Brexit: Navigating the Political Uncertainties

While sufficient progress was made in the first phase of negotiations between the UK government and the EU to advance to a second phase in March 2018, numerous uncertainties remain, especially around the future of financial services.

First, while the UK government has released a number of blueprints regarding the future of various industries post-Brexit, it has failed so far to publish a similar paper on financial services, leaving market participants very much in the dark regarding the details of its negotiation objectives with the EU. The UK government claims that it aims to reach a deal similar to the one concluded between Canada and the EU, known as Comprehensive Economic and Trade Agreement (CETA), but one that would also include financial services, which is not part of CETA. The UK minister of Brexit negotiations went as far as claiming that the current trade agreements between the EU and Canada and the EU and Switzerland should be the minimum objective of what should be achieved during the negotiation.

The EU’s position is quite different from the UK’s position, and also far clearer and consistent.  The EU representatives and numerous European political leaders have left little doubt on the subject: there should be no “cherry picking” of sectors allowed to access the European single market. If the UK does not accept the freedom of movement for goods, services, capital and people, it cannot be part of the single market and, therefore, should not gain the benefits of a member. That means no special treatment for financial services will be on the table. As French president Emmanuel Macron stated in mid-January 2018: “There cannot be differentiated access to the single market, of which financial services are a part.”

“There cannot be differentiated access to the single market, of which financial services are a part.”—Emmanuel Macron

There are clear reasons why the financial industry is left in this uncertain situation. The UK government is concerned about disclosing too much about its intent and strategy before the second phase of negotiations. On the European side, there are numerous elements at play:

  • Diverging interests: Some countries such as France and Germany are beefing up their games to attract business away from London. The French government, for example, has recently decreased its wealth tax and is planning to cut payroll taxes for high earners moving to Paris as a means to lure asset managers away from the City. Other EU countries are pushing to maintain existing arrangements with the UK in the post-Brexit world. Luxembourg, which is the domicile of numerous funds distributed in Europe, advocates for as little disruption as possible for UK managers post-Brexit.
  • Political uncertainty: French president Emmanuel Macron is arguably the only prominent European leader that has been elected on a pro-Europe agenda. German chancellor Angela Merkel has been struggling to find a coalition to remain in office. Spanish prime minister Mariano Rajoy is facing an independentism threat from Catalonia, and the Italian government is facing a major election this spring. This means that 3 out of the 4 largest countries have weakened political leaders at this stage. In addition, numerous anti-EU politicians have joined the governments in Austria, Poland, Hungary, etc. Finally, a new election for the EU parliament will occur in 2019. While Michel Barnier, the head of EU negotiations for Brexit, appears to have a clear agenda, its backing by the 27 EU countries is less clear.

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