Goodwill in the Brexit Negotiations

Home Affairs
Tuesday, November 1, 2016
Danny Zhao & Tommaso Maschera


One thing can be inferred with certainty from the Referendum: according to most British citizens, Brexit is an opportunity. An unrealised one—we may add, at least for the time being.

As with all unrealised opportunities, Brexit is the promise for a better status quo: it represents a chance that things will be better. No matter how hefty this chance may be, however, the fact that it is not realised introduces an element of uncertainty. What if Britain loses its favourable trade relations with the EU? What if companies based in Britain lose their “passporting” to access the EU market? What if Brexit does not give Britain the regulatory autonomy it demanded? —These questions are the corollary of Brexit being an (unrealised) opportunity.

In the context of this great uncertainty, it is fair to ask how we can work to make sure that Brexit, as an opportunity, is realised in the best of possible ways. To this question, we propose a principled solution: the most grounded approach is to reaffirm Britain’s proven identity as a nation that is open to trade, and one where doing business is uncompromisingly easy. This tenet, we also believe, is how negotiations should be approached.

But what does this actually mean? For one, it means that it is in Britain's economic and political interest not to treat the EU's acquis as a unique, undesirable lump of regulatory mess. Rather, a distinction ought to be made: regulation that is beneficial to Britain's economic activities should be kept; and regulation that hampers British business should be scrapped. This, then, begs the question: which is which?

Businesses across Britain, big and small, have the answer: regulation that sets the 'rules of the trading game' is mostly desirable. These non-tarriff barrier (NTB) rules grant that, for instance, the German Government cannot pass laws imposing archaic regulations on acceptable beer ingredients, unfairly discriminating against British ale brewers to benefit their Bavarian counterparts. Since accepting common rules is necessary to play, these rules should be kept—that is, they should be incorporated into British law.

Listening to what job creators have to say can also help us in determining which of the EU's regulatory measures we are better off without. Perhaps unsurprisingly, 'one-size-fit-all' directives top the list, and particular frustrations are reserved towards those attempting to regulate the labour market—Temporary Agency Directive and Working Time Directive first among them.

"Rules” are especially crucial to the trading game of services. After the Financial Crisis of 2008 there is an international consensus that financial services around the world need to be altogether better regulated and supervised.

Closing the regulatory gap between nations’ financial services standards not only helps to prevent a global crisis triggered by the inter-connected financial markets, it also makes providing service cross-border easier by reducing regulatory arbitrage.

This is the focus of most EU financial regulations since 2009 - to better regulate financial services and to make a levelled playing field for cross-border services. Therefore, to maintain financial stability and to continue allow its financial institutions to provide services to EU customers, it is in UK’s economic interest to avoid a bonfire of regulations. For example, the existing EU framework for Capital Requirements largely reflects internationally agreed standard of supervision, and is a crucial regulation for the UK to maintain in order to provide a levelled playing field for UK and foreign banks to continue cross border service.

While it is important to regulate the financial services sector to ensure stability, more rules mean higher compliance costs, and sometimes reduces the liquidity of certain aspects of the financial market. On a scale where avoiding financial risk weights on the one side and the competitiveness of the financial sector weights on the other, it is not surprising that the more financial services reliant UK would prefer a different balance point compared to the EU.

With the support of competent supervisory institutions such as the Bank of England and the Financial Conduct Authority, the UK can induce the competitiveness of its financial sector by reassessing existing EU regulations such as the “position limits” and the “double volume cap”, while maintaining financial stability.

While some worry about the “ill will” of EU member states towards the UK and the impact this may have on Brexit negotiations, we urge the UK to conduct its negotiations in goodwill, re-affirming Britain’s identity as open to trade. And that goodwill lies in the fundamental understanding that Brexit is an opportunity for the UK and the EU to reinvent a new partnership that addresses their emerging political and economic differences.

Danny Zhao & Tommaso Maschera are contributors to the Bow Group