EU must avoid a ‘punch up’ over trade deal with UK

Neither the European Union nor the United Kingdom can afford to be too aggressive in their forthcoming trade negotiations. They will need each other’s cooperation bearing in mind that the EU is the UK’s single largest trading partner. It is imperative for the two teams to find a way to settle disagreements over how the UK’s finance industry, in particular, can do business with the bloc.
Incoming Bank of England (BoE) governor, Andrew Bailey, who is currently head of the Financial Conduct Authority said that it would be “hard to imagine” the UK not being granted equivalence by the EU after the post-Brexit transition period ends in December. Appearing before a House of Lords committee recently, Bailey said that the bigger challenge would be establishing how the two sides deal with disagreements.
Under current rules, the EU can grant equivalence to countries which it deems to have a regulatory framework as stringent as its own, but can unilaterally withdraw this with only 30 days’ notice. “You would want to have a mechanism to say OK, let’s sit down and talk about what we’re doing here,” said Bailey, who is to take over from Mark Carney at the BoE next month.
“If that ended up in a sort of metaphorical punch up every time and a threat to withdraw equivalence, that process would just not work properly.” Shortly before his resignation last week former chancellor Sajid Javid pushed for the UK’s rights to diverge from EU financial services regulation as part of a post-Brexit trade deal based on an enhanced form of equivalence. BoE deputy governor Sam Woods, at the same Lords hearing, said the risk that the EU could withdraw equivalence would deter cross-border activity.
Woods said he hoped something “more durable” could be negotiated, adding the UK should be “concerned” about the possibility of the bloc taking a “mercantilist” approach to regulatory disputes in a bid to grab business from London’s financial district (known as the ‘City’).
However, Woods said he was “cautiously optimistic” that the EU will grant permission for London’s clearing houses to continue to process trillions of pounds of derivatives for EU customers.
The London Stock Exchange’s LCH unit holds positions worth £57 trillion on behalf of clients in the bloc, but will need permission to continue clearing for them after the transition period ends. It came on the same day the European Parliament called on chief EU negotiator Michel Barnier to push the case for “dynamic alignment” of cross-border rules with Britain.
A resolution passed by MEPs said that future competition with the EU must be “kept open and fair through a “level playing field” on issues including the environment, tax, and state aid.
Prime Minister Boris Johnson last week explicitly ruled out tying the UK’s regulatory framework to future rules and standards made by Brussels.
Brexiteers such as former trade secretary Liam Fox said dynamic alignment would be “incompatible with the concept of Brexit”, as one nation is effectively still bound by the regulations of the other.
Barnier responded to the former chancellor’s call by saying British politician should “not kid themselves” that Brussels will grant a special position to the City. He said: “There will not be general open-ended ongoing equivalence in financial services, nor other management or finance agreements with the United Kingdom.”
The European Parliament’s mandate, which is based on Barnier’s recommendations, now needs to be signed off by EU’s 27 countries, with trade talks expected to begin early next month.
Signs of how officious and tough the two sides could get in their trade deal negotiations have already sprung up. The European Union’s executive served a reminder last week that Britain is not yet free from its laws, demanding that it change transport levies or face proceedings in front of the European Court of Justice. For now, Britain remains in a status-quo transition period until the end of 2020.
“EU law continues to apply in full to the UK for the duration of the transition period. In particular, the UK remains subject to the EU’s enforcement mechanism, such as infringement procedures,” the European Commission said.
It added that Britain’s road charges for heavy goods vehicles violated bloc rules, including by discriminating against foreign hauliers. Britain has two months to comply with the EU’s directive on road charging, failing which the Commission may refer the matter to the European Court of Justice.
(The writer is our foreign correspondent based in the UK. He can be reached at