LEADING THE WAY OUT OF THE EU

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Friday 27 April 2018 

This was inbetweener week. With both Houses of Parliament, together with the EU, conspiring to keep Britain in the Customs Union last week, and the Cabinet not set to finalise its position until the next, the past seven days have played out at a moderate pace, with only a few notable sparks flying.

The lack of drama was partly due to Theresa May’s surprisingly canny decision to withdraw the whip over a Commons motion in favour of remaining in the Customs Union, tabled late last week in the aftermath of the Lords’ treacherous amendment to the EU Withdrawal Bill – see Monday’s newsletter on the subject.

With the Commons loaded with Remainers, the motion yesterday carried without a vote. The minimum fuss meant the media largely left it alone.

In any case, the motion is non-binding and, much like the Lords’ amendment which is likely to survive a vote in the Commons next week, its wording is vague enough for the government to work around and keep Britain out of the Customs Union.

If today’s Times is to be believed, the fudged “customs partnership” – the government’s alternative to the CU, which would see Britain forming part of the EU’s external frontier – is set to be shelved thanks to a “clear consensus” against it in Cabinet. Jacob Rees-Mogg described the concept as “completely cretinous”, Cabinet Brexiteers Johnson, Fox, and Davis are said to have lobbied for the proposal to be binned due to fears it could act as a gateway to a return to the EU’s ironclad customs regime – for more details, read today’s Brexit Brunch.

Another blow to Remainer dreams of keeping the border in Ireland open and the whole of the UK in the Single Market was dealt by the DUP. On Thursday, Nigel Dodds, the Party’s leader in the Commons warned the prime minister that protecting the territorial integrity of the UK – and rejecting any special customs status for Northern Ireland – was a major red line.

“You might as well have a Corbyn government pursuing openly its anti-Unionist policies as have a Conservative government doing it by a different means”, he warned. May ought to listen up. Without the support of the DUP’s ten MPs, her government would crumble. Perhaps history will describe the 2017 general election as one of the greatest strokes of accidental good fortune to have ever touched Britain, for making “Theresa the Appeaser” dependent on the support of a group of determined MPs from Ulster.

Bear in mind also that the CU only covers industrial goods. 77% of trade across Ireland’s internal border is agricultural. For Britain to adopt the existing Customs Union arrangement currently imposed on Turkey would only exempt 23% of goods from border checks. May’s pledge to avoid physical infrastructure would not be met. If remaining in the Customs Union would not quite kill independence, upscaling it to include agriculture certainly would.

It would entail aligning with hundreds of thousands of pages of EU regulations. Furthermore, Brussels would insist Britain remain part of the Common Fisheries and Agricultural Policies to evade the distortive effects of heavily subsidised produce being exported tariff-free from the Republic of Ireland to the UK. Our fishermen would remain enslaved to EU quotas. In short, Britain would remain entirely within the Single Market.

The warnings of a former Turkish diplomat, who said this week his country’s customs arrangement with the EU amounted to “semi-colonial status” should be taken very seriously indeed.

No wonder Remainers are eyeing up the Customs Union as their saviour, but even they recognise their only opportunity to inflict a real defeat on the government will not come until October’s “meaningful vote” over the future framework for UK-EU trade.

Speaking before the Commons Brexit Committee on Wednesday, David Davis conceded the vote, which will take the form of a binding motion, would be open to amendment. The opposition benches will therefore have the opportunity to tie in constraints. Theresa May could be forced to return to the negotiating table, keep Britain in the dreaded Single Market, hold a second referendum, or all of the above.

Speculation is now mounting over whether the prime minister will up the ante by turning the motion into a vote of confidence giving her Tory rebels the choice between continuing to defy the public will, or bring down their own government. We explore the possible outcomes in our blog.

At his hearing, Davis also said that what had looked set to be a flimsy “political declaration” agreed between London and Brussels over the course of the summer, will, in fact, be weighty enough to translate into a treaty once Britain becomes a nominally independent nation on June 30th, 2019. And further to nagging from Davis last week for the PM to get her act together and tell Brussels what she wants before the EU takes the initiative (again), it has been revealed Downing Street will next month publish a 50-page document outlining British trade demands.

Finally, Michel Barnier has made his sternest indication yet, Britain will not get a deal on financial services.

“Some argue that the EU desperately needs the City of London, and that access to financing for EU27 business would be hampered – and economic growth undermined – without giving UK operators the same market access as today,” said Barnier, who as the EU’s Internal Market Commissioner relished telling off City institutions in the aftermath of the financial crisis.

“This is not what we hear from market participants, and it is not the analysis that we have made ourselves,” he added.

However, while the liberal media have chosen to dwell on Barnier’s denunciation of the City of London, his other comments were, in fact, cause for optimism. According to Brussels’ lead Brexit negotiator, the EU’s system of financial “equivalence” is set for expansion, potentially curing the headache for British banks, funds and insurers eager to retain access to the EU market. Under the principle of equivalence, companies can sell into the EU without need for a special license, known as a passport and only available in EU countries.

At present, equivalence is limited to a fairly small range of financial services. With the EU planning to add more London’s hopes of preserving the status quo remain rosy. Besides, in 2015 £1.1tn worth of loans were paid out from the UK in the EU (see econ update below). Some sort of arrangement over finance is inevitable. Barnier is bluffing.