German hostility risks derailing UK plans for bespoke Brexit trade deal

German hostility risks derailing UK plans for bespoke Brexit trade deal

Britain’s plan for a bespoke Brexit trade deal is at risk of being derailed by German opposition even before negotiations on the EU-UK future relationship begin later this year, the Telegraph can reveal.

Angela Merkel, the German chancellor, is strongly opposed to a British plan for so-called “managed divergence” from the EU after Brexit, with senior EU officials and experts warning that the German leader considers the idea another ruse for Britain to “have its cake and eat it”.

The staunch German opposition to UK thinking on Brexit emerged as Philip Hammond, the Chancellor, and David Davis, the Brexit secretary, were due to arrive in Germany on Wednesday for a joint charm offensive.

The pair will travel to Berlin and Munich respectively to appeal for more pragmatism from Europe as a reward for the UK’s decision to agree to a €45billion Brexit bill last December. Mr Hammond and Mr Davis will argue that the UK is not trying to cherry-pick, but that “it makes no sense” to put in place unnecessary barriers to trade in goods and services “that would only damage businesses and economic growth on both sides of the Channel”. “As Brexit talks now turn to trade, the UK will look to negotiate a new economic partnership with the EU – the most ambitious in the world – that recognises the extraordinary levels of interconnectedness and cooperation that already exist between us,” they write in the Frankfurter Allgemeine Zeitung.

The British overtures came as EU sources said that Berlin remains implacably opposed to what UK officials have dubbed the “three baskets” approach to Brexit, in which the UK would identify where it wants to stay close to Europe, where it will diverge and a regulated middle ground.

“The ‘three baskets’ sounds like the latest episode in the ‘cake and eat it’ sitcom series,” said a senior official working on preparations for the next round of EU negotiations, adding that Germany saw a “serious risk to the integrity of the EU and its single market”.

Regional analysts warned that the British plan to diverge from the EU over time risked being stillborn if ministers could not convince Europe to take a more flexible approach.

“Hammond and Davis are going to have their work cut out to convince the EU that the UK’s ‘three baskets’ approach isn’t another attempt to cherry pick and sow division within the EU,” said Mujtaba Rahman, head of Europe practice at the Eurasia Group risk consultancy. “Merkel is determined to not award the Brits a deal that gives Eurosceptics a precedent to point to ”Mujtaba Rahman, Head of Europe practice at Eurasia Group “Germany is going to play hardball: senior officials in Berlin are clear that Angela Merkel is determined to not reward the Brits with a deal that gives Eurosceptics and future trade partners a precedent to point to.”

UK ministers have been encouraged that some EU states - notably the Nordics, the Dutch, Italy and Luxembourg - have questioned the hardline approach from Berlin and Paris, and they are now beginning a month of intensive lobbying with EU member states.

Both sides will now engage in a crucial war of ideas, with British ministers urging a pragmatic approach while the EU 27 try to reach agreement on how to approach the trade talks.

A formal EU "mandate" is promised in March. What is the ‘three baskets’ plan? The so-called ‘three baskets’ plan for the UK’s future trading relationship with the European Union is based on an idea that first emerged in Theresa May’s major Brexit speech in Florence in September 2017.

Then Mrs May alluded to three “areas of policy and regulation” with differing levels of integration with the EU Single Market. She described these as follows: _ "There will be areas of policy and regulation which are outside the scope of our trade and economic relations where this should be straightforward. "There will be areas which do affect our economic relations where we and our European friends may have different goals; or where we share the same goals but want to achieve them through different means. "And there will be areas where we want to achieve the same goals in the same ways, because it makes sense for our economies."

This template was then developed by Whitehall officials to form the basis of a 30-page paper which Oliver Robbins, the chief UK Brexit negotiator, presented to the Cabinet in December 2017.

A version of the idea, which has been seized on by senior Brexit negotiators in Europe as a key indicator of the UK plan, was presented in a report by the non-partisan Institute for Government.

The report said the EU and UK could agree on a which elements of the UK-EU trading relationship would be in the core tier, a mid tier and an outer tier. It described the tiers as follows: Core tier: akin to Norway-level obligations, where the UK would accept strong EU oversight and agree to remain fully converged with new EU rules and regulations.

Mid tier: areas where the UK could diverge, but not without losing market access. This would be closely monitored by a committee of experts. Outer tier: areas not requiring active monitoring as it would cover sectors outside EU regulatory orbit. The concept of the "three baskets" was first formally raised by Theresa May in her Brexit speech in Florence last September and expanded upon by Oliver Robbins, the UK’s top Brexit official, at a meeting of the inner Brexit cabinet on December 18.

Under the model, the UK-EU relationship would fall into three "baskets", of complete alignment, rough equivalence and no alignment.

The EU would be able to punish the UK for diverging in baskets one and two. Charles Grant, the director of the Centre for European Reform, said the British ideas had received a “very hostile” reaction from German officials. “German officials worry that clever British diplomacy would – with this model – enable the UK to ‘cherry-pick’ the bits of the single market that the UK wants to stay in, while it spurned those parts of the market it disliked," he said.

British demands for a bespoke trade deal after Brexit will require creative thinking on both sides of the Channel, British officials argue. In her Florence Brexit speech Mrs May rejected both the basic Canada-style free trade deal and a highly aligned Norwegian-style arrangement as inadequate to British needs.

Mrs May spoke of the three “areas” where the UK would either want to be fully outside Europe, fully converged or in an interim level of alignment where “we share the same goals but want to achieve them through different means”. The Florence idea was fleshed out in a 30-page paper which was presented to the inner Brexit cabinet by Mr Robbins, largely at the expense of the “Canada plus, plus, plus” deal publicly espoused by Mr Davis.

At the heart of the British position is the idea that a future trade negotiation with the EU should recognise the complete EU-UK alignment at the outset, and then work backwards, “managing divergence” from that point as the future UK-EU relationship develops. “We are not asking Germany to deliver something we think is impossible,” added a senior Whitehall official, “But when Michel Barnier says the EU want their 'most ambitious' approach to a Free Trade agreement yet, that should hold.” Michel Barnier, the EU chief negotiator, repeated the EU’s fixed positions on Tuesday saying that the “only model available” - given Mrs May’s red lines over freedom of movement and leaving the single market - “is that of a free trade agreement”.

The contents of the Robbins paper remains secret with the Cabinet still working to formalise its final position on the future EU-UK relationship, with key Cabinet meetings on the subject expected this month.

The EU is demanding the UK set out its position ahead of any talks. However, in the absence of any detail from the UK, senior EU Brexit negotiators have locked on to a paper from the non-partisan Institute for Government which outlines how the UK’s “three-tier” approach to regulatory alignment might work in practice.

Brexit | Key dates 15 December: EU leaders decide on sufficient progress

January 2018: Expected date for the Council to finalise its terms on transition deal.

Negotiations can begin on future relationship and transition October: Michel Barnier’s deadline for the Withdrawal Agreement to be finalised.

Negotiations on future relationship can continue but this is the divorce agreement October – March 2019: The Withdrawal Agreement is ratified by EU parliaments, the UK parliament and the European Parliament 29 March 2019: Brexit day and possible beginning of transition deal “When the UK formally proposes its plans for Brexit, the German bureaucracy now expects the UK to propose an approach on this model,” added Mr Grant.

Under the model, a joint dispute resolution body would enable the EU to punish the UK for diverging in baskets one and two, but also potentially allow different sectors to transition between baskets as the EU-UK relationship evolved.

“This could undermine the level playing field that the Germans want. The Germans worry that the Institute for Government model would allow the UK to thrive outside the EU and thus encourage other countries, like the Netherlands, to look for the exit,” he said.

For its part, the EU side will hold a series of seminars in Brussels covering all aspects of the future relationship, including governance, foreign policy, fisheries, aviation and no-deal planning.

The most crucial meeting, however, is scheduled for January 25 when they will discuss how to maintain the “level playing field” - EU jargon for the rules that will stop the UK from obtaining competitive advantage on tax, state aid and other regulations.

The debate is expected to be spirited. EU sources told The Telegraph that at a preliminary November seminar on the future trade relationship, the Netherlands, Sweden, Cyprus and Luxembourg all demanded a more flexible approach. They were met with firm push-back by the European Commission, which is expected to side with France and Germany in urging other member states to take a hard line and limit any prospect of the UK taking advantage of Brexit.

All about EFTA

Full title:European Free Trade Association

Role:Regional trade bloc

Founded:3 May 1960

Current membership:Iceland, Liechtenstein, Norway, Switzerland

The EFTA was created as an alternative trade bloc for countries outside the European Economic Community. Founding members were Norway, Switzerland, Austria, Denmark, Portugal, Sweden and the United Kingdom.

All but two of these went on to join the EU. EFTA institutions operate in parallel with the EU; its treaty authority is based in Brussels; the EFTA court operates in Luxembourg City, as does the European Court of Justice; EFTA’s statistical authority shares a building with the EU’s.

EFTA members Iceland, Liechtenstein and Norway are parties to the European Economic Area (EEA). They adopt most EU regulation (with some exceptions), have access to the single market and have some level of influence on future EU policy.

EEA members are expected to preserve the EU’s “four freedoms” of movement. Switzerland is not part of the EEA, does not have access to the single market and has made its own bilateral agreements with the European Union.

France’s Emmanuel Macron also warned in a remark to the Telegraph of the risk of member states damaging Europe by taking a short-termist approach to protect their own interests, but hardliners say they are confident of winning the argument. “It’s not surprising that we have not all made up our minds on the future relationship, with some countries fretting over short-term exposure while disregarding long-term risk,” said a senior EU negotiator who shares the Franco-German view. “The long-term risk of not maintaining the ‘level playing field’ needs to be explained. When those risks are made clear, you will see more unity.”

 

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