Simon French, Chief Economist
Simon French is the Chief Economist at Panmure Gordon. Prior to joining Panmure he worked for the UK Government, latterly at the Cabinet Office as Chief of Staff to the UK Government COO.
He had a central role in implementing the Coalition Government’s spending reforms between 2010 and 2014 as well as working on the Governments Welfare and Pensions reforms between 2002 and 2008.
He holds an Undergraduate and Postgraduate degree in Economics from Durham University.
The money given to the EU after Brexit isn’t all worth the same
Money, that great lubricant of deal making, now looks set to delay the start of talks on a post-Brexit partnership between the UK and the EU. This was the conclusion from the latest round of Brexit negotiations. At Thursday’s press conference in Brussels following the latest round of Brexit talks, Michel Barnier, the EU’s Chief Negotiator and David Davis, the UK’s Brexit Minister, agreed on just one issue. The UK and EU teams are miles… or perhaps that should be kilometres… apart when it comes to establishing the size of the UK’s exit bill. For businesses all over Europe the delay in clarity over the new partnership increases the chances that investment will be deferred. Expensive contingency plans are being put into action at a time when UK and EU businesses should be exploiting a welcome upswing in the global economy.
The current impasse can be traced back to the EU-27’s insistence back in April that sufficient progress on the divorce bill - alongside the future for the UK/EU land border in Ireland and the rights of EU citizens – must be achieved before a new UK-EU partnership can be considered. Having initially conceded on this point, the UK government have performed something of a U-turn and have determined that progress on both the Irish border and the divorce bill cannot be materially advanced in isolation to talks on the new UK-EU partnership.
When it comes to the monies owed by the UK to the EU post-Brexit, the UK’s approach is to calculate its liabilities based on “law and in the spirit of the UK’s continuing partnership with the EU”. It is the second part of that sentence that visibly aggravated Monsieur Barnier on Thursday. By explicitly linking the divorce settlement with the terms of the new partnership this challenged the ordering insisted on by the EU-27.
The strategy in Whitehall now appears to be an appeal direct to EU leaders – over the head of Barnier - on the folly of separating out the departure and the new partnership. UK diplomats in Europe will have their work cut out to make this case by the European Council meeting at the end of October.
It is a common misunderstanding that Brexit discussions are all a zero sum game. There will be a winner and a loser. This is wrong. The UK and the EU have genuine incentives to cooperate across a wide range of issues. The divorce bill is an outlier. It is one of the few areas that is a genuine zero sum game. What is not paid for by the UK in the latest seven-year EU budget will be picked up by EU taxpayers – or scrapped. David Davis knew exactly what he was doing when making a big play about his responsibility to UK taxpayers to minimise this bill. Davis knows the reverence with which the late Margaret Thatcher is held in some quarters thanks to her battles to secure the UK’s EEC rebate in 1984. It is an issue that, successfully handled, could hand him the Conservative Party leadership on a plate.
The politics of money passing between the UK and the EU is toxic. Serial Brexit hardliner John Redwood described the UK’s obligations to the EU as “zilch” in a typically robust intervention on Thursday. Redwood may have a point, however rolling together the divorce settlement and future UK-EU payments risks conflating two issues of very different value to the UK. The divorce settlement involves paying for its contingent liabilities and infrastructure projects of little forward value to the UK. By contrast payments for single market access after Brexit will realise tangible benefits for many UK businesses and workers.
So what are the lessons of this week’s events for future trade negotiations? Modern, open economies don’t broker trade deals as zero sum games where one country’s loss is another’s gain. As Theresa May outlined this week in Japan, and will need to do so as she tours the world promoting new trading agreements, economic prosperity hinges on cooperation.
International trade, beneficial for both parties, is supported by breaking down frictions. In practical terms this means agreeing common standards as well as legal, regulatory and measurement systems. At its heart trade involves breaking down protectionist barriers, often deliberately designed to deter the free flow of goods, services, capital and people. If UK Trade Secretary Liam Fox is to succeed in his task to broker trade deals across the world he must offer up such compromises, not conflicts.
For example in preliminary discussions over new trade deals with countries such as India, Japan, Australia and China it has been made clear to Department for International Trade officials that any agreements will require a softening of the UK’s stance on visa access for non-UK nationals.
This very compromise risks unearthing similar anxieties to those that accompanied the UK’s adoption of the EU’s free movement of workers. The government must make a better case of showing deals in the round – a more porous flow of people in return for the benefits of larger markets for UK goods, services and capital.
And so to the big prize for British trade negotiators: a trade deal with the United States. In The Art of the Deal, a book documenting Donald Trump’s approach to business, he reflected that “money was never a big motivation for me, except as a way to keep score. The real excitement is playing the game.” And so it is with the game being played out between Davis and Barnier. It is a game being conducted in front of a gallery of 500 million EU citizens - all watching for signs of who has won, and who has lost. How that game is conducted that will be watched by a much larger global audience. It is an audience that will have a significant say in the success or failure of Brexit.