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UK-EU relations are in for a bumpy ride with Frost in the driving seat

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Welcome back. Do you work in an industry that has been affected by the UK’s departure from the EU single market and customs union? If so, how is the change hurting — or even benefiting — you and your business? Please keep your feedback coming to brexitbrief@ft.com.

Just when you thought it was safe to enter Whitehall, Wednesday’s Downing Street dust-up leading to the appointment of David Frost to the cabinet felt like a lurch backwards into the kind of court drama that was supposed to have ended with the departure of Dominic Cummings and friends.

There were furious denials that Frost had threatened to resign to win his seat at the top table along with the chairmanship of the joint partnership council governing the post-Brexit trade deal, but the fact that Michael Gove had been appointed “interim chair” only two days previously made it obvious that these moves were happening hastily.

This fight, by several accounts, had been brewing for a while as Dominic Raab’s foreign office made the case around Whitehall for the bilateral EU-UK relations to be repatriated to his department, but ultimately that was always a forlorn hope. Relations with Europe have effectively been run out of the centre long before even Brexit came along.

On the upside, the Frost appointment does at least clarify where power resides on EU-UK relations. He clearly has the ear of the prime minister and by simultaneously handing Frost control of the Northern Ireland protocol implementation, potential rivalry and confusion with Gove — who previously controlled that element of the deal — is also avoided. 

And for civil servants caught up in the middle of all this — many who well recall the mess created by the rival power centres of Downing Street and the ill-conceived Department for Exiting the European Union — the clarity in reporting lines should be helpful at an operational level. 

Frost’s elevation to the cabinet is also for the best. For too long Frost — a former Foreign Office official, turned Scotch whisky lobbyist and latterly political special adviser — has existed in a political grey zone. As Brexit chief negotiator, he was allowed to make policy speeches in Brussels, and yet was never formally accountable to parliament. That now ends.

But all that said, it is difficult to see Frost’s elevation as a move that will mollify relations between the EU and the UK, which — thanks to mistakes on both sides over vaccines and the implementation of the Northern Irish protocol — have got off to a tetchy start.

The problem is that Frost’s modus operandi with the EU has always been confrontation. He seems genuinely to believe that this is the best way to extract results and officials with close experience of working with Frost say he’s looking to “keep it confrontational”.

In 2019, during the negotiations over the Northern Irish protocol, officials on both sides said it was Frost who advised that taking a tough line would get the EU to force Ireland to accept the creation of a technological north-south trade border in Ireland. 

He was wrong, but ultimately that misjudgement was overtaken by the hasty creation of the Northern Ireland “front stop” that left Northern Ireland following the customs rules of a foreign trading bloc, but opened the door to the political triumph of Boris Johnson’s 80-seat majority in December 2019. 

Having won that majority to “Get Brexit Done”, there was then a second moment in early 2020 when the UK could have taken a less confrontational path. There was an option to extend the transition period, and then to seek the kind of mobility packages and regulatory alignments on chemical and medicine regulation that would have addressed many of the problems that industries and service professionals are now complaining about. 

But again, the Frost-Johnson approach was headlong confrontation — threatening to renege on sections of the Northern Irish protocol and then signing a “Canada-style” trade and co-operation agreement (TCA) that from the outset prioritised sovereignty over market access.

Having done that deal, these first few weeks of 2021 provided a third pivot-point at which the Johnson government could have “moved on”, focusing its energies on the domestic levelling-up agenda and — as the EU ambassador the UK João Vale de Almeida put it this week — worked to embrace “life after Brexit”.

But given all that recent history, it would take a supreme optimist to read Frost’s appointment as a step in that direction. Instead it seems like another triggering of the Conservative party’s EU fight-reflex that has driven the Brexit process ever since Johnson ousted Theresa May. 

To what strategic end remains unclear. Politically, confrontation might play well on the Tory backbenches — not giving full diplomatic recognition to the EU ambassador, for example — but the next year is going to be about real-world implementation of Brexit.

The first six weeks of this deal have generated a whirlwind of complaints as business discovers fully what it means — for product distributors, food exporters, SMEs and professional services — all of which are urging the government to work with the EU to better implement the TCA, limited in scope though it be.

In many ways — as Lord Hill observes in our long read this week on the future of EU-UK relations — confrontation is in-built in the EU-UK relationship, which creates a succession of pressure points by which Brussels can continue to exert its leverage.

In almost any scenario this was going to be tough, but it is difficult to see how confrontation helps address complaints from UK business. Pressure will only grow as pre-Brexit stockpiles expire and the UK starts to implement its own border controls in July, which will affect UK importers and exporters. 

Add to that the coming unemployment surge as the Covid-19 furlough scheme expires and the minister charged with running the EU-UK relationship (that covers 48 per cent of total UK trade, lest we forget) is going to find himself in the operational, as well as ideological, cockpit of Brexit. I do not forecast a smooth ride.

Brexit in numbers

France-Ireland freight routes map

There was a time when Brexit just meant “Brexit”. Slowly but surely, however, a picture is emerging about what Brexit does actually mean, and how it is shifting EU-UK trade patterns.

With the usual caveats about this being early days, some data from an industry source on how Irish businesses are cutting out the UK “land bridge” by shipping direct from Ireland to the EU to avoid customs hold-ups is remarkable.

Fleet-footed shipping lines such as Stena have responded by redirecting capacity into new routes, like Dublin-Cherbourg, while boosting other routes, including by redirecting one ship destined for the Liverpool-Belfast route to work Rosslare-Cherbourg instead. Irish Ferries did something similar.

Roll-on, roll-off freight movements between Ireland and the continent this January have increased more than threefold (329 per cent) since last January. Even off a low base, that is a startling number.

Conversely, movements from the Republic of Ireland ports to Great Britain ports (Holyhead, Fishguard, Pembroke) are down 45 per cent — levels that are ringing alarm bells in Wales and among affected shipping lines. 

Last week Nick McCullough, managing director of the ferry company DFDS Northern Ireland, told MPs on the Northern Ireland affairs select committee that in a low-margin business those kinds of drop-offs could not be sustained for long.

Of course, while shipping companies can move their ships (as Stena did) ports themselves cannot up sticks and chase the business. 

Time will tell if this is a permanent shift, or if the teething problems can be dissipated to the extent that volumes across the “land bridge” will return to previous levels, but for now it seems as if Irish hauliers are voting with their feet.



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German accounting watchdog chief to step down in wake of Wirecard

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The head of Germany’s accounting watchdog is to step down following mounting political pressure over corporate governance shortcomings exposed by the Wirecard fraud.

Edgar Ernst, the president of the Financial Reporting Enforcement Panel (FREP), said on Wednesday he would depart by the end of this year. He is the third head of a regulatory body to lose his job in the wake of one of Germany’s biggest postwar accounting scandals.

The collapse of Wirecard, which last summer filed for insolvency after uncovering a €1.9bn cash hole, triggered an earthquake in Germany’s financial and political establishment.

Felix Hufeld, president of BaFin, the financial regulatory authority, and his deputy Elisabeth Roegele were pushed out by the German government in January for failing to act on early red flags suggesting misconduct at Wirecard. Ralf Bose, the head of Germany’s auditors supervisor Apas, was fired after disclosing he traded Wirecard shares while this authority was investigating the company’s auditor, EY. The German government is also working to revamp the country’s accounting supervision and financial oversight.

Meanwhile, criminal prosecutors in Frankfurt are evaluating a potential criminal investigation into BaFin’s inner workings and on Wednesday asked the market authority to hand over comprehensive documents, the prosecutors office told the FT, confirming an earlier report by Handelsblatt. The potential scope of any investigation as well as the individuals who might be targeted is still unclear. BaFin declined to comment.

Ernst came under pressure as the parliamentary inquiry commission uncovered that he joined the supervisory board of German wholesaler Metro AG in an apparent violation of internal governance rules, which from 2016 banned FREP staff from taking on new supervisory board roles.

Last week, the former chief financial officer of Deutsche Post filed a legal opinion to parliament defending his move. He argued that his employment contract was older than the 2016 ban on board seats and hence trumped the tightened governance regulations.

The German government had subsequently threatened to ditch the private-sector body which currently has quasi-official powers.

In a statement published on Wednesday evening, FREP said that Ernst wants to open the door for a “fresh start” that would be untainted by the discussions around his supervisory board mandates. “FREP is losing a well-versed expert in capital markets,” the body said.



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Putin and Lukashenko’s ski fun shows cold shoulder to EU

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As news of new EU sanctions against Russia began to leak out of a meeting of bloc foreign ministers on Monday afternoon, Vladimir Putin and his Belarusian counterpart Alexander Lukashenko were discussing a different challenge to the Russian president.

“You can try to compete with Vladimir Vladimirovich,” Lukashenko, in ski gear, said to his son, Nikolai. “But you probably won’t catch up,” he added, with a smile to Putin as the Russian leader pushed off down the slope.

Putin and Lukashenko are the men behind Europe’s two repressive crackdowns over the past six months, who have both jailed or exiled their most prominent opponents and seen their security forces violently assault and detain thousands of peaceful protesters.

But in a summit in the snow-covered mountains of Sochi, on Russia’s southern coast, they revelled in their twosome of leaders shunned and sanctioned by Brussels, in a calibrated message to the EU that the cold-shoulder was mutual.

For foreign policy experts there were few details to digest, despite the complex negotiations going on behind the scenes as the two post-Soviet states seek to recalibrate their future relationship.

Putin is keen to deepen integration on Moscow’s terms. Lukashenko is desperate for Russian investment and trade co-operation but is loath to relinquish sovereignty. Yet in place of diplomatic negotiations and policy pronouncements, photographs and video footage of the two leaders enjoying each other’s company were in full display.

At the outset, Putin, in jeans and an open-collar shirt and blazer, greeted his guest with a handshake and a hug. “Even our appearance, clothes and so on, suggest that these are serious negotiations in ordinary clothes,” Lukashenko quipped. “It suggests that we are close people.”

Pleasantries exchanged, it was time for the salopettes and ski boots, and a shared chairlift to the summit. Putin, pushing off confidently, set off down the gentle slope, Lukashenko in his wake.

After a short ride on snowmobiles back to their chalets, discussions continued over more than six hours — and what appeared to be three different sized wine glasses.

“The optics for the international audience is that they have been able to maintain their positions and nothing can be done against them,” said Maryia Rohava, a research fellow at Oslo university specialising in post-Soviet relations.

“Now we’re talking not just about sanctions against Belarus but also against Russia,” she added. “And it seems like they look at that like, ‘Well, we don’t care . . . We’re just enjoying our winter break like autocrats do.’”

To be sure, the fun on the slopes was not wholly without power games. Putin was clear to underscore he was the senior partner, from wrongfooting his guest at the top of the ski lift to releasing photographs of their meeting showing Lukashenko scribbling notes as his host spoke.

But the mood music was in sharp contrast to Lukashenko’s last visit to Russia in September. Then, with protests raging and the Belarusian leader’s position looking shaky, Putin reprimanded his guest for mishandling the unrest and risking the toppling of an ageing post-Soviet regime that could weaken his own.

Then, in a businesslike and cold atmosphere, Lukashenko pleaded with Putin that “a friend is in trouble” and was granted a $1.5bn loan from Moscow — but not before his host remarked that Belarusian people should be given a chance to “sort this situation out”.

The absence of such language on Monday also sent a subtle signal to other illiberal regimes, particularly those on the outer rim of Europe who, like Belarus in the past, find themselves lured towards Brussels by economic opportunities but repelled by the reforms and democratic standards demanded in exchange.

The message to the likes of Georgia, Moldova, Armenia and Turkey is that Putin, whose relations with the EU are at rock bottom, is always ready to talk.



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Mitsubishi Motors set to reverse move to withdraw from Europe

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Mitsubishi Motors is set to reverse its decision to withdraw from Europe and build cars in France after months of pressure from Renault and Nissan, in a sign of fresh rifts within the alliance.

Mitsubishi will formally consider the move at a board meeting on Thursday, according to three people with direct knowledge of the matter, following months of fractious discussions with its alliance partners.

A framework agreement between the three carmakers was reached on Monday during an alliance meeting, two of the people said. They added that the deal may still fall apart.

The decision to have Renault produce Mitsubishi cars at its French factories in a manufacturing deal, if finalised, would force the Japanese company to justify the U-turn — and face down accusations it yielded to a Renault campaign to protect French jobs.

The coalition between the three car groups is held together by Renault’s 43 per cent stake in Nissan, which owns 34 per cent of Mitsubishi, the smallest of the companies.

The French government’s 15 per cent stake in Renault has fed longstanding fears at the two Japanese carmakers that alliance strategy would be heavily influenced by French industrial politics.

In July Mitsubishi announced plans to in effect pull out of its lossmaking operations in Europe by cancelling model launches and running down its current line-up. This would lead to the end of all car sales in European markets as early as this year.

Following the announcement, some dealerships have already sold operations in preparation for Mitsubishi’s exit, while others are preparing to become repair garages for the brand instead.

An agreement to build Mitsubishi cars in France would be held up internally as a sign the Renault-Nissan-Mitsubishi Alliance was working under new management teams installed after the arrest and ousting of former boss Carlos Ghosn in 2018.

But people within both Mitsubishi and Nissan have expressed concern about such a deal that would mean Renault building Mitsubishi cars — increasing work for its French plants and providing a political boost in the country, where it is cutting jobs. 

Executives were particularly worried about a potential repetition of Renault’s 2001 decision to move the Nissan Micra from the Japanese group’s Sunderland plant to its own underperforming Flins factory outside Paris. This was seen as a political move by the French group to shore up union support.

Mitsubishi said there was no change in its policy to halt development of new models in Europe.

Nissan and Renault said they would not comment “on speculation”. Renault added the alliance always “aims to enhance competitiveness and enable more effective resource-sharing for the benefit of all three companies” and that there “are always ongoing discussions between the three companies”.

Last month, Renault chief executive Luca de Meo suggested in an interview with the Financial Times that a deal could be done, saying: “We have space in our plants; we have platforms.”

De Meo also suggested that Renault could end up building more cars for Nissan in its French plants, something that was resisted by Nissan, according to people familiar with the discussions. That led to pressure being applied to Mitsubishi by both sides of the alliance, the people said.

Before last year announcing its withdrawal, Mitsubishi sold just 120,000 cars in Europe in 2019, giving it less than 1 per cent market share.

The tentative agreement reached on Monday is the first big deal between de Meo, who joined Renault as CEO last summer, and the heads of Nissan and Mitsubishi, and a test of the relationship between the three sides.

Nissan and Renault are focusing on turning round their own businesses as well as repairing the alliance, which came near collapse in the wake of the turmoil that followed Ghosn’s ouster.

De Meo announced a scheme to save €3bn by cutting factory capacity as part of a company overhaul last month, while Nissan aims to save ¥300bn ($2.85bn) through its own turnround plan.



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