Yesterday, the German government seemed indifferent to an article written by Brexit secretary David Davis and Chancellor Philip Hammond, that was published in the German daily newspaper Frankfurter Allgemeine Zeitung.  The ministers appealed to the German government to press Brussels, “to craft a bespoke solution” for financial services in a trade deal that prime minister Theresa May would later negotiate.

German Chancellor Angela Merkel’s spokesman, Steffen Seibert, responded by saying: “We have always stressed the importance of the unity of the EU27”, maintaining that they will not be distracted by the UK’s seeking German support. Seibert also said that neither minister was meeting with anyone in the German cabinet. Davis met with German business leaders to “lobby for a deal that includes close economic ties,” according to the newspaper article, while Hammond met with Berlin politicians.

Deals before the formal talks

Phase two of the formal Brexit talks resumes at the end of this month, with negotiators moving onto the topic of the transition period after the UK leaves the EU on 29 March, 2019.  In setting up the agreements for this transition period, it is clear that the EU has come up with a pair of plans: one for the event of a Brexit deal, the other in the event that the trade talks scheduled for this autumn break down.

Whitehall sources remain steadfastly confident that the European Union will grant the UK a two-year transition period after March 2019, even if the trade negotiations fail. This is because it would be in the EU’s best interest to avoid the sudden budget loss from UK contributions and other potentially negative economic impact. The EU has said that they would permit an 18 month “status quo” transition period during which there is no change from the current EU regulations.

And then, we have heard, there is a UK plan for “gradual divergence,” which means that after the transitional phase concludes in early 2021, Britain will gradually diverge from EU rules over an unspecified time. This would allow the UK to maintain the same wider economic relationship with the EU - if - the EU agrees to permit this. However, German Chancellor Angela Merkel, has been adamant about not allowing the UK to “cherry pick” the terms of any agreement. 

Charm Effective?

The UK is still hoping to convince the EU to strike a bespoke deal. Chancellor Philip Hammond and Brexit Secretary are making their best case for allowing Britain to continue having access to financial services after leaving the single market. Merkel is unlikely to be supportive of Davis and Hammond’s German ambitions and she is thought to be opposed to the UK’s plan for “managed divergence.”

Hammond and Davis are attempting to convince German businesses to back their ambitious vision for a trade deal that would “cover the length and breadth of our economies including the service industries—and financial services.” They are striving to win Germany’s assistance to convince Brussels to change their stance on the notion of allowing a bespoke deal. EU chief negotiator Michel Barnier has said several times that this is not an option. In December, he repeated his firm stance, saying: “There is not a single trade agreement that is open to financial services.” 

In a bid to save the immensely valuable services sector, which accounts for about 80% of Britain’s economy, the ministers sought to illustrate the dire consequences for Europe that could spread from the economic crisis this would cause in the UK: “The 2009 global financial crisis proved how fundamental financial services are to the real economy, and how easily contagion can spread from one economy to another without global and regional safeguards in place.”

Barnier disagreed with Hammond and Davis, reiterating his position against the UK having easy access to the EU’s financial markets. In a speech to business leaders in Brussels, he also used the financial crisis as a warning that granting the UK easy access could undermine stability. “We simply want to remain in charge of our own rules and the way in which they are applied. Let us not have short memories, the financial crisis was not that long ago; it cost us a lot and it destroyed value and millions of jobs.”

Financial sector pays to dance?

Speaking off the record to Bloomberg, German officials from two key Government departments in Berlin said this week that Britain can only hope for a trade agreement that includes financial services if the UK is willing to make substantial contributions to EU’s budget and follows European law. This may come as an answer to the chancellor complaining that the EU hasn’t made it clear what future relationship they want with Britain. Hammond told an economic summit hosted by the newspaper Die Welt, which was attended by Angela Merkel: “They say it takes two to tango. Both sides need to be clear about what they want from a future relationship.”

Today, Brexit secretary David Davis meets with German business leaders in Munich to urge them to convince Chancellor Merkel to grant the UK a bespoke trade deal including financial services, which Hammond and Davis say is pivotal to the bespoke deal the UK seeks with EU. 

Die Welt Economic Summit Address

Chancellor Hammond and secretary Davis spoke at the Die Welt Economic Summit in Berlin on 10 January. Hammond asked the EU to “put behind” any intention to punish the UK for having left the Eurozone and focus on maximizing the benefits of future co-operation on defence, science, education, technology and culture. 

Perhaps it is time for Theresa May to put behind the “red lines” she spoke of in her Brexit speech in Florence, especially in contending that “neither the European Court of Justice nor the UK courts can be the arbiter of disputes.” If the UK is to succeed in getting the financial services deal, the City would need to continue following EU laws. As for paying to only enough to “honour our commitments,” the distinct possibility exists that the UK will have to agree to pay indefinitely to preserve the financial passporting rights it has today.