Please see below an interesting article received from Invesco earlier this afternoon, which provides an insight into the intricacies of the UK’s relationship with the EU following the long-awaited agreement of Brexit terms on Christmas Eve.
Almost four and a half years to the day since the Brexit referendum took place, the terms of the future relationship between the UK and the European Union were finally agreed on Christmas Eve. Having spent the final months of the year wrangling over provisions relating to the level playing field, governance and enforcement mechanisms, and fisheries, both sides proclaimed victory as the legal text on these issues was finally settled.
In Downing Street, Prime Minister Boris Johnson declared that the UK had delivered on the referendum verdict by taking back control of its borders, laws and waters, ending the jurisdiction of the European Court of Justice and gaining the freedom to set its own rules and standards. In Brussels, Commission President Ursula von der Leyen said the deal had safeguarded the integrity of the EU’s Single Market and the four freedoms of people, goods, services and capital, demonstrating that having left the EU the UK would no longer be able to enjoy the benefits of membership.
In reality, the verdict on which side was better able to secure its political priorities in the Agreement, and at what cost, will take many months, if not years, to reach. While agreeing a comprehensive trade deal in just ten months was a significant achievement for both sides, the full implications of the 1,246 pages of text and their impact on diverse business models on both sides of the Channel will only become clear over time: even the most obvious physical signs of separation – at the Dover-Calais border – have yet to manifest themselves given that haulier traffic has been much lower than normal during the early days of the year.
But what is clear is that, by avoiding a ‘no deal’ outcome, the UK and the EU have also avoided the risks of an acrimonious break up and blame game that could have soured relations between the two sides for years to come. Instead, they have a platform on which to build – should both sides choose to do so – in the coming years and decades.
Yet despite the last-minute Agreement, significant questions about the future relationship remain. What will be the key drivers of the UK-EU relationship in next years? Where will the main points of friction between the two sides emerge? Will the Agreement stand the test of time or require significant revision? Will, as President von der Leyen optimistically declared, both sides be able to “leave Brexit behind us”; or will the UK join Switzerland as a country outside the EU but in almost constant negotiation with its near neighbour?
It seems clear that on the UK side, the Agreement will not end the debate on Brexit. The Conservatives are already road testing messaging for the next election on the basis of an appeal to “keep Brexit done”, playing to concerns that Labour, should they regain power, would seek to forge a closer relationship with the EU in the future. Former Prime Minister David Cameron’s gambit to try to finally put the EU question to bed may instead have kept Pandora’s box wide open. Britain’s relationship with the EU looks set to continue to be a polarising issue in UK politics, and something that the devolved administrations will seek to play to their advantage in relations with Westminster. By comparison, the EU will be keen to leave Brexit, as a distinct problem to be solved, well behind it; but it will fuel the EU’s growing emphasis on strategic autonomy, requiring a delicate balance to be found between wanting to keep the UK within its area of influence while at the same time arguing for self-sufficiency in areas where it sees itself in competition with the UK.
One bellwether of this approach is likely to be the EU’s stance towards the UK on financial services. Despite the importance of financial services to the UK economy, and the cross-border integration of industry operations in Europe, the financial services section in the Agreement contains just eight articles, covering little of real substance. With the EU keeping the UK in suspense on a range of potential equivalence determinations, it remains to be seen whether the two sides will remain aligned on major regulatory issues such as sustainable finance, financial stability and protections for retail investors. The Governor of the Bank of England, Andrew Bailey, has argued that the UK cannot be an automatic rule-taker from the EU. But where might the UK seek to use its freedom to diverge to forge a separate path; and what would be the EU’s likely response?
Finally, in a world of increasing polarisation and renewed threats to international trade, market stability and security, will the lack of a framework for cooperation on foreign policy, security and defence cooperation in the Agreement significantly weaken the UK and EU’s ability to defend their interests on the international stage? How might actors such as Russia and China seek to exploit the UK’s exit from the EU; and will Europe’s collective influence in Washington now be weaker than before?
Although the UK and EU are now separate entities, they now have the opportunity to move forward together as allies in a productive and positive way. Please check in again with us soon.
Stay safe.
Chloe
13/01/2021