The highlights from the UK
The Grayling view on a tricky few months ahead for Theresa May
With Parliament returning from recess next week, Christine McKenna, Account Manager in Grayling’s London Public Affairs team, looks at the challenges facing Theresa May’s Government over the next 6 months.
With the countdown to Parliament’s return from recess now only one week away, the Westminster machine is slowly rebooting. This week saw Theresa May’s return to the political front line with a three-day visit to three African countries in hope of returning to the UK with the first post-Brexit deal and a positive news story. However, the visit marks the beginning of a challenging six months for Theresa May and her Government, as it attempts to navigate Brexit negotiations, deliver a critical Budget and survive a difficult Conference season – all whilst also keeping the Tory party together.
Despite talk of the Chequers agreement quietening over the summer recess, May will return to face calls that further concessions will be required before a deal will be agreed by Brussels. Michel Barnier has already indicated the EU will not accept a key pillar of the agreement relating to custom duties, and Emmanuel Macron has suggested the agreement in its current form risked “unraveling” the EU. With resignations still fresh and continuing divisions between remainers and leavers, getting a consensus from her cabinet colleagues for any further concessions will be a challenge for May. Especially as members, including Sajid Javid and Michael Gove, look towards the future of the party and their own personal ambitions.
This sitting of Parliament also provides the last real opportunity for May to pass critical pieces of Brexit legislation, including the Immigration Bill. With no stable majority and the return of vocal leave supporters Boris Johnson and David Davis to the backbenches, rebels on both sides of her party will likely use the debates and votes as an opportunity to contest the Government’s position on Brexit. May nearly faced defeat before recess during the passage of the Withdrawal Bill, and supporters from both sides of the referendum debate will undoubtedly again utilise these legislative vehicles to further influence government policy.
But before she makes it this far, May will need to deliver a successful Conservative Party Conference at the end of September and cement her position as the leader of the party. After the nightmare of last year, her team will no doubt understand the importance of this year going off without a hitch. However, there is already talk of hard-line leavers looking to use conference as an opportunity to undermine the Government’s position. Jacob Rees-Mogg’s European Research Group are understood to be planning to release an alternative to the Chequers agreement in the days leading up to the event. Despite this, Conference will be a crucial time for May to show the Party as united and remove any doubts in her ability to see through Brexit.
In the mists of negotiations and political infighting, Philip Hammond will also need to deliver his final Budget in November before Exit Day on 29th March 2019. If an agreement with the EU has not been struck, Hammond will need to be able to strike a balance between a Budget that makes large provisions for a No-Deal Brexit, whilst also gaining support from an electorate that now supports an end to austerity.
With the events of the past year, it’s hard to imagine further political uncertainty, but with the amalgamation of the challenges facing the Government, the next six months could likely be some of the toughest yet.
The highlights from Poland - from our Grayling team in Warsaw
Effects of Hard Brexit in Poland will be negligible
The statement by UK Secretary for International Trade, Liam Fox, from 5 August putting the probability of a hard Brexit at 60% has seen a heated discussion among politicians, the media, and all the Poles who may be affected.
Nevertheless, a thorough assessment of the effects of hard Brexit proves that this scenario won’t have a major impact on the Polish economy.
The Polish authorities claim that Brexit may have positive effects for Poland, as it may motivate Poles living in the UK to return to their homeland and international companies to move their offices here. On the other hand, there is the prospect of a breakdown in trade between both countries and fear about the situation of Polish emigrants. Below we review the argumentation from both sides and present our view on the topic.
The Grayling view
- A hard Brexit will result in the imposition of tariffs on trade between the UK and other EU Member States under World Trade Organization rules. The UK is a significant trade partner for Poland, particularly in the food and textiles industries. Hence, Polish entrepreneurs selling food, cars, and textiles to the UK may suffer the most, but this won’t influence Polish exports significantly. The latest analyses of the effects of Brexit for Poland show that it will cause a 31% reduction in the country’s exports to the UK, which may look a big number but would amount to 1-2% of total Polish exports.
- Financial institutions moving from the UK don't often choose Poland. The Polish banking sector is already very competitive compared to other European countries (and often more innovative than in the UK), which creates a strong barrier to entry. In two to three years, there will be more subsidiaries of foreign banks than commercial banks in Poland because it is a much cheaper form of doing business (subsidiaries do not need to meet capital requirements, which are often higher in Poland than in Western Europe, nor pay contributions to the Polish Banking Guarantee Fund, which are also bigger than these required by other guarantee funds). Hence, some of the banks have already moved their headquarters from the UK (Barclays, HSBC), but only a few have decided to open their subsidiaries here (Standard Chartered, JP Morgan).
- Polish authorities want to create an image of Brexit as the opportunity for Poland to boost its development by increasing entrepreneurship. The rhetoric will be backed by concrete proposals. The Polish government plans to introduce some new projects in autumn 2018 that aim to create a friendly legal environment for developing SMEs, especially from the fintech sector. The regulatory system for fintech will be introduced by the end of 2018, and in the autumn the government plans to present a new tax ordinance, that, among others, will introduce simplifications for SMEs.
- The Polish authorities (including Prime Minister Morawiecki) have repeatedly emphasised that the situation of Polish migrants in the UK won’t be endangered, and the UK government recently declared that it would honour the initial agreement on the protection of EU citizens' rights even in the event of a hard Brexit.
The Polish government wanted to see Warsaw as the new centre for financial services in Europe, which is only partly possible. Major financial institutions have already reacted to the risk of a hard Brexit and moved their headquarters to other countries. Poland has maintained a good investment climate for a few years now, but it still has much to do regarding the regulatory framework if it is to compete with other markets such as Estonia, Lithuania, and the UK. The Polish financial sector is rather competitive, yet as a result of the significant burdens foreign banks have not chosen to move their headquarters here. If the regulators proceed with the changes in the next few months - deregulation boosting entrepreneurship and opening up innovative sectors of the economy, such as fintech, it may help to attract new foreign investment in Poland and enable it to become a place where fintech thrives.
However, it will be very difficult for Warsaw to become the next European financial city. According to the latest economic analyses, the biggest declines in the Polish economy will be seen in textiles, agricultural & food products, and cars, which will be hit harder by a hard Brexit. A hard Brexit won’t lead to many Poles returning to their homeland, according to recent studies. If the EU does not reach a compromise with the UK by March 2019, the Poles who can't stay in the UK will move to other countries, not return to Poland. The conclusion is that a hard Brexit will neither have many benefits nor drawbacks for Poles.
The highlights from Japan
Japan issues ultimatum, whilst Panasonic is already leaving
Japan has been one of the most prominent non-European voices on Brexit, and as early as 2016 produced a 15 page memo outlining their key asks.
Now they’ve further ratcheted up the pressure, with the Chairman of the country’s business association, Keidanren, warning in the Financial Times this week that a no-deal would be "disastrous" and urging the UK to remain in the Customs Union. “Various scenarios get discussed, from no Brexit to plunging into Brexit without any kind of deal at all. We’re now in a situation where we have to consider what to do in all of them,” said the group’s Chairman Hiroaki Nakanishi. He also commented on how UK Ministers tell him different things, which further confuses the situation. “Please keep the current economic environment as much as possible, including the customs union,” he said. “If you don’t then it will clearly hinder economic activity in the UK.”
Shortly after this interview, news broke that Panasonic were moving their European headquarters from London to Amsterdam, justifying their decision by avoiding possible future trade barriers and tax issues post-Brexit.
The Grayling view
Japan’s desire for the UK to remain in the Customs Union, at least for the long-term, must surely be a pipe-dream, so it is perhaps with this in mind that Panasonic decided that enough was enough and followed in the footsteps of the European Medicines Agency, now also in Amsterdam. The interview with Keidanren in the Financial Times will have been picked up and read by all those in Westminster, but although its message is clear, is anyone really listening? Furthermore, if this is how Japan feels, then we can probably assume that other countries and regions - South Korea for example - are feeling the same way, but it is still rather un-Japanese to be so outspoken on a topic of such importance. Clearly they feel they are riding in the last chance saloon. Panasonic may be the first of many other Japanese companies to leave the UK shores this autumn.
Dates for your diary
18 September 2018 - General Affairs Council Art.50
18-19 October 2018 - EU Summit and deadline for negotiations on Withdrawal Agreement
1 January 2019 - Romanian Presidency of the Council
29 March 2019 - UK expected to leave EU
31 December 2020 - Expected end of transition
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