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Limited Brexit transition deal just prolongs uncertainty for the City

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Any capital markets professional breathing a sigh of relief over the agreement of Monday's Brexit transition deal between the EU and the UK, should stop to realise that all this agreement does is prolong the uncertainty.

A boost in the price of sterling suggested that market players were positive about the agreement. The UK will remain a member of the single market and customs union following March 2019 for a further 21 months, allowing financial services businesses in London to continue trading in the EU.

But, the transition text says little about the future relationship between the EU and the UK, and the future of financial services remains clouded in mystery beyond 2020.

As GlobalCapital wrote two weeks ago, the UK’s plan for financial services, laid out in a speech by UK chancellor of the exchequer Philip Hammond on March 8, was greeted warmly by the City of London.

The UK Treasury’s plans are ambitious and unlike any free trade agreement the EU has ever negotiated.

The EU has been steadfast in its position that financial services had never been included in a free trade agreement before Brexit, but the bloc’s intention to include services in its proposed free trade agreement with the US (TTIP) suggests that this stance is not so doctrinal that it cannot be reversed.

However, the problems with negotiating such an arrangement appeared in the same week as French finance minister Bruno Le Maire's rejection of the possibility of financial services being included in a free trade deal.

Sources in the City suggest that this was a cynical move by the French politician to coax banks into relocating from London to Paris.

And therein lies the problem with a time-limited transition. Future free trade agreements must be approved unanimously by EU member states. Any single member can veto the UK’s future relationship with the EU and derail the process, meaning no deal is agreed before 2020.

It is why EU’s deal with Canada (Ceta) took seven years to negotiate and was almost derailed at the final stage of the ratification process by the Belgian region of Wallonia.

Even if France backs down over financial services any EU member which sees Brexit as an opportunity to poach business from London can veto the deal.

Given that even a limited amount of relocation from London would benefit the economies of a number of smaller European states pitching for the City’s business, there is added incentive to make financial passporting as difficult as possible for UK-based companies.

States such as Luxembourg, which have already begin to benefit from relocations from London and are less dependent than France on co-operation with the UK on  policy areas such as cross-border defence and security, could see an advantage in there being no deal for the City.

Even Ireland, if it is successful in enshrining a legal back-stop guaranteeing no hard border between Northern Ireland and the Republic, may have little incentive to ratify a free trade deal including financial services, as it would mean businesses might not relocate from London to Dublin.

Under a transition wth no time limit, the UK would have been able to wait in the knowledge that businesses could continue to trade into the EU until a suitable future arrangement for all parties had been agreed and there would be less incentive for the bloc's member states to veto the deal out of self-interest.

The failure by the UK government to secure even a clause to extend the transition beyond 21 months means that, given the UK has ruled out staying in the EU single market, a “no-deal” Brexit, or one that is harmful to the City, is just as likely as it was before the transition was agreed.

The only difference is it will happen at the end of 2020 rather than March 2019.

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