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.
Thanks for reading and please keep your feedback coming to firstname.lastname@example.org.
Berlin under fire over attempt to interfere with Wirecard inquiry
Germany’s finance ministry has come under fire over an attempt to secretly interfere with the questioning of a key witness during a parliamentary inquiry into Wirecard, a potential breach of parliamentary etiquette.
The collapse of the German payments company last summer sent shockwaves through Germany’s financial and political elite. A parliamentary inquiry has exposed multiple regulatory failures and led to the departure of the heads of three supervisory agencies.
Days ahead of Friday’s final parliamentary debate on the committee’s final report, the finance ministry disclosed that one of its senior officials tried to intervene in the inquiry’s work in the run-up to the questioning of Munich chief prosecutor Hildegard Bäumler-Hösl, a key witness.
The government revealed this in a written answer to a question raised by Fabio De Masi, an MP for the hard-left Die Linke party, which was seen by the Financial Times.
The ministerial official was not named, but can be identified by the description of his role, as Reinhard Wolpers, the head of the subdivision financial market stability. Wolpers is one of three finance ministry employees who are members of BaFin’s administrative council. The finance ministry declined to comment on his identity.
In the run-up to the questioning of Bäumler-Hösl in January, Wolpers approached BaFin’s then-vice president, Elisabeth Roegele, and asked her to provide questions for Bäumler-Hösl which he then would pass on to MPs.
The government has no constitutional role in the inquiry, which is being pursued by parliament and has powers akin to a court. Moreover, Roegele was also nominated as a witness and had not yet been questioned by MPs at that point. She was forced out of her job by the government alongside President Felix Hufeld in late January.
“Wolpers’ behaviour is a clear violation of rules,” De Masi told the Financial Times, adding that the government official showed a “lack of respect for the Bundestag”.
BaFin and Munich prosecutors are embroiled in a blame game over the controversial 2019 short selling ban which investors regarded as a vote of confidence in the disgraced company. BaFin imposed the ban after receiving information from Munich prosecutors about an allegedly imminent short selling attack against Wirecard.
Several BaFin employees told MPs that Munich prosecutors had stated that the information was highly credible. Bäumler-Hösl denied that and said she just passed it on to BaFin without commenting about its validity.
The short-selling ban is potentially toxic for German finance minister Olaf Scholz, who is the Social Democrats’ candidate for chancellor in September’s federal election.
The finance ministry scolded the watchdog publicly for the short selling ban, saying it was based on poor and insufficient analysis.
The ministry’s response to De Masi disclosed that Wolpers approached Roegele via email and text messages days ahead of Bäumler-Hösl’s testimony. The ministry said Wolpers “acted upon his own, personal initiative and did not co-ordinate with other employees of the finance ministry”. It added that the executive level “at no point” was informed about the behaviour but only became aware of the matter because of De Masi’s inquiry.
“The communication of [our] employee with Ms Roegele was eventually without a result, as Ms Roegele did not submit such suggestions for questions,” the ministry said, adding that “no information” was passed on to members of the inquiry committee from the ministry.
Lisa Paus, a Green MP, said that the “authority of the finance ministry” was misused for the political interest of the Social Democrats. “That’s an absolute no-go.”
Florian Toncar, an MP for the pro-business Free Democrats, said that it would be “very surprising” if Wolpers’ actions were “not approved or even requested by the ministry’s senior level”.
Jens Zimmermann, SPD representative on the inquiry, said he was unable to comment on internal procedures at the ministry “as I don’t have any insights [into them]”, adding that his only contact was with the ministry’s official representatives in the committee. “I did not receive any suggestions for potential questions to Ms Bäumler-Hösl,” Zimmermann said.
Wolpers and Roegele did not respond to FT requests for comment. Munich prosecutors declined to comment.
UK exporters get more than £12bn in government financial aid
UK exporters have been given more than £12bn in state financial support to keep Britain trading with the rest of the world through Brexit and the pandemic.
UK Export Finance, the government’s export credit agency, provided British businesses with the highest level of financial support in 30 years in the 12 months to the end of March, according to its annual report published on Wednesday. This is almost treble the amount from the previous financial year, to help exports to 77 countries.
The agency aims to support viable UK exports with loan guarantees, insurance and direct lending to help them win, fulfil and get paid for international business where there are gaps in private sector provision.
UKEF provided more than £7bn in support to companies disrupted by the pandemic, such as Rolls-Royce, Ford, easyJet and British Airways, with a mixture of trade guarantees and insurance to encourage private sector lending to exporters.
It also helped exporters facing Brexit risks, for example providing a £480m guarantee on a £600m commercial loan in March 2021 after a carmaker committed operations to the UK.
UK exporters, especially smaller businesses, have complained about extensive red tape and costs arising from trading with the EU after Brexit.
Many have also warned that the trade deals struck by the government have yielded little benefit so far, instead causing them to rejig operations and move production and distribution overseas.
“We are opening up the world’s fastest-growing markets through the trade deals we are negotiating so that the UK can recover as quickly as possible from the pandemic,” said minister for exports Graham Stuart.
Support through finance and guarantees was given to 549 companies, more than double the number helped over the previous two years.
The agency also underwrote its largest ever civil infrastructure project, with £1.7bn in guarantees to build two monorail lines in Cairo and provide the trains, the first such exports in more than 12 years.
The export agency is now planning to increase its coverage of businesses focused on zero carbon initiatives.
Stuart will say on Wednesday that UKEF will create a renewables, energy and carbon management team to underwrite activity across sectors such as wind power, solar, green hydrogen, grid resilience and decommissioning. UKEF has also committed to ending support for new fossil fuel projects overseas.
Last year, UKEF launched a new scheme to encourage trade after Brexit and for small businesses to take advantage of new trade agreements.
Under this, exporters could apply for larger loans from the UK’s five high street banks backed by an 80 per cent guarantee that can be used both to cover costs linked to exports and also to scale up business operations.
Marcus Dolman, co-chairman of the British Exporters’ Association, said that such new products were “already proving their value to UK exporters and to supporting UK jobs”.
What unites and divides Germany’s potential coalition partners
Guten Morgen and welcome to Europe Express.
Germany’s election season is kicking into gear and both Angela Merkel’s centre-right CDU/CSU and the up-and-coming Greens have published their election manifestos. With polls indicating the two parties could end up bedfellows in the first post-Merkel government, we compare their Europe-related policies.
The Uefa Euro 2020 football championship is in full swing and gripping fans across the continent. But we explore a darker reality that has spilled out in stadiums and pitches: culture wars.
In Luxembourg, EU affairs ministers meet today to prepare for a summit, hear the latest on EU-Swiss relations and discuss the rule of law in Hungary and Poland.
This article is an on-site version of our Europe Express newsletter. Sign up here to get the newsletter sent straight to your inbox every weekday morning
Germany’s ruling Christian Democratic Union and its Bavarian sister party, the Christian Social Union, have laid out their joint election manifesto after the Greens published theirs in past weeks. It is well worth looking at what unites and divides the potential government allies in the post-Merkel era.
In brief, the CDU/CSU wants to return to how things were before the coronavirus pandemic, especially on fiscal rules and the sacrosanct schwarze Null (a balanced budget). They seem lukewarm on disruptive digital and green policies and made a libertarian push for a retreat of the state from many areas of society under the motto: “throwing money at problems isn’t always the best way to solve them”.
Meanwhile, the Greens have put forward a transformational plan. Their ambition is to turn Germany into a carbon-neutral economy in the next 20 years. Here are three areas to watch closely:
Debt and spending
The CDU/CSU have insisted that once the pandemic is over, so should be any relaxation of fiscal rules. They support the EU’s unprecedented, mutual-debt-fuelled €800bn recovery plan, but say it should be a one-off. They oppose consistent debt mutualisation across the bloc. (Here is Armin Laschet’s take in an interview with the FT)
The Greens are less dogmatic about what other EU nations should do in terms of borrowing. They even suggest a relaxation of Germany’s debt brake to allow public investment in schools and infrastructure, to be financed with more debt.
The CDU/CSU have embraced the goal of CO2 neutrality by 2045 and a 65 per cent cut in carbon emissions by 2030. But there are caveats for some industries and climate activists have pointed to inconsistencies and omissions in the conservative parties’ manifesto — notably their vague commitments on a “stable, fair and transparent” price for carbon.
The Greens are seeking to raise the carbon price to up to €60 per tonne in 2023, along with subsidies and incentives to cushion the social impact of a greener economy.
Europe and foreign policy
The CDU/CSU were more dovish on China and Russia and they failed to mention the controversial Nord Stream 2 gas pipeline. The Greens were more hawkish and maintained their opposition to the pipeline for environmental and geopolitical reasons (they worry about circumventing Ukraine, depriving it of transit revenues, and increasing energy dependence on Russia).
Both the CDU/CSU and the Greens favour majority voting in EU foreign policy, replacing the current model of unanimity. The Greens would also abolish the need for unanimous EU decision-making on taxation.
The September 26 election result will determine how much of these manifestos get translated into actual policy — and how much one or both political groups will have to compromise.
Chart du jour: Europe’s Covid bill
Public debt in the eurozone rose 14.1 per cent in 2020 compared with the previous year, the biggest leap in two decades, driven by the pandemic. Greece and Spain have recorded the biggest single increase in debt loads, while Ireland only recorded a marginal increase.
Beautiful game, uglier realities
International football’s biennial jamborees usually offer a few weeks of summer escapism for avid fans and newbies alike, writes Mehreen Khan in Brussels.
But this year’s European championships have become an extension of the psychodramas and culture wars that dominate political life on the continent.
The list of controversies runs long (and we are only 11 days in). Last month, France’s far-right kicked off a movement to boycott Les Bleus over a rap song. In England, the national team has defied criticism in the tabloid press by continuing to take the knee in support of Black Lives Matter, despite jeering from some of their own fans.
Further east, Ukraine’s football association was ordered by governing body Uefa to partly modify its kit design. Russia had complained that the jersey included a map of Crimea, which Moscow annexed in 2014.
Greece has also complained to Uefa about neighbouring North Macedonia using the acronym “MKD”. The Greeks (who didn’t qualify for the tournament) say the abbreviation violates the terms of the 2018 agreement under which Macedonia changed its name to North Macedonia.
The latest conflagration came this weekend, when German captain and goalkeeper Manuel Neuer became the subject of an investigation by Uefa for wearing a rainbow armband in support of LGBT+ rights. News of the probe prompted senior EU officials to express support for the player.
The inquiry has since been dropped by the governing body, which concluded that the armband did not constitute a breach of its rules prohibiting the display of “political symbols”.
Neuer’s Germany faces off tomorrow against Hungary, where LGBT+ rights have come under political assault from Viktor Orban’s ultranationalist government. Munich’s Allianz arena is preparing to welcome the visitors by lighting up the stadium in rainbow colours.
Separately, Uefa on Sunday said it was investigating “potential discriminatory incidents” during Hungary’s two opening matches in Budapest, where TV images captured homophobic banners among the 55,000-strong crowd. Monkey chants were also reportedly directed at French players on Saturday.
Brussels risks getting ensnared in the politicisation of the world’s most popular game. EU diplomats have told Europe Express that the incoming Slovenian presidency, led by rightwing prime minister Janez Jansa, wants leaders to sign off on summit conclusions this week on the governance of sport.
Under the banner of the European Way of Life, Jansa is pushing for leaders to agree language “reaffirming the uniqueness of the organisation of sport in Europe”. The request has baffled diplomats, particularly as the EU has little legal authority over sport.
Slovenian diplomats said the push was needed to prevent schisms such as the scuppered European Super League that rocked world football earlier this year. Jansa also has a long-running grudge against his compatriot and president of Uefa Aleksander Ceferin, often taking to Twitter to send pointed jibes at football’s governing chief.
Between all the spats and controversies, viewers could be forgiven for forgetting that some football is also going on.
In the dock
Poland and Hungary will be in the spotlight during ministerial meetings in Luxembourg today as member state ministers discuss Article 7 procedures against the two countries, writes Sam Fleming in Brussels.
These procedures allow the European Commission, European parliament or member states to take action against countries for serious breaches of the rule of law under threat of punishments such as the suspension of EU voting rights.
The commission triggered the process against Poland in 2017, while the parliament launched it against Hungary the following year.
In Poland, incursions into judicial independence have continued, as have apparent threats to the primacy of EU law. In Hungary, there are mounting concerns about the judiciary, anti-corruption frameworks, media pluralism and human rights. Last week, Hungary passed an anti-LGBT+ law that sparked criticism from rights groups. The commission said it would look into whether the legislation breached EU laws.
Nevertheless, the two countries can shield each other from punishments under the Article 7 regime by wielding their vetoes. The question ahead is whether the commission can obtain better results by deploying powers agreed last year to withhold EU funds over breaches of vital principles.
Commission vice-president Vera Jourova is due to address the ministers in the General Affairs Council, setting out the state of play in both countries.
“The last hearing on Poland took place in December 2018 and on Hungary in December 2019, and many things happened since then,” she told Europe Express. “Unfortunately most of them continued to raise our concerns.”
What to watch today
EU affairs ministers meet in Luxembourg
Germany’s chancellor Angela Merkel receives European Commission president Ursula von der Leyen in Berlin
United front: French politicians from left to right have persuaded a Green candidate to withdraw from the second round of regional elections on Sunday. The move is aimed at ensuring that Marine Le Pen’s far-right Rassemblement National does not take control of the southern Provence-Alpes-Côte d’Azur region.
Belarus sanctions: EU foreign ministers approved sanctions against a further 86 individuals and organisations in Belarus and set their sights on industries including finance, potash and petroleum products to put pressure on President Alexander Lukashenko’s regime.
Government collapse: In a first for Sweden, the country’s prime minister Stefan Lofven has lost a no-confidence vote in his government. The vote, engineered by rightwing opposition party Sweden Democrats, means Lofven has a week to call an election or build a new ruling coalition.
German tech offensive: Germany’s Federal Cartel Office added Apple to the Big Tech companies in its crosshairs, launching a probe into whether the iPhone maker has established market dominance through its “digital ecosystem”.
St Schuman: “Founding father” of the EU Robert Schuman may soon become a saint. The former French prime minister was given the title of “venerable” in a decree by Pope Francis over the weekend, which is one of the steps that could lead to sainthood.
Recommended newsletters for you
DUP’s new leader strives to stabilise N Ireland’s biggest party
A blueprint for central bank digital currencies
Krispy Kreme: sugary valuation piles on the dollars
Italy’s government in crisis as Renzi ministers resign
Macron’s war on ‘Islamic separatism’ only divides France further
US allows sales of chips to Huawei’s non-5G businesses
Europe5 months ago
Italy’s government in crisis as Renzi ministers resign
Europe8 months ago
Macron’s war on ‘Islamic separatism’ only divides France further
Emerging Markets8 months ago
US allows sales of chips to Huawei’s non-5G businesses
Europe6 months ago
European truckmakers to phase out diesel sales decade earlier than planned
Emerging Markets9 months ago
Mexico’s Supreme Court approves referendum on presidential trials
Company8 months ago
Most investors now expect the U.S. stock market to crash like it did in October 1987 — why that’s good news
Markets8 months ago
Two top Morgan Stanley commodities traders lose jobs over use of WhatsApp
Emerging Markets8 months ago
Arrest of Mexican general in US shakes López Obrador at home and abroad