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28 November 2018

No plan B: it’s May’s deal approved by the EU or going back to square one

The withdrawal agreement is a take-or-leave situation, EU leaders and PM May warned UK MPs. The end of the year will see politicians show their true colours in a historic vote for the British Parliament.

By Paula Martín Camargo

British PM Theresa May finally found a way around for the Northern Ireland border quandary and for an eleventh hour diplomatic spat with Spain over Gibraltar that saw the Spanish Government threatening to block the accord if it wasn’t given veto power over The Rock’s future relation with the EU. May got EU leaders to endorse the draft Withdrawal Agreement and a political declaration on the framework for the future relationship, but lost some major cabinet members like Brexit Secretary Dominic Raab, who resigned and branded the deal as “worse than staying in the EU”. The next major hurdle May must overcome if the legal texts are to be enshrined in UK law is waiting for her at home.

The Prime Minister is fighting her way out of the Brexit corner, putting her hopes on forcing MPs to vote YES to the agreement secured over the weekend in Brussels by winning the hearts of the public. Her strategy consists in convincing voters that the UK is “getting behind this deal” and negotiators should now approve the accord and “get on with Brexit” to let her team focus on working on the UK’s new relation with the EU and on the exciting trade prospects Brexit may bring to an unshackled Britain. But Britons are not on board with this idea, pollster YouGov found: By more than two to one, the public oppose the agreed plan for Brexit as it stands.  

Faced with fierce opposition at home, where MPs could derail the hard-won deal in a vote before Christmas, Theresa May told parliamentarians that they have a duty to deliver on what their constituents voted for in 2016. As the PM presented it, there’s no other choice anyway: rejecting the deal, May floated to lawmakers, would equate to going “back to square one.” Either way, EU leaders backed the UK PM signalling there could be no return to the drawing board: EU Commission President Jean-Claude Juncker said that Sunday’s was “the only deal possible”. An agreement that comes at a huge cost, research by the National Institute of Economic and Social Research (NIESR) has claimed: withdrawal arrangements will leave the UK £100bn a year worse off by 2030,  “the equivalent of losing the economic output of Wales or the City of London”.

The battle for parliamentary approval is, thus, now on.  The British Parliament is set to vote on the deal on the 11th December. Parliamentarians should read both texts together, argues Federal Trust Director Brendan Donnelly, so they can understand the full scope of the weakness and incoherence of Mrs May’s negotiating position, which makes a People’s Vote more likely.

But what happens if Commons vote down the deal, CER Director Charles Grant wonders? Three possibilities arise: it could lead to no deal – an option Work and Pensions Secretary Amber Rudd has ruled out-, the negotiation of a different deal, a general election, a second referendum – or MPs swallowing the package at the second attempt. For the time being, Labour said they would ask for an extension of Article 50, while foreign secretary Jeremy Hunt warned that the Government could fall if the Brexit deal failed.

Away from Westminster fluster, a legal action that seeks to establish whether the UK can unilaterally stop Brexit quietly made its way to the ECJ, where EU lawyers argued that cancelling Article 50 would require unanimous support from EU governments to protect the interests of the union. The tide is changing as people’s minds on Brexit, and the time may be ripe for a People’s Vote, Sky Data showed, with results finding that a majority of Brits is now against Brexit and backs a second EU referendum, which a vote for Remain would win by a 8-point margin if a referendum were held today. The strength of the British will to have a say on the final say was shown in a 700,000-strong march in London that campaigners for a second Brexit referendum are hoping to harness to lobby MPs in the run-up to a crucial Commons vote. They have identified 50 Tory MPs whose vote could be swayed on departure from the EU.

Graham Bishop marked the centenary of the end of the World War I asking Members of Parliament to “see the connection with the Sixty Years of Peace and Prosperity that have ensued. They must now represent the best interests of their constituents, look into their consciences and ensure that the people have the final say on such a profound decision”.

Should the Labour party take into account these words, MPs would back a second referendum by majority, given data released by the People’s Vote campaign that a majority of voters in all seats held by Labour support a final say on Brexit, and the motion has won the backing of former prime minister Gordon Brown.  

The City of London is split on the issue: while a great number of financers backed the prime minister’s blueprint for Britain’s future relationship with the EU, half a dozen leading figures told the FT City Network that they advocate a “people’s vote” on May’s Brexit deal.  The UK’s departure must give the EU a much-needed push for the capital markets union (CMU) project, Vice-President of the ECB Luis de Guindos said. Apart from further integration, the UK’s impending exit from the European Union has increased the need for banking giants in the bloc that can rival those in London and New York, according to Germany’s central bank.  

Although bankers in the EU and in Britain now think financial-market chaos will be avoided, the head of the eurozone’s Single Resolution Board told the Financial Times that there wouldn’t be a‘white knight’ for banks in no-deal Brexit so they should be prepared for all scenarios. And banks have heeded regulatory warnings, moving a number of job figures but most importantly, increasing capital moves:  some of the major US investment banks are planning to shift about 250 billion euros of balance-sheet assets to Frankfurt because of Brexit, as reported by Bloomberg.  

Political uncertainty since the Brexit vote has reduced foreign direct investment to the UK by 19%, research by the UK in a Changing Europe found, the longest continuous decline in FDI since records began, with a £1.5 billion reduction in the value of capital investment between 2016 and 2017. And the latest EU/UK accords will make it worse, creating devastation for the City of London over time, Graham Bishop concludes in his assessment of the financial services section of the Political Declaration on the Future Relationship. Even so, BoE’s chief backed the transition deal agreed by Prime Minister Theresa May with the European Union, making the case for an even longer time to adjust.

The derivatives clearing in euros industry would have some time to avoid disruption in a no-deal Brexit: Brussels responded to financial industry calls for continued access to London’s capital markets by providing reassurance that EU groups will temporarily be able to use crucial derivatives clearing services in the UKESMA proposed a regulatory change to support the Brexit preparations of counterparties to uncleared OTC derivatives, and asked clients of credit rating agencies and trade repositories to prepare for a no-deal Brexit.

The battle over this trillion-worth business deteriorates further, with Deutsche Börse’s derivatives exchange Eurex extending its scheme to share profits with users to foreign exchange swaps and repo markets, in an aggressive bid to lure more of British LCH exchange market to Germany. But the excitement, somewhat spurred by a favourable political environment due to Brexit, risks ripping the lucrative market apart and triggering something worse that the 2007 financial crisis, warns Lionel Laurent of Bloomberg.

European proposals threaten to break the balance with traders abroad such as the US, duplicating regulation and giving the EU27’s markets regulator the power to inspect the activities of a US derivatives business on its home turf. The EU-US dispute could lead to fragmentation and ultimately determine the price of hedging risk, writes Patrick Jenkins, if national regulators cannot agree on a system of collaborative oversight. Germany’s deputy finance minister Jörg Kukies attempted to placate the row by saying that the EU proposal was not at odds with current regulatory arrangements between the EU Commission and the Commodity Futures Trading Commission (CFTC). ISDA produced an impact assessment for US entities registered with the CFTC in the case of a ‘hard’ Brexit for American financial dealers to address the issues at stake. 

The International Swaps and Derivatives Association called on the industry to overcome challenges such as Brexit, which has the potential of throwing away some of the achievements of the global regulatory reform initiative developed over the past 10 years to make derivatives markets more robust and resilient.  

Industry leaders CBI, IoD and EEF backed May’s Brexit deal, perhaps spooked by what a no-deal would look like for the UK economy as recent findings by the National Institute of Economic and Social Research showed: if Britain reverted to World Trade Organization’s most-favoured-nation status rules, gross domestic product would increase only 0.3 percent in 2019. Just in case the UK Parliament finally rejects the deal, the French government has asked its businesses to gird themselves against a cliff-edge scenario.

Rightfully so: analysis by the FT found that Britain’s solo way ahead in the global trading system will be long, arduous and to an unnerving extent dependent on the kindness of others. And ‘the others’ aren’t looking any kinder. A group of countries including the US, Brazil and China has objected to EU plans for splitting up sensitive import quotas with Britain after Brexit, while Russia was among 20 countries seeking to capitalise on Brexit after blocking an attempt by the international trade secretary, Liam Fox, to fast-track an agreement on post-Brexit UK’s terms of trade at the World Trade Organization.  Moreover, US President Donald Trump dropped a rhetorical bomb saying that the deal May reached with the EU could jeopardize Britain’s ability to strike a trade pact with the US.

The Government’s trade team isn’t finding things much easier to replicate international treaties that the EU has signed with countries around the world, having rolled over only 14 of the already existent 236 trade deals. The UK was just granted “provisional” support to a  WTO accord to maintain access to a $ 1.7 trillion public procurement market after British membership lapses on Brexit date. 

Full article available for consultancy clients here

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