The UK must learn that concessions cut both ways

Scotland Europe Initiative
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The UK must learn that concessions cut both ways

July 19 2023, by Rebecca Christie

Brexit may have come and gone, but the UK still wants to make decisions like it’s part of the gang. Time and again, British policymakers call on the European Union to make a change because it makes sense or because data show it might help invested companies with deep European roots. But staying inside the EU also made sense, and UK voters chose to leave anyway. It’s time for Britain to recognise that politics cuts both ways. 

Trading concessions is the new name of the game. So far, whether it’s swaps clearing or electric battery manufacturing, the UK has resisted offering concessions lest it set a precedent that every change requires an exchange of compromises. This is a pointless hill to defend: Brexit is done, and the initial agreements are fixed. The EU has no incentive to make changes to keep London happy and every incentive to insist that its own priorities matter, even if they cost a little more.

In the same vein, the UK has expressed interest in redoing the Trade and Cooperation Agreement that sets out post-Brexit relations and is scheduled for its first review in 2026. But the EU has made clear that major adjustments are not on the cards, nor will it revisit specific product rules. In the words of a European Commission spokesman, “Just because there’s a call from somebody doesn’t mean we have to immediately react to change things.”

What this means for financial services is that the industry’s priorities—large, liquid markets that avoid fragmentation and take advantage of established infrastructure—do not automatically line up with the EU’s, which are to maintain regulatory control over areas that it considers of critical importance. The ECB has been very clear that financial institutions that operate within its territory need to have critical operations inside the euro area, and post-Brexit cooperation will have to make that a starting point.

Rules matter

The EU remains, at heart, a rules-based economy. The Single Market was always intended as a way to boost seamless trade within the bloc, not necessarily with outside players, and to establish common procedures. From the carbon border adjustment mechanism to credit rating rules that require firms to have an EU presence, the bloc has sent a consistent signal that its priorities begin inside its perimeter. UK policymakers too often come to the negotiating table with only data showing why the thing they want makes economic sense. That’s not good enough. As the Brexit referendum showed all too clearly, societies regularly prefer self-determination over economic expediency…While the EU may be open to cutting a deal, it is clearly in its interest to require concessions to do so.

UK stakeholders underestimated the difference between going from being outside the euro to going outside the EU-27 completely. When they were inside the single market, they had a lot of sway over the common currency despite an explicit exemption from ever having to join it. This may have given policymakers an overvalued sense of how much their opinion mattered in Brussels. While the EU recognised and took advantage of British expertise when it was inside the club, it feels no such interest or obligation to work so closely with a “third country” that explicitly intends to diverge.

British policymakers dislike acknowledging these fundamental realities, which seem obvious, yet also seem not to be fully accepted. British officials like Business and Trade Secretary Kemi Badenoch and Chancellor of the Exchequer Jeremy Hunt say they want to “work closely” with the EU, even as they field domestic pressure to repeal hundreds of EU-era rules and regulations. If the UK changes its rules, it stands to become less compatible with its neighbours, which will then require further talks on how to collaborate.

Still, there are some encouraging signs. Now that the Windsor Agreement has eased tensions over how customs procedures will work in Northern Ireland, there has been some scope for post-Brexit relations to move forward. The EU and the UK have signed off on a Memorandum of Understanding on financial services that at least sets the stage for resolving differences, even if it does not bind either side to specific actions. In the latest indication that the negotiating era may be underway, the UK and EU appear to be nearing a deal on research funding through the EU’s Horizon programmes. As of this writing, the agreement is not final, and details are unavailable, so it is unclear if the UK secured some of the financial advantages it sought or agreed to the EU’s general terms. While Horizon may seem unrelated to financial services or manufacturing tariffs, all of these sensitive issues are bound together in their possibilities for give and take.

Investors love working within the friendly confines of London’s financial-sector expertise and investment-friendly centralisation. Likewise, the EU has much to gain from UK venture capital, technology innovation and global market connections. But any move to grow closer must come with exchanges of compromise, not just declarations of why the other side should change its mind.

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Scotland-Europe Initiative

This Initiative will examine Scotland’s and the UK’s relations with Europe and the effects of Brexit on our daily life by exploring public policy issues such as trade and investment, energy policy, and migration.

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Rebecca Christie is the Brussels columnist for Reuters Breakingviews and a non-resident fellow at Bruegel.

The RSE’s blog series offers personal views on a variety of issues. These views are not those of the RSE and are intended to offer different perspectives on a range of current issues.