Brexit News, Member News

Weekly Vulcan View: EU Developments

KEY EVENTS THIS WEEK:
BREXIT
 
Short-lived UK cabinet unity on transition deal crumbles as calls to end free movement after Brexit re-emerge
 
Any hope held by the EU27 capitals last week that the British government was finally beginning to come to an agreed consensus of a post-Brexit transition deal were quickly dashed over the past few days as various ministers and Downing Street itself committed to ending the free movement of EU citizens after Brexit. According to a spokesman for the British Prime Minister, it would be wrong ‘’to suggest that free movement will continue’’.
 
This U-turn comes quickly after last week when various Eurosceptic ministers such as International Trade secretary Liam Fox indicated that they were prepared to accept some sort of transition deal, an exit route that has been heavily advocated by the Chancellor Philip Hammond. The Home Secretary, Amber Rudd, even added that this post-Brexit regime would have a relatively liberal migration policy. This apparent unity was temporary however, as Mr. Fox last weekend denied that any freedom of movement between the UK and EU would continue during a transition period after Brexit. 
 
It is highly unlikely that the EU would accept any form of transition deal that allows the UK to remain in the single market and customs union while refusing to accept the free movement of people. Britain’s ever changing position will only add to the high levels of frustration currently felt in Brussels.
 
The bloc’s lead negotiator Michel Barnier has already voiced his dissatisfaction over the progress of negotiations so far. Speaking to ambassadors to the EU, he said that the British government had so far been unable to provide sufficient clarity on its positions during the last round of talks, adding that a post-Brexit trade deal was looking increasingly unlikely. London’s latest reversal only seems to confirm Monsieur Barnier’s stark warning.  
 
40,000 UK banking jobs at risk from consequences of Brexit
 
Fears within the City of London heightened this week after a report from the consultancy management group Oliver Wyman estimated that a hard exit from the EU could see British banks lose 40,000 jobs and face increased costs of up to 4%. With stark divisions emerging once again within the British cabinet over what kind of transition or exit deal they want with Brussels, this report has highlighted how damaging a hard Brexit deal could be to the UK financial sector.
 
The report, entitled ‘’One year on from the Brexit vote’’, makes for bleak reading for British banking officials. It warns that as London becomes less and less suitable to provide services for the Euro financial system, such as clearing, it ‘’could move around 35,000 – 40,000 jobs from the UK to the EU in wholesale banking alone’’. However, the report also adds that the movement of jobs could be ultimately greater than this prediction if management teams find further commercial reasons to relocate other activities to the continent to encourage collaboration amongst banking staff, while also maintaining close proximity to clients.    
 
Britain’s exit from the Union may have additional consequences for banks, the report observes. Some functions that only previously existed in London will have to be duplicated in their EU subsidiary. A doubling of such functions ‘’could add 2-4 percent to the annual cost base, equivalent to around USD 1 billion across the industry’’. With banks already struggling, this latest report will heighten the financial services sector plea to the UK government to negotiate a stable long-term transition deal as it prepares to exit from the EU.    
 
Bidding race begins for relocation for London-based European regulators
 
Cities across Europe have launched their bids to become the new host city for the European Medicines Agency (EMA) and the European Banking Authority (EBA). Both currently reside in London but Brexit has led to relocation plans being put in place. According to a statement from the Council of the European Union, 19 EU countries have made submissions to take the EMA, while only eight have put in bids for the EBA. Six countries, including Ireland, have made double bids in an attempt to lure both regulatory bodies.
 
Last Monday was the deadline for submissions and four months of lobbying are expected ahead of the eventual decision in November. The lucrative European regulators would provide a significant windfall for the winning cities, bringing in jobs, tax revenues and greater influence in either health or finance policy.
 
Candidate cities have put in glossy promotional pitches and wheeled out political heavyweights to voice their support. The Commission and Council will vet each application before making its initial findings in October to the Committee of Permanent Representatives in the EU. After which, the EU27 will then choose a winner through a complicated scoring system in up to three rounds of secret voting.   
 
 
EU-US RELATIONS
 
EU firms set to suffer as Trump signs Russia sanctions
 
US President Donald Trump on Wednesday officially signed into legislation sweeping new sanctions against Russia that will have widespread ramifications for Europe’s biggest energy firms. Complaining that the bill was ‘’seriously flawed’’ and that it undermined his ‘’exclusive constitutional authority’’ on foreign relations, the President nonetheless put into effect new sanctions against Russia that were put forward by the US congress.
 
Mr. Trump’s criticisms of the bill was backed by both US and EU energy groups who argued that the new sanctions could cause unintended harm to billion dollar projects. Doubts now have been raised over the €4.75bn funding by five major EU companies for Gazprom’s Nord Stream 2 gas pipeline from Russia to Germany. The new law threatens to penalize companies that invest in big Russian energy projects or help it to sell arms.
 
Although Brussels believed that last week’s last minute lobbying from EU officials managed to water down some of the more damaging sanctions, the European Commission President Jean-Claude Juncker said in an interview this week that the Union was prepared to ‘’launch counter measures within days’’ if European companies were affected by the new sanctions.
 
These views were echoed by the German Foreign Affairs Minister Sigmar Gabriel who asserted that Berlin would not accept any new US sanctions against Moscow that target EU companies. Now that the sanctions have officially been signed into effect, attention turns to Brussels to witness whether or not it follows through with such actions.
 
 
GERMANY ELECTIONS
 
Merkel’s conservatives soar in polls as election looms in eight weeks
 
The German Chancellor’s Conservative bloc, the CSU-CDU, have staked a significant lead in the polls ahead of the country’s Federal election on September 24th. Achieving a 14 point lead ahead of its nearest rivals, the Social Democrats (SPD), Angel Merkel’s party now stands at or near 40 per cent in the latest opinion polls, positioning them close to the 41.1 per cent they secured in the 2013 election.
 
Surveys from only a few months ago polled the SPD and the CSU-CDU at near equal level after the SPD chose the former European Parliament President Martin Schulz as its new leader. However, this temporary ‘’Schulz effect’’ boost for the Socialist party was short-lived, allowing Ms. Merkel’s conservative alliance to reclaim its formidable lead.
 
The question now being posed is not over whether the Chancellor will secure her fourth term in power, but rather which party will the CSU-CDU favour as its junior coalition partner. With the election eight weeks away, stumbling blocks do exist for the German leader. Brexit negotiations, an increasingly fraught US-EU relationship, the migration crisis and the growing scandal around German car manufacturers collaborating in a cartel manner have the potential to trip up Chancellor Merkel. Nonetheless, we predict the CSU-CDU to top the polls come September and  thus re-instate Angela Merkel as German Chancellor.

 

Compliments of Vulcan Consulting, a member of the EACCNY