impact of future immigration policies on their business. We’re also seeing businesses continue to support EU citizens to register their rights, their treaty rights and I think this is increasingly important for EU citizens’ children because they can have rights to British citizenship because, you know, because their parents are registering EU rights of permanent residence. So we’re seeing that continue and then we’re seeing lots of very helpful suggestions from different sectors about what they would like to see in the long term and not just on immigration but also with an eye to the industrial strategy throwing in training and experience.

Gaenor: Ok that’s a very good point isn’t it? So I think what you’re still seeing is a lot of focus on supporting EU citizens who are here and vice versa and their families and getting clarity, even if the government isn’t able to give us clarity, trying to give those individuals clarity on their personal position. And are you seeing, it’s interesting you’re seeing the focus on skills, are you already seeing businesses cut back on recruiting from the EU or just finding it too hard to recruit from the EU?

Julia: Yes, I think it’s certainly right to say that business has found it harder to source EU citizens. I think you know with the exchange rate and also you know with the noise around EU citizens in the future and an uncertainty, definitely you know businesses are experiencing difficulty in recruiting EU citizens.

Gaenor: Yeah, well that’s probably understandable. So Ray, I want to bring you in. You came from Brussels this morning, so you kind of have a sense -  again a similar question to the one I asked Neil which is, what’s your sense on the ground of, what is the reaction in Brussels to the UK’s position? What have they said so far?

Ray Taylor: Well I think like a lot of people in the UK I think the fact that Theresa May called an election came as a shock and a surprise. In part because what, certainly the European Commission and people that are close to this process understood was it is a very narrow timeframe that we have to negotiate. Neil quite rightly identified it’s a two year process but that the sort of reality from the EU side is that it’s actually much shorter than that because, and Michel Barnier, the Commission chief, basically actually has already alluded to this point. He feels that he needs to be able to present a deal to the 27 member states in the European Parliament by the back of 2018 because he knows that it will necessitate a ratification process but he will also be aware that there will be European elections in May 2019, the effect of that will be that most European parliamentarians will be out of Brussels very quickly after the sort of January 2019. So there’s actually a very narrow period of time to resolve this, so there was that sort of slight surprise that the UK elected to take a chunk of time out of the process of what was already a very sort of testing time.

I think the other thing that’s becoming quite clear is actually the Commission have become quite concerned about the position the UK government now finds itself in. As we know in any negotiation, how you can actually achieve an answer is if both sides are able to conclude an agreement. The Commission knows exactly what it wants and has actually had over, nearly a year now to prepare the ground on a lot of very detailed areas and that’s obviously exhibited by the fact that they’re producing a massive amount of material with respect to what their positions are. They are having very regular dialogue with the 27 member states and the European Parliament. The UK government now is in a weaker position and the Commission knows that and that isn’t actually helpful to the Commission. You know it would much rather have somebody who could give you a yes or no answer rather than a ‘I don’t know, I’ve got to go back and check’ answer and for that reason I don’t think, I get the sense that the Commission is in not a particularly happy place at the moment with respect to where the UK is.

I think the other thing, and it sort of goes to the business point as well, is I think, it’s firmly clear that outside of the sort of the high level areas, and obviously Julia touched on immigration, that the UK government does not yet have any really settled views whereas the Commission and member states do but that allows an opportunity for UK business to sort of raise issues that will allow the policy formation phase for those sort of secondary issues to be taken into account by the UK government and that’s why there most probably is a window of opportunity, both here but also elsewhere, to raise these issues. You know I sort of you know I mean Neil sort of alluded this, there was one meeting about three weeks ago in Brussels, the next round of meetings is scheduled the week commencing 17 July in Brussels. I think what we need to remember is however this is still a highly politicised process and that was actually demonstrated by a speech that Michel Barnier gave yesterday, where basically he basically reiterated what I think anybody in Brussels would view as the obvious with respect to what the UK can reasonably expect to get out of any ultimate deal, particularly around trade when, if the UK’s stated position of not being a member single market and not being part of the customs unions is the end game, that we cannot, by implication, expect there to be frictionless trade following on from that and also he made a very political point of the UK will be a third country. So I mean it’s very, it’s still a highly politicalised process. As the process moves on one would hope that the politics would come out of the process and more rational negotiation could actually take place and I think we’ll most probably start to see that, certainly by the end of this year, going back to my earlier point, cos if not then we have a real problem.

Gaenor: So I think that you said a lot there, but I think what I heard from there was that actually there’s quite good consensus coming out of the EU. We’re getting in a clear position what their position is. You’re going to get more heat and light, you’re going to get the public position may belie some progress has been made behind the scenes and this is the window of opportunity where that progress might be made.

Ray: Absolutely and I think you know it’s sometimes, I think it’s an area that you know a lot of people in the UK sort of don’t understand about Europe is that actually in Europe people are passionate about the European model and you know a demonstration of that is that certainly I’ve become aware that you know German business has been engaging with the German government but the German government has in effect said to them at this moment in time, we are not going to be doing any deals with the UK that undermines the European ideal, a single market, free movement and all those sort of things and I think sometimes we sort of, in this country, I think sometimes we misunderstand that. You know there is a passionate belief across a lot of Europe that the European model works. It could be tweaked where it could be made better but actually at a fundamental level it works and it works to the benefit of Europeans and therefore going in and saying ‘We want this but we’re not going to have that’ if it breaks that model is unacceptable to a lot of people in Europe Commission and a lot of member states and that’s why at this moment in time you see this very common view that has come out - unanimity at the moment. Now ok fine, that’s probably worse than in the political phase, once we start getting into the nuts and bolts, the nitty gritty, then maybe some divergence of view, who knows, but at the moment there’s this passionate belief that it’s this or it’s not this.

Gaenor: Yeah and maybe I’m clutching at straws here, but does that passionate glue if you like, that’s going to drive, surely everyone’s going to want, both sides are going to want some sort of deal because if that glue can’t achieve a deal, it hasn’t got any power, you know what’s the point?

Ray: Yes we’re certainly, you know, I think where we’re at, at the moment is, and I mean the UK basically sort of accepted this right on the first day of the negotiation. The first thing that’s going to be dealt with is citizens’ rights, you know the UK’s financial liabilities to the EU and also the question of what happens to Ireland. And once progress has been made on those three areas then there can be some conversation about well what happens next? Accepting that what happens next will not be what we have now in absence of there being free movement of people ok? So there has to be, be some acceptance that there will be a watering down of that free movement for trade and services but quite when we get to that point will be very dependent on how willing the UK is to negotiate on some of these topics and sort of to Julia’s point about citizens’ rights, what is actually quite interesting is the European Commission actually produced its own paper on citizens’ rights in the middle of June and if you were to compare the UK position with the Commission’s position strangely there is not a lot of difference between those two documents. The problem is the differences are big issues, European Court of Justice being one. So there are still some quite fundamental differences between the two sides but if there is a willingness to find a way then a way will be found.

Gaenor: Let’s hope so.

Ray: Yes.

Gaenor: So I am now going to kind of bring you all back together actually - and sort of think, asking you all in a way to not exactly look through the crystal ball, but in terms of, you know, for businesses listening, what’s likely to happen next? People talk about likely scenarios. Neil, I’ll start with you. What do you see as the two or three likely scenarios that maybe business should be contingency planning around?

Neil: Well I think Ray touched on the shorter term point which I think is absolutely pivotal. Will there be enough progress made on those three issues that Ray talked about, that were set out right at the beginning by the Commission that originally the British government were going to try and not have that as the agenda, decided that would be the agenda. If significant progress is made on those issues by October, November, December this year, then that clearly opens up the opportunity to then start talking about what a new partnership, new arrangement might look like in broad terms. I think it will be too tight to get all of that detail done but I think getting a sense of what it, the direction of travel, what the broad outlines of that arrangement might be and does one need any transition around that? You can see those sort of things, particularly as transition being looked at towards the end but I think we’ll know a lot by the autumn towards the end of the year about have we made progress on those three issues that superficially look straightforward, that actually have a lot of complexity and give rise to the points that Julia and Ray have made about the detail and getting into the detail to make enough progress to say, ‘Look we have made enough progress. We haven’t agreed yet. We’ve made enough progress, let’s move on to talking about a trade deal’. So businesses and we’ll all know that by autumn, Christmas of this year and the pivotal thing for Europe I think will be that inevitably those decisions will be looked at after the German election which is at the end of September. So German election, German government then takes a little bit of time regardless of the outcome to form, because they go through a period of negotiating policy by policy. Once that is in place then I think we will see, reasonably quickly, a judgement based on a recommendation from Barnier about has significant progress been made in those three critical issues? If the answer to that is yes, then I think we can have some, a degree of optimism that we can move forward to get enough landed by the end of the period and therefore something for both the European Parliament to vote on, not straightforward, and the British parliament to vote on, not straightforward either.

Gaenor: There are at least two things going on there. One is, actually you’ve given a very helpful steer in terms of again businesses looking at when we’ll get more data, autumn time, after general elections, assessing progress, we should get a bit more of a sense… But, in terms of what we do now, it’s really, I suppose the million dollar question is, is there likely to be a transition phase or isn’t there?

Neil: Well it’s interesting that on this very day the business groups meeting in Chevening with David Davis and the business secretary and others, seemingly have made transition as the big point and one can utterly understand that from a business point of view and agree with that from a business point of view, but just to be clear the transition bit will be decided towards the end of the negotiation when there is a judgement about how far has one got in the negotiations and is there a need to have a bridging point between the outcome and the future and of course you would have to have a sense in that, what does the British Government want the future to look like and is there enough of an agreement to have a small enough timeline in order to have a sensible transition. And it’s worth just reflecting, business groups today were talking about a reasonably lengthy transition, the Treasury have talked about three or four years. Crucially, the European Parliament in their document, which they voted for a few months ago, said three years maximum and I think that’s a point to just keep in our minds.

Gaenor: Yes. Ray anything else that you want to add to that?

Ray: Well, no. I mean I completely agree with everything that Neil said. I mean, on the transitional point, you know I think if we take a view that just by saying ‘Well let’s have a transitional period’, we’ll get a transitional period and that Europe will agree to that, I think completely misunderstands where Europe is. Europe will only want to consider a transitional period, even after we get past the initial you know, the goodwill has sort of been built up to a degree through the earlier negotiation, is if there is some understanding of where we ultimately want to get to and so Neil’s point about three years, it goes back to my earlier point which is, you know for all intents and purposes you know Europe is going to lose the whole of 2019 because you’re going through European elections, then you’re coming to the end of the current Commission with the appointment of new Commissioners, so the new, the whole new team will not be in place until the 1 January 2020. So that’s your sort of start point to really get into the meat of what transitional arrangements will get you to so when European Parliament say three years, in reality what we’re talking about is most probably two years.

Gaenor: That’s really interesting. So you know the point you’re making is, as well as political reasons why things might happen at a particular time, there are actually some structural reasons which we just can’t get around …

Ray: Absolutely

Gaenor: … which are going to box us into certain time periods.

Ray: And of course you know you then overlap with that and you know others can possibly understand this better than me, but you then overlap that to the UK domestic, political domestic situation as well as to what’s actually going on politically here over that timeframe as well.

Gaenor: Yes, so interesting. So we’re not probably going to get clarity on transition period, what it’s going to mean for a while. What about, a scenario sometimes painted that we will still agree but we’ll only have actually agreed the exit and then there’s a sort of hiatus period and then we have to re-agree and renegotiate a kind of WTO position going forward. Sometimes we call that the kind of rocky landing scenario. Neil do you have any thoughts about whether anyone really wants that? You know surely there’s lots of goodwill to kind and try and keep working together.

Neil: Well I don’t think anybody particularly will want any of those sort of outcomes. I know people for good domestic reasons have talked about you know no deal is better than a bad deal and those sorts of things, you can understand those sorts of things in a domestic political scene. I don’t think there is you know, I think people do want to do a deal and I think one of the reasons why one knows that is actually Europe, including the United Kingdom, has been rather successful over more than 40 years of people with different positions, different views, different histories, actually agreeing things and often it’s been right through the night, often it’s been leaders round the table, making compromises to agree things but Europe does have a history of doing that, of which the United Kingdom has been a significant part, so I think we should just remember that architecture still exists, people do know each other, there’s a lot of very good relationships there but I think for that to happen this period of a few months of the talks starting with those three big issues will send a very clear signal about can people make the necessary compromises which is largely, but not exclusively on the British side, in order to sort of move to that phase. So I think autumn, end of the year that will be a very good moment for businesses to assess progress but in waiting for that period I think businesses should recognise the clock is ticking and therefore planning, whether it’s on people, whether it’s on your business model, whether it’s on how you might deal with you know a bumpier ending, I think all of those things need to be done, but there’s some milestones that will help you have a sense of do you have to continue to still prepare for the worst case or will it be slightly better?

Gaenor: Yeah. So it’s very much still businesses have to be able to deal with running several scenarios in parallel. We all hope that it will be a smooth transition, but you have to have contingency planning - what if the worst case comes out. Julia anything you want to add, becasue you know you’re in Brussels a lot, you know you’re on Sadiq Khan’s committee, anything else that you’re hearing that business is doing that would be good to share?

Julia: Well, I think that one thing that has come out to me in the last week, the Mayor had a very useful visa summit, and there was lots of different sectors represented, that there’s quite a lot of differing views about what a new immigration policy should look like and different sectors seem to want different things. So I think that all of that thinking’s very, very helpful and it would be good for more sectors to get their thinking out now and as I said before not just about immigration but about the industrial strategy. So that you know as much as possible business could come to more of a common view about what it is they want because it will be much easier I think if there was you know a common view. So for example some businesses are very keen on the idea of a regional visa policy and some businesses think this will be you know really, really helpful and some commentators think that too. Others think that it would be better not to have a regional, any regional variations. Some would like quotas for low skill sectors and they would like the Migration Advisory Committee to adjudge on those quotas. Some don’t want that at all and so I think it, you know it is important that business gives this serious thought and doesn’t just react to the consultation paper that will be coming out from the Migration Advisory Committee shortly after the White Paper but starts to think themselves, what is it that we need for the future of our business? As I say not just in terms of immigration but in terms of the industrial strategy too.

Gaenor: So there’s a real opportunity for business to be innovative and proactive and perhaps using this time whilst there’s still a lot of uncertainty to try and come together and maybe work with the CBI, other trade bodies who are being invited to these forums.

Julia: Yes, or work you know with ourselves at PwC, because you know we’re doing a lot of thinking in this area and in fact yesterday you know we did the City UK report which has been, you know, very powerfully received and as part of that you know my immigration team, led by Sapna Patel, came up with a digital visa which was a very new and innovative idea to help Fintech so I think there is you know lots of different thought leaderships around visas that companies could contribute to.

Gaenor: Excellent, really good idea, both innovation and also kind of long term thinking. Let’s just not think about the two years, this is here forever and let’s plan for that. We’re getting a lot of questions in so I think I’m going to move to the questions.

So let’s start with the first one. Given the UK’s comparative advantage in new and emerging sectors, so Fintech might be an example there, like machine learning, robotics. How can companies take advantage of this and minimise risks of Brexit opportunities? Neil do you want to have a stab at trying to answer that one first?

Neil: Well I think that the important thing for business is - and businesses you know every year look at their business strategy and their business model. I think that whilst one is doing that one should absolutely be focussing on the impact of Brexit and thinking through that it does mean a change for how your business has operated, particularly if you’re selling things, globally, if you’ve got integrated supply chains across Europe, there will be things that will make those situations more difficult, more challenging, more costly cos ultimately and Michel Barnier consistently makes the point and Ray has reiterated it that if we’re not going to have a sort of frictionless trade because we will be moving outside the membership of the EU and therefore that will mean various things around checking and customs and various barriers, not just potentially tariffs but non-tariff barriers, so businesses will need to think that through and how will they make their model consistently work going forward and that’s the thing the people should really seriously look at. There are opportunities, and there clearly are, of trade outside the EU. Do you know what, that’s something that one can focus on today.

Gaenor: And I think that’s a really good point. So I think there is a point about one, Brexit is going to happen, so you sort of have to weave into all decisions rather than having a sort of separate, right now, we’ve done our business plan and let’s focus on Brexit. But there’s a second point, is let’s play to our strengths, that’s got to be the right thing to do.

Many thanks to our panellists for their perspectives and to you for listening. Please subscribe to receive further episodes. If you’d like to watch our recent webcast or find out more information on how we can help you navigate Brexit, please go to www.pwc.co.uk/brexit. Thank you.

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