8th May 2017
Who would have thought that an article in a German newspaper, in German, and not appearing online for a long time, would have caused such a furore in the UK?
Theresa May began by calling the article in the Frankfurter Allgemeine "Brussels gossip" but the next day came out all guns blazing, claiming that the EU was "interfering" in the UK General Election.
But what are the lessons to be drawn from this?
It should not come as a surprise that the EU leaks information, but it is surprising that the UK is surprised. Expect leaks to take place regularly on both sides from now on, particularly in this early stage of the negotiations when both parties are feeling themselves out and looking for weaknesses.
Compared with the opacity of the discussions around TTIP (the bilateral EU-US trade deal), the Brexit discussions look like being very public debates - and this can present a problem for lobbyists. This is because what marks Brexit out from other trade and international negotiations is that it has become so political, with many politicians risking their political capital and careers.
There is a risk that industry positions could be made public, on purpose or inadvertently, as a result of leaks to the press.
You should therefore proceed with caution and be prepared for some publicity around your positions, in the worst case scenario.
Lobbyists need to ensure they don't become collateral damage - keep your contacts close, ensure the rest of your business is aligned on your messages, and be prepared in case your positions are aired in public. Don't leave your position papers on the Brussels metro!
If you have any suggestions about the Brexit Bulletin or want to find out more about a specific aspect of Brexit, please do let us know. Please visit the Grayling Brussels website, follow us on Twitter @TheEULobby, and don't forget to check out our Brexit Papers and Timeline.
This weeks contents:
Sectoral Insight -
UK Highlights -
EU Highlights -
Member State Highlights -
Highlights from the US -
Sectoral Insight: Food
Contributed by Sévrine Pereira Teixeira, Consultant, Grayling PA
UK AgriFood sector increasingly worried about Brexit prospects
The policy and economic impact of Brexit on the food and drink industry is likely to be damaging on both sides of the Channel, but particularly for the UK as it is heavily reliant on food imports from the EU such as fruit, vegetables and meat (especially pork and chicken). 27% of the food consumed in the UK comes from the EU. Brexit could also be detrimental for UK exporters, as the country exports the majority of its agrifood products to the EU, particularly Ireland, France and The Netherlands.
In fact the UK’s largest food companies, including Sainsbury’s and Marks and Spencer, have expressed concerns about a ‘hard’ Brexit and have called on the Government to negotiate the best possible access to EU markets. For UK food manufacturers the best scenario would be for the EU and the UK to agree on a trade deal to allow tariff-free trade, an outcome that is by no means guaranteed. When it comes to agricultural products the EU could settle for Tariff Rate Quotas, according to which duties are lowered or removed for certain quantities, and anything above these quantities is charged at the normal tariff. In any case, a trade deal will be absolutely critical for the UK, as a recent House of Lords report indicates that leaving the EU without a trade deal in place could endanger 97% of British food and drink exports.
However, trade is not the only issue the UK food sector is facing. The UK’s food and drink industry is very reliant on EU workers with more than 250,000 EU citizens employed across the agrifood industry. If Brexit leads to restrictions on migration, the sector may face a shortage of workers and have to find new recruitment channels and practices, with the probability that labour costs will increase.
Higher import costs combined with rising labour costs will most likely be passed on to consumers, which could negatively impact sales.
The Grayling view
It seems clear that the agrifood sector will be forced to pay a heavy price for Brexit. With trade tariffs and access to labour at stake, the entire UK food industry is likely to be affected. The repeated comments from the UK Prime Minister suggesting that leaving without a deal would be better than a bad deal is particularly worrying for the food industry, for which the absence of a trade deal is the worst possible scenario. UK food companies have started to actively lobby for a free trade deal with the EU and to maintain the free movement of workers. Whilst UK agrifood manufactures have started their advocacy campaign in the UK, it is highly recommended that they simultaneously engage with the decision-makers in Brussels and in the Member States who will also be central to the conclusion of a trade deal.
The highlights from the UK
Constructing the domestic policy response to Brexit
Theresa May and Nick Timothy (Joint-Chief of Staff) came into Downing Street promising to put an active industrial policy strategy (IPS) at the heart of her administration. This intention marks a clear departure from the policy of the Cameron Government and will be targeted at rectifying the UK’s entrenched productivity deficit. Internationally, the UK performs poorly in relation to other countries, with a British worker taking five days to complete the same amount of work that his or her French counterpart can in four.
The Government has clearly stated that this new regime will not herald a return to 1970s-style picking of ‘industrial winners’. Prior to January 2017, Downing Street’s concept of IPS was purely ethereal, with any details based on rumours. Some clarity has since been provided by the Government’s Green Paper, which began a conversation between Government and businesses about productivity, investment, skills, and regional growth. Now coming to a close, the initial consultation gave businesses a chance to input into the industrial strategy proposals which will now be launched in the next Parliament following the 8 June General Election.
The Grayling View
When the launch of the IPS takes place we can expect a focus on improving connectivity across the country and increasing incentives for businesses to relocate to the regions. However, these are long term measures that rely on big infrastructure projects like the high-speed train project HS2 being completed before their full effect will be realised.
The concern for the May Government is that the IPS, without concrete proposals, may increasingly appear as empty rhetoric. This was reflected in the CBI’s recent call for a new productivity regulator. The message from business is clear: the drive to address Britain’s productivity deficit needs to be at the heart, not only of the industrial strategy, but of everything the Government does. Getting the IPS right will form an essential part of the UK’s domestic policy response to Brexit, which will partly determine whether it makes a success of its departure.
Of the four nations of the UK, Scotland was the biggest backer of Remain in the EU referendum, with all 32 council areas and 62% of voters opting to stay. Scotland is closely tied with the EU, and the prospects of a "hard" Brexit raises many concerns for Scotland’s economy.
Losing access to the Single Market presents a raft of challenges for Scotland’s Higher Education sector, which is significantly exposed to Brexit and is one of the main employers in the country. Freedom of movement restrictions will make it harder to attract students from the EU, as well as affecting the ability to hire European academics. Many in the sector fear that Scotland could lose its reputation for cutting edge research, as 23% of Scotland’s research staff are from the EU. Scotland’s farming and construction sectors, both dependent on substantial migrant labour, have also voiced concerns that Brexit could lead to a skills shortage. However, some sectors, such as Scotland’s fishing industry, have been more positive about the effects of Brexit.
Aware of these concerns, First Minister, Nicola Sturgeon previously set out a proposal to the UK Government that would keep Scotland in the Single Market through the European Free Trade Association (EFTA) and the European Economic Area (EEA). However, given May’s determination for a single UK Brexit deal, it was always likely to be rebuffed.
The refusal to involve Scotland in the negotiations, further bolstered the SNP’s argument that Scotland was being dragged out of the EU against its will. Emboldened, Sturgeon is openly campaigning for independence, citing the SNP’s manifesto commitment to hold a second referendum in the event of Brexit.
Despite a vote in favour of a referendum in the Scottish Parliament, Theresa May has ruled out the possibility until the UK has formerly withdrawn from the EU. However, the prospect of a second referendum is dominating the General Election campaign in Scotland, and will continue long after June 8th.
The Grayling view
Whilst many sectors have reason to be concerned over a Hard Brexit, many are also nervous of independence being touted as a solution to this problem. If anything, Scottish business has increased its aversion to risk following Brexit, making it unlikely that they will endorse yet more uncertainty for the economy.
In looking to reduce the damage to their sector, organisations should be engaging with Government at both Westminster and Holyrood. Negotiations will be led by Westminster, but it is important to note that the Scottish Government could expect to gain new devolved powers among those returned to the UK as a result of Brexit, irrespective of independence. More generally, both Governments will be looking to reduce the impact of Brexit, and given the volume of different interests, it is important that organisations are engaging with the relevant people in Government.
If the SNP’s case for independence rests on avoiding a damaging Brexit, the party must consider how a pro-European position could risk alienating the 14% of the Scottish population that voted for independence but also for leaving the EU. The General Election may provide a gauge of where Scotland stands on independence, but the issue of a second referendum will continue to drag on throughout the Brexit negotiations.
EUnified-27 move quickly to the fine details of their Brexit position
In the end, the European Council Summit on 29 April that had been billed as "extraordinary", in fact provided very little of the anticipated fireworks. The leaders of the EU-27, in an emphatic display of unprecedented unity, adopted the EU’s negotiating guidelines before the first coffees had been drunk.
The negotiations, with the eventual begrudging acceptance of the UK, will be conducted in two consecutive phases. Agreement will first be sought on a withdrawal agreement covering citizens’ rights and the UK’s outstanding financial obligations. Theresa May has indicated that citizens’ rights could in her opinion be settled in June, whilst her German sparring partner Angela Merkel would prefer the first phase to be concluded in the Autumn. If this were to occur, than discussions could begin on the future relationship agreements as well as any transitional agreements that may be considered necessary.
In a sign that the EU wants to get on with negotiations proper, the European Commission published its draft negotiating directives on 3 May, which will form the detailed basis for its negotiating mandate. This can be amended, should ‘significant progress’ be made, to cover the second "future relationship" phase.
The Grayling View
It is likely that May and Merkel’s comments on the possibility of swiftly concluding the first phase will prove to be rather ambitious, especially following the now infamous dinner at Downing Street.
It is possible that divisions could open up between the EU-27, now that the EU is getting its hands dirty with the fine detail of its Brexit position. Italian Prime Minister Paolo Gentiloni opportunistically used the Summit to suggest that Brexit unity could be secured if the EU reconsidered its policies on fiscal austerity and migration.
Developments in the marathon that is the race to host the UK’s EU agencies
Whilst giving a green light to the EU’s negotiating guidelines at the European Council Summit on 29 April, EU leaders also discussed the process for relocating the agencies currently located in the UK. President of the European Council Donald Tusk is proposing that criteria should be adopted at the next Council summit between 22-23 June with a view to taking the final decision in the Autumn. Despite not proving contentious at the Summit, many of the Member States jockeying to host the agencies are known to favour a decision as early as June.
Of the 16 cities bidding to become the EMA’s new home, a report published by consultancy KPMG on behalf of Danish pharmaceutical firm Novo Nordisk suggests that Copenhagen, Stockholm, Munich, Amsterdam, and Berlin have the most attractive bids. The report ranked the cities on parameters including life sciences clusters, research environment, connectivity, quality of life, and political stability.
The Grayling View
The calls from some Member States to decide on the future locations of the agencies in June is a position echoed by the European Federation of Pharmaceutical Industries and Associations (EFPIA). EFPIA also concur with the KPMG report on the parameters that should constitute a successful bid, with the aim of ensuring that the EMA’s vital function in approving lifesaving new medicines is not significantly disrupted.
Swiftly reaching a decision on the agencies would be beneficial for the EU in removing a source of exploitable discord between some of the EU-27. If left to fester this could undermine the unity among the EU-27 that has so far been the hallmark of negotiations. Tusk’s attempts to ensure a transparent process should however provide temporary salve.
The highlights from EU Member States
Bundestag aims to ensure that its voice will be heard
On 3 May the European Commission published its draft negotiating directives that will provide the basis for its mandate as the sole negotiator representing the EU. In a timely reminder, a Germany Parliamentary report, published on 24 April, again raised the spectre that the EU-UK future relationship agreements will have to be ratified on the basis of Member States constitutional settlements.
The report reiterates that the Bundestag and 37 other national and sub-national parliaments will be required to consent to any agreement. Further, the report suggests that any transitional arrangements, the need for which appears increasingly likely, will also require a ratification process. This runs counter to widely held assumptions that transitional arrangements would ‘only’ require the unanimous support of the EU-27 in the Council.
The Grayling View
The prospect that even transitional arrangements could require ratification before 38 parliaments makes avoiding a ‘cliff-edge’ much harder. If this is the case, then a whole other constellation of interests will be inserted into the Brexit process, undermining the unity that the EU has painstakingly constructed. Whilst National Parliaments may be expected on the whole to follow their governments, this is less likely to be the case for those at the sub-national level – remember Wallonia and CETA!
It is however entirely possible that the Council may choose to conclude a transitional agreement without referring it to the Member States for parliamentary ratification. This would most likely instigate an unprecedented legal challenge before the ECJ, the outcome of which would be extremely uncertain.
Highlights from the US:
JP Morgan plan to move ahead with their Brexit ‘threats’
The world’s third largest bank by total assets, JP Morgan Chase, was a consistent advocate for Remain during the referendum. Indeed, its Chairman, CEO, and President Jamie Dimon invited the then UK Chancellor of the Exchequer George Osborne to share a platform at the company's offices in the seaside resort town of Bournemouth. At that event on 3 June 2016 Dimon suggested that 4,000 of the bank’s 16,000 UK based employees would be at risk if the UK lost its financial ‘passporting’ rights.
Prominent supporters of Brexit at the time derided Dimon’s comments as scaremongering. Scaremongering or not, the investment bank appears to be serious about following through with these threats. On 3 May the head of JP Morgan’s investment banking operations, Daniel Pinto, alluded to plans to move jobs even “in the short term to be ready for day one” as contingency for a no deal scenario. Pinto suggested that these jobs would move to the bank’s existing “anchors” in Europe, swelling the pay-rolls of their offices in Luxembourg, Dublin, and Frankfurt.
The Grayling View
JP Morgan is one of a bevy of US investment banks that are considering root and branch restructuring of their operations in Europe. This is far from scaremongering. It is the logical response to a fundamental change in the operational business climate in Europe as a result of Brexit. An estimated 25% of US investment into the EU is currently invested in the UK. US firms have not invested these levels in the UK purely to service the domestic market, but with the aim to use the UK as a stepping stone to the Single Market. It is therefore only natural that US firms are considering the viability of these investments, whilst also actively advocating their concerns in London and in Brussels.
Dates for your diary
7 May 2017 - French Presidential elections
8 June 2017 - UK General Election
19 June 2017 - Queen's Speech - Great Repeal Bill + 15 other Brexit Related Bills
11 June - 18 June 2017 - French Legislative Elections
1 July 2017 - Estonian Presidency of the Council
24 September 2017 - German Federal elections
End of October 2018 - Negotiations expected to end
Autumn 2018 - Spring 2019 - Likely Scottish independence referendum
March 2019 - UK expected to leave EU
Grayling Brexit Unit
Our Grayling Brexit Unit brings together the very best consultants from across the Grayling network and includes those who have direct experience of working alongside the leading political figures charged with negotiating Brexit in London and Brussels.
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