Brexit — the clock is ticking

Brexit — the clock is ticking

If Hollywood was to produce a movie about the monthly Brexit talks between the EU and UK, the script of “Groundhog Day” might serve as a good template. The two chief negotiators, Michel Barnier for the EU and David Davies for the UK, gave a press conference concluding the fifth round of negotiations.
Davis was still talking up success and asking for more flexibility, while Barnier was visibly frustrated with the slow progress. Barnier reiterated that negotiations needed to proceed further in order for him to recommend a start to all-important trade negotiations.
The EU stipulated that trade negotiations can only commence once the first phase of negotiations dealing with Northern Ireland, citizens’ rights and the financial settlement is successfully concluded. They made good progress on the first two issues, but came to a stalemate on the last.
This despite Prime Minister Theresa May’s charm offensive during her Florence speech on Sept. 22, in which she affirmed the UK’s willingness to pay a fair share of the outstanding bills. She hinted at €20 billion ($23.7 billion), which is still shy of what the EU is asking for.
She may have generated some goodwill in Florence, but it quickly dissipated after UK negotiators were unable to put a euro figure on the divorce settlement either in September or October. Instead, they came up with a complicated formula of how they want to calculate said number.

Businesses need to make decisions now. Realigning their operations, and relocating people and systems, take lead time, and we are running out of this commodity fast.

Cornelia Meyer 

Sadly, we are not dealing with fiction or a movie. We are dealing with reality. Barnier was correct when he said: “No deal was a very bad deal.” The UK economy might fall off a cliff if no deal is reached, and the EU can ill afford the situation to disintegrate further. There are too many centrifugal forces at work, from separatist movements running wild to populist parties on the rise.
Britain risks being penny-wise and pound-foolish if it does not swallow the bitter pill and come up with a tangible and fair number for the exit payment. There is too much at stake. British industry and its supply chain are highly integrated with the EU. It is imperative that goods can flow freely between the two entities. The City of London also needs solutions. So far the haemorrhaging could be contained to 1,500 jobs, but it will get worse.
The question is how much worse it could potentially get. On the day of the press conference, the European Banking Authority, which has oversight over the regulators, released a Brexit Opinion Paper saying financial institutions headquartered in the UK could only retain access to the single market if they established entities in the EU with real substance in terms of capitalization and risk functions.
Against that backdrop, businesses need to make decisions now. Realigning their operations, and relocating people and systems, take lead time, and we are running out of this commodity fast.
Meanwhile, May had a bad Conservative Party conference in the UK, and is again more anxious to please her backbench Brexiteers, so much so that she ordered Chancellor Philip Hammond to draw up a contingency budget for border and customs personnel in case no deal is reached. He was right to skip that one for the time being. This scenario would have terrible implications for the economy.
Barnier is not authorized to recommend taking negotiations to the next stage. Leaked draft conclusions of the upcoming EU Summit (Oct. 19-20) state that there was not enough progress made for trade talks to commence. But he should start “internal preparatory discussions.” Although the statement was networked with all 27 capitals, it could still change on the day.
The EU is Britain’s most important trading partner, which should in itself be enough incentive for the government to ensure progress. May wants to widen the country’s trade relationships, but India, China, Japan, Australia and even President Donald Trump’s US need to understand the dimensions of the UK’s relationship with the EU to sign any bilateral treaty.

• Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources
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