The ups and downs which have marked the final negotiations about the trade treaty between European Union and Canada (CETA) are full of lessons about those which will open with the United Kingdom about Brexit. The last-minute agreement reached between Belgian provinces to permit their country to ratify the treaty currently discussed in Brussels does not change anything to the questions this affair has rose regarding European procedures related to negotiations between the Union and third countries and their approvals. Commission has received by delegation, a full mandate to negotiate. But regarding approval, it is either the Council of ministers, which decides on a majority basis, or each States, which requests unanimity. The Wallonia case reveals a new complication. In some States, which have a federal structure like Belgium, the approval of each province is necessary to authorize the ratification by the State. In Europe as a whole, there would be 38 parliaments in charge of any approval. Only one of them can hold up the whole process. It is exactly what was about to happen with Wallonia.
In a trade negotiation,, and inside a country, there are necessarily, winners and losers. Some productions, which are located in a portion of the territory, would export more due to the suppression of trade barriers or to the reductions of duties. Other territories, on the opposite, will see the increase of imports for the same reasons. When the State is the only one which has the mandate to approve the final terms of the negotiation, it will have to find, with the political risks it has to face, the way to soften, for the losers, the consequences of the agreement. But when the territories have this mandate, it happens exactly what has happened with Wallonia which has refused to see an invasion of Canadian products which could have put in danger its farmers. An agreement, except if there is an unexpected reversal, at the end, has been reached. But Wallonia case shows the European discussion process fragility.
When the United Kingdom has activated article 50, which opens the exit process of a member-State, the negotiation which starts will be much more complex than the discussion of a commercial agreement with Canada which is a minor trade partner of European Union. The scope of the discussion will be much broader and both participants to the negotiation will have to report to states and to local authorities which will have frequently opposite demands. To reach an agreement, it will be necessary that everyone makes concessions, which will be more difficult because discussion will be split. It is usual that at the final stage of a negotiation and to reach an agreement, parts exchange concessions related to different topics. But, in that case, it will be almost impossible since, legally, proceedings will be separated, if for instance they are related to people freedom of circulation, trade or financial regulation.
The freedom of circulation issue, which abrogation was the major argument of “Leaves”, is already an almost impossible mission, due to the situation in Ireland. After decades of civil war, both parts have, at the end, found an agreement. Northern Ireland staid in the United Kingdom, but borders inside the island wilould be abolished. It is inconceivable that Europe impose to Ireland the institution of a border as a consequence of the Brexit. But it is also inconceivable that other European Union members accept that their nationals cannot go freely to the United Kingdom when Irish people can freely travel to Belfast or to London. And it is even more unlikely than the United Kingdom reopens, with its Irish neighbor, the painful issue of the reunification, which would be the only solution to content everyone in case of Brexit. Scotland, which has not said its last word regarding its independence aspirations, would definitely take it as an opportunity to call for a new referendum on this issue.
The de facto status quo of the City privilege, as the favored market place in Europe with its current status, is, apparently less complex to solve. There are two candidates to take over this role, Paris and Frankfurt, and one cannot turn down the idea that if one of the two feels it is about to lose the competition, it will support the status quo. The negotiation could, in that case, be focused on the money England would pay to keep its passport. The country would regain it on those which will take advantage of the deal.
The negotiation of a new free-trade agreement will be much more complicated since European countries priorities are different and that those which will have no gains from it will try to get, as a counterpart, advantages and even financial compensations. France and Germany have high trade surplus. Both will be more inclined to approve a deal than Eastern European countries which essentially send to England those who have not found a job at home. And who, in the future, will be forced back. The Wallonia case, in a growing eurosceptic climate, will incite provinces, even when their constitution doesn’t make provisions about their role, to formulate more and more demands. The most affected country will be, once more, Ireland, which has attracted a huge amount of investments from American and Japanese companies to supply European markets and take advantage of a friendly corporate tax system. They located there their profits through artificial transfer prices. If they cannot re-export their product to England, a substantial part of their arrangements will become irrelevant.
The only thing which is sure is that any done deal, if there is one, will take a lot of time and will generate, during that time, heavy damages to the British economy. Foreign companies, located in the United Kingdom, have already delayed their investment programs, waiting to know more about Brexit. It is the case for the car industry. Nissan obtained guarantees from the Prime Minister to get compensation if there is any damage caused by the new trade regime, which is in contradiction with any current or new commercial agreement. But General Motors and Ford have suspended their decisions regarding the launch of new models. Majors banks located in the City of London are facing the greatest incertitude about the future of their businesses. They will stay but the size and the scope of their activities is impossible to foresee.
The sterling has fallen by more than 10% since the referendum but production is still growing, ahead of the first half of the year, at an annual rate of 2%. Financial markets are reacting more quickly than businesses and the consequences of their decisions take more time to have effects. But these one are unavoidable. The United Kingdom is confronted with a heavy balance of payments deficit. In such a climate and to attract foreign capital to finance it, there is only one cure : to increase interest rates. But it would be dangerous at a moment when, due to the numerous difficulties to reach an agreement on Brexit, the economy would enter into a recession.