Thursday, June 27, 2019

As Brexit negotiations have stalled, tensions between the EU and Switzerland are ramping up

Published in The Daily Telegraph

Since 2014, Switzerland and the EU have been trying to amalgamate their existing 120 bilateral treaties into a single agreement. Yet the Swiss refused to concede to EU terms without clarification on certain issues; in response the EU now looks likely to cut off Swiss stock exchanges from the Single Market within days in retaliation for their failure to ratify the treaty quickly enough. 

As a leak last week revealed, their reasons for doing so are, quite transparently, to make an example of Switzerland “in what is probably the decisive phase regarding Brexit”, according to the commissioner in charge of the talks. In other words, Switzerland, a member of EFTA and Schengen, a country that has paid billions into the Brussels coffers over decades, and enjoyed a largely amicable trading relationship, has become mere collateral in the EU’s desire to cow Britain into submission. 

But the Swiss are refusing to back down, threatening to retaliate by banning EU stock exchanges from trading Swiss shares. About 30 per cent of trading in Swiss blue-chips takes place in London. Opposition is not only coming from the right-wing populist Swiss People's Party, but also from trade unions. The Swiss Parliament has instructed the government to return to the negotiating table. 

For the EU, these problems date back to the 1980s, and an initiative by then-Commission President Jacques Delors, who inspired the legendary Sun headline “Up Yours Delors!” following one of his clashes with Margaret Thatcher. Delors, keen to design a uniform system to deal with neighbouring “third countries”, proposed to grant them full access to the single market, but only in return for adopting all the EU’s rules and standards. Lack of a veto over these rules inspired Jens Stoltenberg, the PM of Norway, which did adopt this arrangement, to brand his country a “fax democracy”. It didn’t take sovereignty-loving Swiss voters long to figure this out, and they rejected a similar arrangement in a referendum in 1992.

Back then, the EU respected this outcome and went on to negotiate a package of bilaterals, granting the Swiss selective market access in return for selective rule-taking. Today, however, the EU dismisses this arrangement, which closely resembles the government’s “Chequers plan” for the future EU-UK relationship, as “cherry picking”.

There are many parallels between Brexit and the EU-Swiss relationship, and in fact the British government should be ramping up coordination with Switzerland, to counter the EU’s attempts to increase its regulatory power on the back of disrupting business.

The proposed framework agreement between the EU and Switzerland contains two issues that would be troubling not just for Swiss politicians, but could be rejected in the Swiss public referendum which will follow if their government concedes to the EU terms. First of all, the agreement introduces an arbitration mechanism, with a role for the European Court of Justice, into the Swiss-EU relationship. Until today, that wasn’t the case - all previous disputes were resolved by politicians. The arbitration mechanism anticipated in the framework agreement is effectively the same as that agreed by Theresa May with the EU in November. The Swiss government seems to have conceded on this issue, but whether it will survive its own direct democracy is another question.

Secondly, the EU favours “dynamic alignment”, which means that the Swiss would be forced to accept updates of the EU rules they have aligned with in return for market access. It is a long-standing EU frustration that this wasn’t negotiated in the 1990s. The reason was of course the deep Swiss attachment to democracy and suspicion of agreeing to accede to EU rules that aren’t properly understood.

All in all, the Swiss-EU relationship has been so smooth that the EU’s ultimatums and threats to restrict trade look disproportionate and uncharitable in the extreme. Switzerland has contributed billions to EU projects, and granted free movement, so that today almost one in four inhabitants of Switzerland does not have Swiss nationality, 80 per cent of which are Europeans. How can the EU treat a friendly neighbour in this way? 

In 2018, eleven EU countries, including Germany and the UK, opposed the EU Commission when it suggested cutting off access for Swiss stock exchanges. Now the Commission is getting its way, ignoring warnings from Business Europe, the confederation of European industry, not to escalate. 

One EU diplomat told the FT that because “we’re not going to treat the Brits any worse than Switzerland”, hinting that failure to punish Switzerland with loss of market access for refusing to bow would be seen as a dangerous precedent. Though Switzerland will likely manage to mitigate the damage through its protective measures, it would signal that the EU is willing to restrict market access when it fails to increase its regulatory control over a trading partner.

Given the deep seated love of self-government in both Switzerland and the United Kingdom, two of the oldest democracies in the world, self-destructive attempts to hurt trade in a bid to gain more regulatory control will only fail. When faced with a European country that does not seek to belong to the customs union or single market, yet nevertheless enjoys a smooth trading relationship with the bloc, the EU should not seek to restrict the flexibility that has driven prosperity on both sides, over decades. Instead, it should channel some of its past pragmatism in approaching its future relationship with the United Kingdom.

Thursday, June 20, 2019

What are the chances of a Brexit deal in case Boris Johnson becomes the new British PM?

Published on The Daily Telegraph

It seems almost inevitable that Boris Johnson will become the next Prime Minister of the UK, tasked with delivering Brexit. Boris may not be universally loved in Brussels, given his role in swinging the referendum vote towards Leave, but it would be wrong to assume that concluding a Brexit deal has become less likely as a result.

In many negotiations, it takes a hardliner to close the deal. Theresa May, a Remainer, would always have had a much harder time selling concessions to the British public than a Brexiteer would. For Boris, there are two options: either he goes full-on Trump or he chooses a more diplomatic path. It is not obvious what will work best with the EU. Jacob Rees-Mogg, a key ally of Boris, summed up the basic idea of a “Trumpian” strategy well, when tweeting: ‘To misquote Vegetius "If you seek a deal prepare for no deal."’

Contrary to the popular narrative, the EU does seem willing to compromise - at least a bit. Boris is keen on delivering the “Brady amendment”, the only thing UK MPs could agree upon, apart from rejecting no-deal. This entails renegotiating the Withdrawal Agreement relating to the Northern Ireland backstop, an arrangement whereby the UK would remain under the EU’s customs regime until further notice, and replace it with ‘alternative arrangements’.

From talking to diplomatic sources, the Telegraph’s Europe Editor Peter Foster, has gathered that a time limit to the backstop, is “not beyond realms of possibility if we're talking five to seven years [and if there is a] clear baked in Parliamentary majority as price of a deal.” Foster however thinks that the Trumpian approach would fail, as “a demand to ‘bin the backstop’ will be rejected outright and very quickly scupper any chance of a reset”.

In a way, the question isn’t even which approach will appeal to the EU. The real question is what will appeal to Ireland. A senior French official recently stated that "only Ireland can say the backstop is no longer necessary, but that’s not the case.” So when push comes to shove, the EU will ask the Irish what they think.

Following the increased discussion of a no-deal Brexit during the Conservative leadership contest, Irish Taoiseach Leo Varadkar said, “to me, no backstop is effectively the same as no deal”. Will Varadkar and the Irish political class respond positively to a Trumpian approach or will they dig in deeper instead?

Well, we can’t know for sure, and even if Ireland were to concede to a time-limited backstop, discussions would only resume in a few years time. This is why it’s so important to have a plan B, to prevent a traumatic no-deal Brexit.

While it’s true that the effects of “no deal” can and will be mitigated, given how both sides have a clear interest in doing so, it would spark a terrible blame game. French President Emmanuel Macron would no doubt blame the UK when confronted by French fishermen angry over the loss of access to British waters. The UK, meanwhile, would blame Ireland and Ireland would blame the UK. Everyone would be right to blame each other, but as a result of this, there would be less political capital to agree the deals necessary to mitigate no-deal.
A plan B could therefore consist of proposing to negotiate “alternative arrangements” to the backstop immediately. Both sides agree that the backstop should be replaced by something else at some point, so why not try to agree it now, so the UK can leave the EU, knowing for sure that it won’t have to enter the backstop?

So far, the Irish government has been very sceptical about the possibility of alternative arrangements preventing a hard border with Northern Ireland. Then Christian Bock, the head of the customs department of Switzerland, which is outside of the EU’s single market and customs union, has told British MPs at a hearing that he thinks an “invisible border” on the island of Ireland is “possible”.

The EU will of course come up with shaky legal arguments that it wouldn’t be able to talk trade before the exit date, even if Jean-Claude Juncker himself suggested just that in December. Then if the EU accepted to talk about future trade, Boris could claim that an extension of UK membership is warranted.

The actual “alternative arrangements” are likely to entail a lot of concessions from all sides. The UK may need to concede to some regulatory alignment, perhaps by Northern Ireland alone, which would cause some extra regulatory checks in the Irish Sea. Ireland may need to accept that Northern Ireland will simply also leave the EU’s customs union and the other EU member states would need to tolerate that Ireland and the UK will not bother to impose burdensome border checks. If goods entering the Irish Republic from Northern Ireland were compliant with single market standards, there isn’t much for the EU to fear, beyond the loss of a tiny bit of tariff income, which Ireland and the UK could compensate for.

Fundamentally, if we want to protect the extensive trade between the world’s fifth biggest economy and the world’s largest trade bloc, there is no alternative to perpetual negotiations and flexibility. Even when the EU-UK divorce and future relationship have been sorted, negotiations will remain necessary. If market access were granted on the basis of regulatory alignment, any regulatory changes would once again trigger negotiations. That is certainly the case in the stormy relationship between Switzerland and the EU. The EU’s relationship with post-Brexit Britain will be no different.