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September 29, 2020

Europe

UK/EU: Towards yet another round of last-minute drama

BY Carsten Nickel

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The European Commission’s deadline for the UK to retract the most controversial parts of its internal market bill is approaching this week, but the focus is on another round of post-Brexit trade talks. In a meeting of the joint committee governing the transition period, Brussels insisted that the UK change course on the internal market bill, which the UK government refused to do. But as discussed in the past, the bill’s true impact depends largely on the degree of progress made in the future relationship talks this week.

In this sense, the Commission’s late-September deadline has been answered by the UK side, but only implicitly. The government refuses to retract the bill, but at the same time, it does not only continue its future relationship negotiations with the EU but has lately been sending much more positive signals about these talks. In other words, if the UK’s goal was to get the EU to pull the plug on the talks, this has not happened; instead, perceptions of a renewed momentum leave the opportunity intact that a trade deal might address some of the issues related to the internal market bill.

Specifically, and as previously highlighted, a zero tariffs/quotas deal would at least somewhat reduce the complexity regarding items that might be “at risk” of being exported into the single market: if neither quotas nor tariffs apply, this would leave product checks as the main hurdle, but probably reduce the scope of customs declarations required for exports from Northern Ireland, including into the UK. A similar logic applies to state aid, where the definition of some joint basic standards in the future relationship talks might mitigate the fallout from any right the UK government might try to reserve to make changes to domestic sign-off procedures.

The new optimism around the trade talks, meanwhile, comes after days of warnings regarding an imminent collapse of the negotiations. This is yet another reminder not to rush to conclusions about potential worst-case scenarios. Instead, the Brexit saga remains an extremely slow-moving story which requires elements of last-minute drama at every major iteration. This should be kept in mind ahead of the potential start of intensive talks next week, in the run-up to the mid-October European Council. In the meantime, the EU might interpret this intensification of talks as an indication that some of the problematic substance of the internal market bill can still be healed through a trade deal – despite the initial September deadline.

Regardless of whether there will be an agreement or no-deal, however, the magnitude of the regulatory challenges ahead in the years to come became obvious again in recent days. EU regulators have labelled London-based clearing houses as vital for the bloc’s financial system. During a post-transition grace period until mid-2022, they will still be able to operate from London. But the trade deal currently under preparation does nothing to address related questions of financial services market access and regulation. If anything, the EU might be tempted to use its unilateral powers over regulatory equivalence as a power tool in a no-deal scenario. But even with a zero tariffs/quotas deal in place, competition for lucrative parts of the (financial) services industry will be a major variable in the regulatory talks that will inevitably have to follow.