Now that Brexit has been signed, sealed and is set to be delivered, it is time to talk transition. While it is a regret that we see the UK, after 47 years of influential membership in the European project, leave the EU on January 31, we hope that this may be more au revoir rather than adieu. February 1 marks the start of the most testing phase of the EU-UK's move to its future relationship. In some ways the transition period marks the biggest experiment in legal fiction by agreeing to treat a third country as if it were an EU member state, while trying to negotiate a comprehensive free trade agreement in 11 months. These are the most important negotiations since the 2016 referendum. No one has said this was going to be easy, even if there is some relief because of the greater certainty as to what happens next. Michel Barnier has said that the EU and Britain will only be able to reach a "basic" trade agreement, ultimately for goods and not services, if the UK government refuses to seek an extension of the transition period. Doing so would go against the current government's position.
On the assumption that no agreement is concluded by the end of 2020 and no extension is requested, then free trade, along with the transition period's mutual access for financial services along with professional services, ends on December 31, 2020, and effectively there is a reversion to WTO trading terms and a "No Deal" level of access for much else. On Monday February 3, the European Commission will announce its mandate for the trade talks. Michel Barnier, who remains chief negotiator, has already briefed the EU-27 on the proposed three-week rhythms of one week prep, one week of negotiation and one week of debrief. Factor in the summer and other holidays on both sides and this leaves considerably less time than 11 months.
This might explain why the UK has launched its consultation on Singapore-style "freeports" – something which goes against the grain of what the EU would like to see – and like statements by the UK's financial services regulators point to further friction due to divergence. For those financial services firms wanting to do business on both sides of the border, this merits, as highlighted over the past years, taking decisive action to maintain access to markets and customers (reverse solicitation and other measures that do not embody the spirit of the EU's supervisory principles on relocations pose issues), but ultimately also on how they are set up in terms of governance, policies and procedures, an area that is becoming increasingly a priority for invasive supervisory scrutiny from the ECB-SSM, as our recent client alert on the SREP 2019 findings details. Some firms may want to revisit their planning.
Transition is also very much on the agenda in relation to the future of the Eurogroup, the informal meeting of Eurozone finance ministers that helped guide members and the wider EU through much of the last financial crisis and set up the legislative reforms and institutional pillars that have shaped the EU since then. Jostling for top jobs is set to commence with a delicate balance between northern and southern member states set to influence that decision. An alternative that is being mooted is to abolish the Eurogroup altogether unless it is reinvigorated to focus on its core purpose, the euro, which the EU Commission has committed to grow in terms of its international role.
Transition has also been on the agenda over at the ECB, with the start of its strategic review of its monetary policy activity, and the pledge at its first ECB press conference during 2020 to leave no stone unturned in its review. The review, which will conclude by the end of the year, will focus on economic and quantitative analysis that affects both inflation targets and real economy development, as well as the ECB's use of models for financial stability purposes, including counter-cyclical buffer levels, along with a review of the range and adequacy of its monetary policy toolkit and corresponding communication strategy (seasoned ECB-watchers will have noted a more confident and communicative ECB conducting outreach to the wider real economy through the use of podcasts and short videos). While welcome, perhaps more is needed, especially as a number of the "big ideas" have been floating around for some time, whether covered in ECB working papers or elsewhere, and others may, like central bank distributed ledger systems, still need to convince many seasoned policymakers and stakeholders, some of whom are concerned about the strength of macroprudential tools if rates stay lower for longer.
Where the ECB is certainly responsive to the concerns of citizens (in contrast to its position on rates) is its bold and very welcome commitment to place ESG as a "mission critical" aspect, much in line with the EU Commission's Green Deal, and to include green modeling in its decisions, but not quite 'green QE', for at least the moment. President Lagarde's summary on climate neutrality as "failing to try is trying to fail" may bring echoes of Mario Draghi's "whatever it takes" and it's now up to the current ECB team to deliver.
We hope you have had a very good start to the New Year and that you enjoy this month's edition.
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