Good afternoon. The Brexit Briefing is back after taking a couple of weeks to get over the drama of the eleventh-hour trade and co-operation agreement (TCA) that Boris Johnson finally agreed last Christmas Eve.
Skinny though it is, the deal was a relief when set against the potential fallout from a no-deal exit, but as the new year dawns business is digesting the full reality of what Mr Johnson has done in the name of “prospering mightily” outside the EU single market.
Over the next few months Brexit Briefing will do its best to unpack what this actually means for industry and business in important sectors, a process that will be necessarily anecdotal until we start to get data on what is happening. Even then it will be masked by other factors, notably Covid-19.
The truth is that no one knows exactly how this will pan out because no government has ever done this kind of reverse co-operation trade agreement before — applying the brakes to the EU’s integrationary juggernaut overnight.
The first thing that is emerging is the extent to which some parts of industry have failed to fully appreciate what the deal means for future UK-EU relations and their cross-border supply chains.
It was interesting this week, for example, to see the food and drink industry lobbies on both sides of the Channel protesting about the impact the “rules of origin” clauses in the TCA will have on their existing distribution networks.
The Food and Drink Federation, backed by some EU counterparts, warned that UK distribution hubs would struggle to function because goods imported tariff-free into the UK from Europe were then facing full EU tariffs when they were spun back out into EU member states.
The trade groups initially said they believed this was an “unintended consequence” of the deal and were lobbying for a derogation (which trade experts say is technically possible) but EU officials were very clear — and I paraphrase — that this is just the deal, so deal with it.
It took the UK government 24 hours to give a response but when it finally came the Cabinet Office gave no sign that the UK government intended to fight the industry’s corner. It just said that businesses could use “transit” procedures to get goods through the UK without falling foul of the rules of origin issue.
But as the Food and Drink Federation said, this is “unworkable” based on current models, since hubs don’t just shunt goods onwards, they break them up, repackage them for onward distribution — and that won’t work now. Clothing retailers will also be hard-hit by this.
In short, change is coming, and perhaps more change than some had previously understood, and there is no sign of the EU looking to help.
“You can’t expect the UK to remain the food import hub for the EU. It’s not sustainable, and makes no sense in the mid-to-longer run,” said a senior EU official, explaining thinking in Brussels, and drawing the parallel with financial services where Brussels also sees little point in moving to preserve the UK as a “hub”, even if that drives up costs for some businesses.
The prevailing view in Brussels seems to be that given that dual regimes will emerge over time — for financial services and indeed phytosanitary (SPS) regulations — it makes no sense to have the UK as an EU hub for very much. This penny is now starting to drop.
On a micro level, this means that some businesses will simply stop trading with the EU because it becomes too expensive — or move to split their supply chains to avoid having to do cross-Channel trade, shrinking their UK footprint in the process.
So, for example, a company such as Aston Chemicals in Aylesbury, which has imported chemicals for the cosmetics industry for 30 years and distributed to the EU from the UK, sent its last load across the Channel on December 18.
It will now serve its EU customers directly from Poland to avoid duplicating paperwork for compliance with the EU’s Reach chemical safety regulations, border delays, and tariffs risk from rules of origin requirements. Its UK warehouse staffing has shrunk by one-third as a result of the changes.
It is a similar story for Premium Plus UK — a dental medical devices maker — that is now also hubbing in Poland because EU medical devices rules make it prohibitively expensive to import from China and then hub from the UK. This is because it would turn their EU customers into importers, with all the regulatory burden that entails for medical devices.
For others, like The Curiosity Box that makes children’s science kits, it’s more of a wait-and-see game, working out if it is worth the cost of obtaining both EU “CE” and “UKCA” safety certifications. The company estimates that the UK decision to create a dual regime will cost the company £20,000 it doesn’t have.
There will be many of these stories, particularly for small businesses. Some will stop trading with Europe altogether, others — such as Hampstead Tea, Chiltern Distribution or Produmax aerospace parts — will look to adapt. The FT will track their progress as they do so.
There will be some local “winners” from this transition process as UK businesses pick up work previously done by EU competitors, but economists are pretty clear that in aggregate the effects from erecting such barriers with the advanced economies on our doorstep will be negative.
John Springford, deputy director and former chief economist of the Centre for European Reform, said that it was inevitable that barriers to trade created by leaving the EU would act as a drag on the forces of “specialisation and exchange” that had been driven by the creation of the EU single market.
As he explains: “The UK provides advertising to big business in Germany and big business provides the UK with cars — it is that process that we’re weakening, which ultimately means that UK wages are likely to grow less strongly over time.”
In short, the laws of economic gravity point to the “very, very high” likelihood that the UK will end up poorer than peer economies in Europe a decade from now.
The extent to which anyone will notice in the short term (no one lives the counterfactual, after all) and how that cuts into UK politics is a separate question.
Brexit in numbers
Just one quick number to consider this week as haulage and logistics companies try to adjust to the new trading arrangements — trade with Ireland is throwing up some of the most immediate teething problems.
One of the main issues, Irish hauliers say, is preserving the circular nature of the trade flow. This means that trucks that drop off Irish produce on the UK mainland need to be able to reload in Great Britain and return to Ireland so they can repeat the process.
If one side breaks down, the flow starts to get blocked, with knock-on consequences for both sides. The same principle applies across the short straits.
In Ireland the system is already starting to grind. For example, Seamus Leheny, Belfast-based policy manager of Logistics UK, told MPs on the Northern Ireland affairs committee this week that one haulier had sent 285 trucks to GB since January 1, but got only 100 lorries back into Northern Ireland.
There are several factors at play: one is because of stockpiling (less need to send goods), another is delays caused by GB suppliers not having correct paperwork (so hauliers can’t lift the loads or they’ll get stopped) and some of it is deeper legal and process issues.
Chief among these, hauliers say, is the fact that no one seems to have found a legal formula to enable them to pick up multiple loads of agricultural goods one after the other. The rules around signing off EU export health certificates make this staple of GB-Irish supply chains very problematic — a fix is being sought.
Thus far there have been very few queues, but talking to industry it is clear there are still many concerns about what happens when the pre-Christmas stockpiles expire and the full force of EU-UK trade has to absorb frictions designed for “rest of world” trade.
Industry was also warned today that the French authorities will start to impose much stricter enforcement from next week, having been lenient thus far. When they do, just as with Ireland, it will be all about the impact on the circular flow.
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French Greens given a grilling over meat-free school lunches
Grégory Doucet, mayor of Lyon, said he had no inkling that the school lunches served up in the French city this week would put him at the centre of a political storm.
But the decision by the environmentalist mayor that children should be offered just a single lunch option — one without meat — prompted immediate denunciations from French government ministers, and protests by farmers who responded by releasing herds of cows outside city hall.
The ruling — which Doucet said he took for a limited period to avoid long queues for multiple menus that would bunch pupils close together during the Covid-19 pandemic — has set carnivores against vegetarians, town against country, and right against left.
“It touches a lot of topics deeply rooted in French political culture,” said Vincent Martigny, politics professor at the University of Nice. “Everybody knows we should be eating less meat, but we’re still a very traditional food culture in France, quite conservative. If you don’t eat meat and drink wine, you’re not very French.”
Doucet and his Europe Ecologie-Les Verts (EELV) , which took Lyon from the centre-right in local elections last year, say the row has more to do with June’s regional elections and the presidential and legislative polls due in 2021.
“They’re targeting the ecologists because we’re the biggest threat,” Doucet told the Financial Times.
Even so, a mini-campaign by some ministers in President Emmanuel Macron’s government to curry favour with conservative voters and paint the Greens as crazed ideologues quickly spun out of control and exposed divisions in the cabinet.
Gérald Darmanin, the hardline interior minister, denounced the Lyon Greens for what he called a “moralistic, elitist policy” to deprive working-class students of meat. Julien Denormandie, who holds the agriculture portfolio, leapt to the defence of farmers, calling the decision “shameful” and saying: “Let’s stop putting ideology on our children’s plates!”
Environment minister Barbara Pompili, however, said she was sorry to hear a “prehistoric debate” full of clichés about the supposed nutritional inadequacies of vegetarian food. Macron eventually had to tell them to stop disagreeing in public as he called for an end to the “idiotic” argument.
The school meals controversy is the latest manifestation of a long-running debate in France and abroad over the environmental sustainability of meat consumption by an increasingly wealthy and numerous world population, given the land taken up by cattle and their greenhouse gas emissions.
Doucet, a “flexitarian” who said he tried to limit his intake of meat and fish, has campaigned to reduce consumption of animal protein and provide more vegetarian meals in schools, but he said his immediate priority was to ensure the meat served comes from local farmers.
He also pointed out that Gérard Collomb, his centre-right predecessor as mayor, had made exactly the same decision for a single, no-meat menu acceptable to the largest number of school pupils during an early phase of the pandemic — and there had been no political backlash.
“When we took the decision, we didn’t think for one minute it would lead to a political polemic,” Doucet said.
Somewhat later than neighbouring countries such as the UK, France is in any case gradually coming to accept vegetarianism. The Michelin Guide this year for the first time awarded one of its prized stars of approval to a French vegan restaurant called ONA — for Origine Non Animale.
“People used to be treated as the village idiot if they were vegetarian,” said Jean-Pierre Poulain, a sociologist specialising in food at the University of Toulouse. “That’s no longer the case.”
The change was slow in coming, said Poulain, but as in other urbanised societies, French city dwellers anthropomorphised pets, idealised wild animals and no longer automatically accepted the legitimacy of killing animals to eat them.
As mayor of Lyon, Doucet has also found himself at the heart of another contemporary debate — this time a particularly French one — about the role of schools and other state institutions in shaping the values and ideals of the nation’s youngest citizens.
Macron and his ministers, who are currently promoting legislation designed to curb Islamist “separatist” ideology and lifestyles, are demanding strict adherence to French secular values. As such they are reluctant to see the state’s prerogatives usurped by local governments with their own priorities.
Conservatives have already fulminated about the Green mayor of Bordeaux rejecting a public Christmas fir because he did not want to celebrate around a “dead tree”. Other Green civic leaders have refused to host the Tour de France cycle race in their towns because of the carbon footprint of all the accompanying motor vehicles.
On the right, the loss of meat as a choice for school meals is sometimes portrayed as another step towards the forced dismantling of the French way of life, but politicians wary of pointless conflicts are more phlegmatic about the affair.
“I don’t think the children of Lyon are going to die of anaemia in the days ahead, but I also don’t think this will do much to reduce greenhouse gases,” Roland Lescure, an MP with Macron’s governing La République en Marche! party, was quoted as saying in Le Parisien.
“Everyone is playing politics,” he added, “including the mayor of Lyon.”
ECB signals rising concern about eurozone bond market sell-off
The European Central Bank has indicated it will increase the pace of its emergency bond purchases to counter the recent sell-off in eurozone sovereign debt markets if borrowing costs for governments, companies and households continue to rise.
Philip Lane, chief economist of the ECB, said on Thursday that the central bank was “closely monitoring the evolution of longer-term nominal bond yields” and its asset purchases “will be conducted to preserve favourable financing conditions over the pandemic period”.
The ECB has pledged to ensure financial conditions encourage investment and spending, helping the eurozone economy to make a swift recovery and lifting inflation towards the central bank objective of just below 2 per cent.
To achieve this, Lane signalled that it would rely on its pandemic emergency purchase programme, under which it plans to spend up to €1.85tn on buying bonds by March 2022. There is just under €1tn of that amount left to spend.
“We will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation,” he said.
Eurozone government bonds fell to their lowest levels for almost six months this week, and while Lane’s comments caused a brief rally on Thursday afternoon, prices then resumed their downward path.
Bond yields move inversely to prices, so the sell-off is pushing up the cost of borrowing for governments, which must sell vast amounts of extra debt this year to cover the cost of the coronavirus pandemic and its consequences.
Germany’s 10-year bond yield has risen to its highest level since last March, while the French equivalent returned to a positive yield for the first time since June and Italian sovereign yields hit their highest level since November.
ECB president Christine Lagarde said in a speech on Monday that policymakers were “closely monitoring” the rises.
Isabel Schnabel, another ECB executive board member, said in an interview with Latvian news agency Leta published on Thursday: “A too-abrupt increase in real interest rates on the back of improving global growth prospects could jeopardise the economic recovery.”
Lane gave more detail of how the ECB defines “favourable” financing conditions, saying it would track the availability and cost of bank lending and market-based funding — in particular, the risk-free overnight index swap curve and the GDP-weighted eurozone sovereign bond yield curve, which have both risen in recent days.
He warned of the need to avoid “a mutually-reinforcing adverse loop” in which banks interpret lower borrowing demand as a negative signal about the economy and companies interpret a tightening of bank lending conditions as a worrying sign about the outlook.
Eurozone bank lending to the private sector grew by just under €12bn in January, down 75 per cent from the average monthly loan growth last year according to data published on Thursday.
Much of the slowdown was because of a sharp fall in net lending to insurers and pension funds. Lending to non-financial companies also retreated slightly, while lending to households still grew but at its slowest rate since last April.
Krishna Guha, vice-president at Evercore ISI, said “ECB jawboning” was “having little effect” and “the next step — in our view presaged by Lane — is for the ECB to dial up the pace of its [bond] purchases”.
Last week the ECB spent a net €17.3bn on its emergency bond purchase programme, up slightly from the previous week but still well below the levels of last April, during the previous sell-off in government bond markets.
Frederik Ducrozet, strategist at Pictet Wealth Management, said the ECB was likely to wait until it was clear the bond market sell-off was a lasting shift before increasing its emergency bond buying above €20bn per week. But he said that “will bring the risk of disappointment [for investors] — because you have to walk the walk as well as talk the talk as a central bank”.
Armenia’s prime minister claims military is plotting a coup
Armenia’s prime minister has claimed the country’s military is plotting a “coup,” and taken to the streets with his supporters after senior army figures in the former Soviet republic called on him to resign.
Nikol Pashinyan has faced months of protests demanding he step down after the defeat of Armenian forces in a six-week war with neighbouring Azerbaijan that ended in November.
The army weighed in on Thursday, calling on the prime minister to quit after he fired the first deputy chief of staff for criticising him.
A letter to the prime minister signed by 40 senior officers warned Pashinyan not to use force against demonstrators, but did not say whether the army would act to remove him from power.
“The current government’s ineffective management and serious mistakes in foreign policy have put the country on the brink of collapse,” the officers wrote on Facebook.
Pashinyan later fired the chief of the general staff, Onik Gasparyan, ordered police to secure government buildings in Yerevan and told his supporters in the capital’s Republic Square to avoid violent clashes.
Describing the situation as “manageable” the prime minister denied he was planning to flee the country and said the army’s statement was an “emotional reaction” to a dispute over the defeat in the Nagorno-Karabakh conflict.
“We have no enemies in Armenia. I am calling for calm,” Pashinyan said, according to Russian news agency Interfax. “Of course, the situation is tense, but we need dialogue, not confrontation.”
He later took to the streets with several thousand supporters and a megaphone — an echo of the 2018 “velvet revolution” that swept him to power following a march across the country that galvanised popular support. A few thousand opposition supporters gathered at a different square and cheered as a fighter jet flew overhead.
Pashinyan has fought off calls for his resignation since signing a Moscow-brokered peace deal in November that cemented territorial gains for Azerbaijan in Nagorno-Karabakh. The mountainous enclave in the South Caucasus is internationally recognised as part of Azerbaijan, but is populated by ethnic Armenians who seized control after a war that broke out in the dying days of the Soviet Union.
Azerbaijan, a mostly Muslim country and a close ally of Turkey, launched an offensive in September with the aim of retaking the entire enclave. Armenia’s army was ill prepared for oil-rich Azerbaijan’s modern drone fleet and significant backing from Ankara.
More than 3,300 Armenian soldiers died in the conflict, with a further 9,000 wounded. Thousands of civilians were displaced, including some who set their own homes on fire as they fled land now under control of Azerbaijan.
Russia, the traditional regional power broker and Armenia’s most important ally, remained neutral even as several previous ceasefires failed and has deployed 2,000 peacekeepers to secure the region.
Pashinyan admitted the terms were “unbelievably painful for me and my people” but argued the concessions were necessary to prevent further losses.
The devastating defeat sparked fury among Armenians who stormed the country’s parliament and attacked its speaker, demanding the prime minister’s resignation.
Pashinyan backtracked on a pledge to step down after snap elections earlier this month and remained in office in the face of opposition from Armenia’s ceremonial president, three parliamentary opposition parties, and key church leaders.
The Kremlin said on Thursday it was “following events in Armenia with caution” but considered them “exclusively Armenia’s internal matter”.
Dmitry Peskov, President Vladimir Putin’s spokesman, told reporters Russia was “calling on everyone to be calm” and said “the situation should remain within constitutional limits,” according to Interfax.
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