Mark Hoban Speech to City of London European Reception – 10 October 2016
My first speech as a Treasury minister was in Brussels in June 2010 at the Brueghel Institute. I reread that speech in preparation for tonight. I will win no prizes for political forecasting! In it I said of the European Union “We are in it and we are here to stay.” What I also emphasised was that the financial markets of the UK and Europe are interconnected – that was true then and true today. Indeed, our markets were interconnected before we joined over 40 years ago and will remain interconnected when we leave. That interconnection applies to our economies, our security and our culture as much as it does to financial services. I want to focus on the interconnectedness of Europe tonight – a few days after the Prime Minister announced the timetable for our departure.
We learnt last week that:
- Article 50 will be triggered before the end of March next year.
- Unless Article 50 is extended, the UK will leave the EU before the next European elections, before the next budget round and before the composition of the next Commission is finalized.
- Theresa May has been very clear about two key issues that have emerged from the Brexit campaign that will shape our future relationship – that the UK Government will determine who enters the country and that the UK Parliament will be sovereign.
As we think about the change in the nature of our relationship, we should also reflect on continuity and stability. The UK and Europe share common interests on the economy and security which will remain unchanged whether we are a member of the EU or not. The health of the UK economy is as important to the EU as the health of the EU economy is to us. From food to fund management, from IT to insurance, from broadband to banking, our economies are interconnected. BMW’s minis are still rolling off production lines in Oxford. At a time when economies across Europe face challenges, neither of us can afford for the other to suffer as a consequence of Brexit.
Like our European neighbours, such as France, we play a role on the world stage through hard and soft power. We have more Royal Navy ships in the Mediterranean today than we did before the referendum. Our armed forces have been in action alongside each other as part of European and NATO operations for decades. Preventing people smuggling from North Africa to Italy matters to Theresa May as it matters to Matteo Renzi. Our aid budget at 0.7% of GDP complements EU development spending – maximizing the impact we have on improving lives in developing countries.
Whilst our interests remain common, the structures for working together will change as a consequence of Brexit. We will be outside the EU framework of relationships and processes that enable us to function together as we do. The challenge we face is how to reshape that relationship. Article 50 determines how we will leave the EU, what it doesn’t do is tell us what will replace the current structures. So what do we need to think about as we head towards negotiations next Spring.
Firstly, there isn’t an off the shelf package. There isn’t that moment that you often see on cookery shows when the chef pulls out of the oven something they had made earlier. EEA membership doesn’t work for us given the basis on which the referendum was fought. Trade agreements have tended to focus on goods whereas much of our trade is in services. The Swiss network of agreements took 20 years of negotiations. Whilst none of us believe we can conjure up a deal overnight – like a magician pulling a rabbit from out of a hat – neither the UK nor Europe can wait 20 years. If we recognise the interconnectedness that has developed over the last 40 years, then we need a bespoke agreement that mirrors the complexity of our relationship.
Secondly, Europe and the UK needs stability whilst that bespoke agreements is hammered out. I don’t think it is in anyone’s interest for there to be a cliff edge at the point of exit which disrupts business. That could create a sudden economic shock which would damage jobs and growth across the EU. In financial services, we see the need for a transitional period to preserve financial and economic stability to bridge the gap between the end of the Article 50 process and the conclusion of the talks on the future relationship.
During the transition, the current terms on which EU27 businesses can access Europe’s financial centre – London – need to be maintained so they can continue to meet their needs for financing, capital and insurance. Depending on what is agreed in the talks on future relationship, a further transitional period will be required to enable businesses to adjust their business models – for example whilst awaiting regulatory approval if they need to set up a new subsidiary operation in the EU27. Long transitional periods will be needed in so many areas to safeguard jobs and growth. Those arguing on either side of the Channel for a swift, clean break, underestimate the economic cost of their plans. We all need a stable transition from EU membership to the new relationship.
Thirdly, it will be complex – complex due to its breadth but also due to its subject matter. This is a recurrent conversation – not just in financial services but across all sectors where we have traded freely. Businesses are starting to understand the legal basis on which we have imported and exported goods and services. Complex legal, technical and operational structures have been built around acquis. In shaping the future relationship, we need to understand the fundamental rules of doing business that need to feature in a new settlement. This is particularly the case in financial services.
The IRSG, which I chair, has kicked off a work stream looking at equivalence and third countries relationships across every financial services directive. This is no easy task since it has been dealt with on a piecemeal basis rather than horizontally. Depending on the deal that is reached, the UK could become a third country for the EU, but of course, this applies to your relationship with us – the UK will need its own third country regime.
In thinking about our future relationship, we should consider how to maintain some form of coherence between UK and EU regulation to enable EU businesses to access insurance, capital markets and banking services in London without adding to the cost of doing business. Unpicking the basis on which business has been done over 40 years is not going to be straightforward! That complexity also means we need time to get it right.
Fourthly, it should avoid the risk of fragmentation. There are those who believe that when the UK leaves the European Union, that the EU27 will be able to cherry pick the bits of business that they want and there will be an exodus of business from Britain to the EU. There is no guarantee that this will happen.
We should not forget the fundamental strengths of the UK economy, such as contract and labour laws, that led businesses to locate in Britain rather than one of the other 27 member states. But further fragmented markets, shallower pools of liquidity and capital, higher costs from conducting business from two jurisdictions rather than one – all have to be taken into account when deciding whether to move business from Britain into the EU 27 or to the Far East or North America or simply leave it where it is. Fragmenting Europe’s markets might look superficially attractive, but a fragmented market will cost us all jobs and growth.
So in looking beyond the Article 50 process, those negotiating for Britain and the 27 member states and three European Union institutions will need to look for a bespoke, comprehensive deal which reflects the unique richness of the relationships between the UK and the EU, it is deal that will take time to sort out. Much of that deal will be coloured by events of the last few years but we need a longer horizon.
The history of Europe is of shifting patterns of blocs and alliances – from the Holy Roman Empire to the European Union. At this point in Europe’s history we should recognise that regardless of the different configurations of nations, that the relationship between the UK and its European neighbours was, is and will be vital. That history, culture, security and economics bind us together far more than institutional structures. My hope is that in the negotiations in the future relationship between the UK and Europe that we don’t lose sight of the threads that bind us together whilst we unpick our current relationship and forge a new one.