The flashpoints of last week in response to the EU’s Draft Withdrawal Treaty have given way to calmer discourse with the key protagonists taking more of a back seat. There has been no let-up in cross-border visits though, with the supporting cast stepping into the spotlight with the financial and business leaders taking centre stage.

Leaving the City

Personalities matter in politics. Anyone who tells you differently needs to observe the attention, or lack thereof, on the Chancellor, Philip Hammond’s ‘Road to Brexit’ speech which was in stark contrast to the coverage given to his more colourful Cabinet colleagues in recent weeks. Imagine the hype if one of his predecessors – George Osborne or Gordon Brown – were speaking in the same situation.

This was still an important intervention however. ‘Spreadsheet Phil’ made a clear case for financial services to be included in any future EU/UK trade deal as it would provide “mutual benefit” to both parties with any fragmentation only benefiting global competitor cities and not the EU. He also called out the EU for its inconsistency in seeking to negotiate more robust trade agreements that include financial co-operation, most clearly with the USA and the now aborted Trans-Atlantic Trade and Investment Partnership. Hammond’s message was simple – if the EU is willing to attempt this with a nation on another continent, then its perverse not to consider it with the UK.

Along with EU/UK border issues, the role of the EU institutions post-Brexit and citizens’ rights, financial services will be a tricky obstacle to overcome in the pursuit of a final deal. The difference with financial services is that the UK is united on what it wants, with the EU equally adamant they will not have the same access if they leave the single market and ‘creative solutions’ are not an option on the table. This week, the French economy minister Bruno Le Maire was the latest continental voice to totally reject the idea that financial services could be included in any free trade deal. This is because services are not impacted by tariffs, as goods are, but instead require common rules, supervision and enforcement. From the EU’s side, British red lines preclude this from happening, but whilst a system of mutual alignment and enforcement is not impossible, the fact is the EU – and Paris and Frankfurt, its finance capitals – consider the loss of the City’s passporting rights as the silver lining to Brexit.

We’re just not that into you…

One fundamental difference of opinion between Brexiteers and Remainers is to what extent they believe the EU depends on the UK and how far they will go to amend its principles to keep the status quo. Reflecting on this week, the signs are that the EU is fully braced for the sacrifice.

First, Stefaan De Rynck, principal advisor to the EU’s Chief Negotiator Michel Barnier spoke candidly on the subject. He said that the EU27 know and understand that there will be short-term pain and costs associated with Brexit – especially regarding exports – but that this could never outweigh the longer term damage that compromising on the EU’s principles would mean – the unravelling of the single market.
Secondly, and of more concern, was European Council President Donald Tusk unveiling the draft EU27 negotiating guidelines for the next phase of discussions on trade – scheduled for later this month. Tusk’s message was not a fillip for business – expect a considerably worse deal than now with more trade friction and barriers between the UK and EU.

In response to this, British business is showing their frustration and nerves; this week two top UK manufacturers – Vauxhall and Airbus – have warned about the consequences of a hard Brexit on their industry. Businesses are increasingly seeing the value of Labour’s commitment to support a customs union to ease the shock factor and Keir Starmer and John McDonnell are leading this charm offensive.

Between the Rock and a hard place

Gibraltar – the other UK territory with a land border to the EU – has been overshadowed by the Irish question during Brexit, but according to Tory elder statesman Ken Clarke, has the ability to make it “look like a picnic”.
It encompasses many of the challenges of Ulster regarding the movement of goods and people – but with add-ons. The 35,000 Gibraltese materially rely heavily on imports from their Spanish neighbours and these could be significantly disrupted and made more costly by any trade deal not covering the movement of goods. The more serious hurdle is the Spanish Government being granted a veto over a final Brexit deal by the EU if they are not happy with the status of Gibraltar. This slipped relatively under the radar and is not something that Dublin has also been granted.

The Prime Minster is between a rock and hard place here: needing to convince Madrid to approve the final deal, whilst persuading Gibraltar to (sensibly) accept a ‘special status’, giving the peninsula membership of the customs union and single market. A further complication is that the Gibraltar constitution also gives the territory a veto over any changes and, so far, Gibraltar’s Chief Minister Fabian Picardo is threatening to exercise this right if sovereignty is threatened.
Despite these headaches, a path ahead is navigable. Special status for Gibraltar is heavily in its own economic interest – unlike perhaps in Northern Ireland. The Spanish will be happy with the closer alignment this would bring, throw in preferential access to British fishing waters and Madrid should be appeased. The question, as ever, is if Theresa May is strong and persuasive enough to face down the more nationalist factions within Gibraltar and her own party who may view this as a capitulation.

Roll on the next UK overseas territory issue to raise its head… watch out for similar problems arising with the status of British military enclaves on the island of Cyprus.