Side-lining Brussels, two top members of the British cabinet were in Berlin on Wednesday to talk trade.
The visit of Philip Hammond and David Davies culminates in their address of the Die Welt Economic Summit, where they would have the opportunity to address the German economic and political elite. The Financial Times also claim there were several meetings arranged prior to the event. Davis would meet politicians, Hammond would meet business leaders.
The message is one: Britain wants a bespoke deal. Berlin’s answer is clear: there will be no bespoke deal.
The spokesman for German Chancellor Angela Merkel, Mr. Steffan Seibert, told the press on Wednesday that Berlin will not break ranks with the EU 27. He made clear that no one in the German cabinet would talk to the British ministers.
Set menu versus a la carte
The UK insists that talks on trade cannot be reduced to the existing policy frameworks – Norway, Switzerland, Canada, and Turkey – but should reflect the uniqueness of the UK. The argument put forward is that the two parties begin from a position of complete harmonization and they only have to negotiate scope for deviation.
Brussels objects to that framing of the challenge at hand. The UK will leave the EU and must choose which of the existing relationships it wants.
The negotiation continues to be about process rather than substance. In an article to Frankfurter Allgemeine, the two ministers admitted that the UK cannot have the same relationship it has as a member. But, they dispute that access to the Single Market for goods and services requires membership of the Customs Union.
The EU 27 are committed to avoiding bilateral talks. Brussels offers a “set menu” of relations that the UK can have, as it fears than any deviation will have a spill over to relations with other partners. In sum, it will be hard to offer Britain something that Brussels is not willing to extend to others.
Still, the British government feels entitled to a relationship that is bespoke.
“It makes no sense to either Germany or Britain to put in place unnecessary barriers to trade in goods and services that would only damage businesses and economic growth on both sides of the Channel,” they have argued.
Berlin’s response is clear: there will be no “cherry picking” and no bespoke deal. What is at stake is not merely the relationship with the UK but the integrity of the EU.
British calls for reciprocity
The UK has trade objectives that do not fit existing frameworks, most prominently passporting rights for its financial sector. No third party has access to the Single Market’s services industry, which make up for 80% of the UK’s economy.
The European Commission’s chief Brexit negotiator, Michel Barnier, made clear on Tuesday that the UK cannot hope for passporting rights for its financial sector. The Bank of England has made unilaterally clear that it would not require from European subsidiaries operating in London to set up new UK-based companies, such as Deutsche Bank.
The argument is that the UK is operating on the principle of reciprocity, although Brussels reiterates that this is a multilateral framework that the UK is choosing to leave and must bear the cost. In German terms, there cannot be “cherry picking.”
“We must re-double our collective effort to ensure that we do not put that hard-earned financial stability at risk, by getting a deal that supports collaboration within the European banking sector, rather than forcing it to fragment,” Philip Hammond and David Davies wrote in an article published in anticipation of their visit on Wednesday.
The pressure is on London
London has already agreed to pay a divorce bill to the tune of €50-to-67 bn, addressing a whole in the EU bidget until 2022. Meanwhile, overall growth in the UK is slow. Quarterly growth in the third quarter was 0,4%, which is below initial projections of 0,6%.
The Bank of England estimates that 10,000 job could leave the UK by 2019, while other consultants believe the number could be seven times as high.
The British economy is underperforming, mostly because of the Brexit process. For many companies there is lack of clarity for the future, and, according to the British Quarterly Economy Survey (BCC), they are reluctant to invest as a result.
That is especially the case for services, that is, a sector that is already facing recruitment challenges. And although there is a shortage of labour, there is no raise in wages that would make the market more attractive. To the contrary, inflation is above 3% with real income dropping.
The bright side of this story is British manufacturing, which has seen a surge in exports boosted by the pound’s devaluation.