As rapporteur for the ECON Committee opinion on the Trade and Cooperation Agreement (TCA) between the EU and the UK, as well as rapporteur for the implementation of the Withdrawal Agreement and an S&D Group member of the UK Coordination Group, I have been very closely following this never-ending Brexit saga, which started with the British referendum back in 2016.
After so many years of doubt and uncertainty, the mere fact that there is finally an agreement on the future relationship between the EU and the UK is, by itself, an important damage control exercise. True, this agreement also sets the framework for building a new political and economic relationship of major strategic importance for both parties. However, we must recognise that even with this unprecedented trade agreement allowing for market access with zero-tariffs and zero quotas, in exchange for clear commitments ensuring non-regression on existing standards and a level playing field for fair competition, life cannot be the same after Brexit.
“After so many years of doubt and uncertainty, the mere fact that there is finally an agreement on the future relationship between the EU and the UK is, by itself, an important damage control exercise”
While the UK loses, in one fell swoop, all the benefits of being a member of the European Union, the Single Market and the Customs Union, businesses on both sides of the Channel will face additional costs and logistical difficulties arising from regulatory divergences and new, unavoidable border controls and customs checks for a number of products and economic sectors.
One of the sectors that will have to deal with an entirely new framework is, of course, the financial services sector, one which is of particular importance for the British economy (services representing around 80 percent of the UK´s economy, the largest share being financial and professional services). In fact, the so-called ‘passporting rights’ of financial institutions immediately ceased to apply on 1 January and, from now on, access to the European market will depend on unilateral and provisional ‘equivalence decisions’ made - in the case of the EU - by the European Commission.
In other words, ‘equivalence’ means a limited, conditional, and revocable access to market, fully dependent on the other party’s decision on the recognition of such equivalence. In concrete terms, equivalence decisions will assess, on a case-by-case basis, and in a forward-looking fashion, the degree of alignment with the regulatory framework of the Single Market. This will ensure consumer protection, financial stability, and market integrity as well as avoiding any undue competitive advantages arising from future regulatory divergences.
In accordance with the joint declaration on regulatory cooperation between the EU and the UK in relation to financial services, a Memorandum of Understanding is to be agreed by March 2021. This will provide arrangements with the aim of fostering regulatory alignment and ensuring political consultations in the process of adoption, suspension and withdrawal of equivalence decisions. However, one thing is certain: equivalence decisions will always remain unilateral. For financial services, even more than for many other sectors, Brexit really does mean Brexit.
“While the UK loses, in one fell swoop, all the benefits of being a member of the European Union, the Single Market and the Customs Union, businesses on both sides of the Channel will face additional costs and logistical difficulties”
Unlike all previous trade agreements, where regulatory convergence was the issue, the most challenging aspect of the Trade and Cooperation Agreement has always been the way to manage future divergences arising from the regulatory autonomy of each party. However, the key to solving this very difficult problem was, from the beginning, at the heart of the Political Declaration, which guided the negotiations on the future relationship. In fact, the Political Declaration clearly pointed out the essential link between an ambitious trade agreement, with unprecedented market access, and the need for a robust and sustained commitment to ensure fair competition, a level playing field and a non-regression clause on the existing environmental, social and labour standards.
To manage this in the event of a breach of these commitments or in case of future regulatory divergences with relevant economic consequences, a set of innovative solutions were finally agreed, including the possibility of trade sanctions and cross suspension of trade provisions across all economic areas. This means that where future divergences arise, the level of market access granted to the UK will be adjusted in a proportional manner, unilaterally if necessary.
In the last few years, trade sanctions have been a topic of intense and rather absurd discussions regarding the toolbox for enforcement of the Trade and Sustainable Development chapters in trade agreements. The negotiations with the UK have proven that a sanctions-based approach must be part of the solution. The time has come to move forward and let this approach become the new standard for future trade agreements.