In Brussels I spoke to senior Council and Commission officials, as well as the ambassadors of some large member-states. In Paris I spoke to officials in the finance ministry, the foreign ministry and the prime minister’s office, as well as close advisers of candidates François Fillon and Emmanuel Macron. I also attended the annual Franco-British colloque in Versailles, which brings together politicians and business leaders of the two countries, at which one of Fillon’s top advisers gave a keynote speech. These meetings took place at the end of January 2017.
These notes are for friends of the CER. They will not be published and should not be cited.
MAIN POINTS
BRUSSELS
- Top officials are gloomy about the Brexit talks, fearing that Britain’s highly emotional domestic debate may drive Theresa May into taking such a tough position, eg on money, that negotiations may break down without a deal.
- On the sensitive question of money, the Commission is more hard-line than the Council of Ministers.
- Similarly on ‘sequencing’, though the Commission says the EU cannot talk about the future relationship till the British sign a deal on Article 50, the Council thinks the two sets of talks can run in parallel.
- The member-states do not fully trust the Commission to run the Brexit talks properly. So they have insisted on having two of their own representatives in the negotiations.
- The Parliament has threatened to block the Article 50 deal, unless it is allowed into the negotiations. But neither the Council nor the Commission takes this threat very seriously.
- On the refugee crisis – being discussed at this week’s Malta summit – the Commission thinks things are under control but the Council is more worried. The much-trumpeted ‘migration compacts’ between the EU and key African states, which would facilitate returns of economic migrants, are for the most part not yet working.
PARIS
- The combination of Brexit and Trump has made France’s ruling elite insecure and defensive. Its top priority is to keep the EU strong and united. This means that Britain must not be seen to thrive on the outside. The French fear some combination of the UK, the US and Poland undermining the EU.
- In the Brexit talks, the French will take a very hard line on the City of London, doing it no favours. They will also be uncompromising on the question of the money that the UK ‘owes’ the EU.
- On eurozone matters, France and Germany remain as far apart as ever on what they want. The French suspect that even after their respective elections, the Germans will still be reluctant to go for any kind of grand bargain reform of eurozone governance. But the Franco-German relationship could warm up, overall, with either Fillon or Macron as French president.
- Of the main presidential contenders, Le Pen’s problem is that she presides over a party that is split down the middle (one side is economically liberal and socially conservative, the other is statist and socially liberal). Macron has momentum but his problem is lack of support among working class voters. Fillon has been damaged by the scandal over his wife’s non-jobs and his economics may be too ‘Thatcherite’ for his own good.
NOTES FROM BRUSSELS
MRS MAY’S LANCASTER HOUSE SPEECH, AND BRITAIN’S EUROPEAN DEBATE
EU officials liked the clarity and generally positive tone of Theresa May’s Lancaster House speech. They disliked the threat to walk away and establish Singapore in the North Atlantic – they don’t believe that threat is credible and they are devising schemes for punishing the UK, if it pursues social or tax dumping. They disliked the statement that the UK would seek to give the car industry and financial services special treatment via quasi-single market arrangements; they remain strongly opposed to any kind of ‘cherry-picking’ of the single market.
Several key officials fear the outcome of the Brexit talks will be a much harder separation than the model implied by May’s speech. They have a very jaundiced view of British politics and in particular of the European debates within the Conservative Party. These officials note that hard-line eurosceptics usually win arguments in the UK on European issues, and think May may be incapable of standing up to them. Therefore, they fear, domestic politics and press campaigns may force May to storm out of the talks – perhaps in an argument over money – and then go for a general election. When I argued back that May still has to take many key decisions on Brexit, and that the final model may look less hard than they feared, they were not at all convinced.
Officials regard May’s pledge to negotiate not only the Article 50 divorce settlement, but also the future relationship in just two years, as bonkers. They don’t buy the 10 Downing St line that, because EU and UK regulations are currently aligned, an FTA will be relatively simple. Dealing with the UK’s wish to be able to de-align its rules, plus the need to work out deals for service industries, competition policy, state aid and much else will be very difficult, they think. That May came out with such a pledge reinforces the view in Brussels that 10 Downing St is not fully in touch with reality. The officials also think May erred in making such an unequivocal pledge to keep the ECJ out of Britain. That closes off many possible compromise deals.
The officials think that if all goes well, an Article 50 deal plus a political declaration on the future relationship may be possible in two years. One senior Commission official says his British counterparts understand perfectly well that that would be the best possible outcome for the UK. Officials think there may be scope for Britain and the EU to make voluntary undertakings to do certain things, eg on taxation, before Brexit happens.
THE MONEY ARGUMENT
There is a definite difference between the Commission and the Council on the money question. Both institutions say they accept the same methodology and figures. And everybody in the EU institutions stresses this is not about punishment or giving the UK an ‘exit bill’, but holding the UK to account for promises it has made on EU spending.
However, one very senior Commission person says that Britain must sign up to pay a total of €60 billion, net; other senior Commission officials won’t give a specific figure. Meanwhile the line in the Council is that if the Brits sign up to the principle of meeting their legal obligations to the EU on money, then the member-states will compromise on the actual numbers. Most member-states won’t want to quibble over the odd €10 billion to jeopardise the whole deal. “The amounts at stake are peanuts,” says a Council official. “If the member-states want to adjust the numbers downwards, we’ll go along with that.” In terms of UK domestic politics, the government would need to sell the payment as a means of getting a generous FTA.
The Commission is much more obdurate. It views the numbers as objective fact and argues that if Britain ended up paying less than is demanded, other governments would have to step in to take on its commitments. In some parts of the Commission there was little understanding of how difficult this question would be in British politics, and that presentationally everyone needed to come out a winner. These parts say progress on the money should be a precondition for discussing the future relationship. Nor can the money owed be paid off gradually over years, they say – the British will need to cough up quickly. Council officials think the Commission will soften when member-states make their view clear. However, the German government stands by the €60 billion figure.
A British official says several member-states take an even softer line than the Council, and would not insist on the principle of the UK accepting all its obligations. But he accepts that both net payers and net recipients have a common interest in making Britain pay as much as possible. (On February 6th the CER will publish a detailed analysis of the money question by Alex Barker of the Financial Times.)
SEQUENCING
On this issue, too, there is some difference between the Commission and the Council. The Commission sticks to the line that only when Article 50 is done and dusted can the EU think about deals on future relations. But it is less hard-line on this point than it was six months ago. It now says that informal talks on the future can run in parallel to the Article 50 talks, though the latter would have to be going well, and generating trust, to make the former worthwhile.
The Council is much more relaxed on sequencing. It thinks the Commission is making a tactical mistake in emphasising the €60 billion as a precondition for talks on the future. It says it is OK to discuss money early on, but not exclusively. “Money’s not the main concern of the Council.”
The Council thinks that the EU shouldn’t leave difficult issues like money for the beginning or the end of the talks, but do them in parallel to other issues – though the British should be prevented from trying to bargain between the Article 50 talks and the FTA. The Council thinks the member-states will be more interested in future relations than Article 50, ie the past. The German government is happy for there to be parallel talks.
THE INSTITUTIONAL BALANCE DURING THE BREXIT TALKS
Once it receives Britain’s Article 50 letter, the European Council will take four to six weeks to respond with guidelines for the Brexit talks.
There is a risk that Donald Tusk will not be reappointed as European Council president when his term expires in the summer, because of opposition from the current Polish government, and because Europe’s Socialists – having just lost the presidency of the European Parliament – want one of the top jobs.
But whoever the European Council president is, he or she will have a representative present in each round of Brexit talks (that person will not have speaking rights but will report back). The member-states insisted on this because they don’t trust the Commission’s reporting. The Commission says it is happy with this arrangement, though I sense that it may be putting on a brave face over a battle that it lost. The rotating presidency will also have a representative present in the talks.
Many member-states, and even the British, are relatively relaxed about Michel Barnier’s key role in the Brexit talks. He has done his homework in listening to what the 27 say. He is better on the big picture than the details. He has assembled a strong team, starting with his deputy Sabine Weyand, one of the best Germans in the Commission (though there are no Brits in Barnier’s team). There are more worries about Martin Selmayr, President Juncker’s chief of staff, who is the most powerful official in the Commission. Some member-state officials worry that he has his own agenda and some British officials claim that he is hostile to the UK. Selmayr’s supporters deny that, pointing out that his job is to defend the principles, independence and integrity of the Commission and the other EU institutions.
Meanwhile the Parliament has won the right to have a representative present when the heads of government’s ‘sherpas’ meet. But it has failed to gain a presence in the formal negotiations. The recent deal between the EPP (centre-right) and ALDE (liberal) groups in the European Parliament – which helped Tajani to win the presidency – said that the EP would block the Brexit deal unless it is allowed into the negotiations. But senior Commission and Council officials don’t take this threat very seriously.
SOME PARTICULARLY DIFFICULT ISSUES IN THE BREXIT TALKS
The legal basis of the transitional arrangements. The Council and the Commission believe that the phasing out of the UK’s current obligations can be done under Article 50, ie without a need for ratification by every national parliament. Anything about the future, such as staying in Horizon 2020, or trading arrangements, would require a separate deal, and in some cases national parliamentary ratification. While the Council thinks phasing in to a new set of arrangements can be done under Article 50, some Commission officials think that different legal bases may be required.
Data flows. Officials expect this to be a very contentious issue. The EP will be the problem, not the member-states, since it tends to put citizens’ rights to privacy ahead of the need to encourage security co-operation. Some member-states already accuse the UK of not following current EU standards on data privacy. But one Council official thought the Commission will probably grant the UK ‘data adequacy’, so that data can flow across the Channel after Brexit.
Competition policy. Few people are yet focusing on this difficult area. There will have to be an agreement on co-operation between the UK and EU competition authorities. But the role of the ECJ – which plays an important role in EU competition policy – will be a difficult issue for the British. Equally they will have to get used to the fact that the Commission will sometimes intervene in mergers between two British companies, as it has done between two American firms. There will need to be another agreement on state aid, with the EU insisting on provisions to prevent the UK from subsidising its industries, such as cars, unfairly.
‘Acquired rights’. Both sides will want to make a priority of giving security to UK and EU citizens living in each other’s territory, but the legal difficulties will be enormous. For example, the definitions of residence differ in the UK and in France. International law provides very little guidance on what to do with citizens’ rights when a country decides to leave the EU. Adding to the complications, some of the relevant legal competences rest with the EU, and others with the member-states.
Co-operation on Justice and Home Affairs. Creating arrangements that allow the British to plug into Europol should not be too difficult; Britain would be able to exchange information with the 27, and take part in joint actions, though it would not be in decision-making councils. However other sorts of Justice and Home Affairs co-operation will be much more difficult. Only member-states can participate in the European Arrest Warrant, and there is no precedent for a non-EU, non-Schengen country having access to Schengen databases. The EU will insist on the ECJ overseeing many sorts of JHA co-operation.
REFUGEES
The Commission, as always, is very optimistic on the EU’s ability to cope with refugee flows. One senior official detects real convergence among the 27, for example on efforts to reform the ‘Dublin system’ of dealing with asylum-seekers. The imminence of the ‘multi-annual financial framework’ (MFF) talks on the budget is concentrating Central Europeans’ minds, he says – and he predicts that they will contribute in kind, such as with money or border guards, if they cannot take refugees. The ‘hot spots’ for processing refugees in Italy are working. In the long run, this Commission official predicts, everyone will agree to a reform of the Dublin rules, to the effect that once a country has taken in a certain number of refugees, a redistribution system kicks in. This official finds Italy much easier to deal with, now that Gentiloni rather than Renzi is prime minister; Italy is working with EU coast and border guards to train Libyan coastguards. The idea is to move Operation Sophia into Libyan coastal waters so ships can then return migrants to Libya. Meanwhile EU countries like Germany are changing their rules on returns, so that they can more easily send people back.
But the member-states are much more worried about the refugee crisis. The Germans see little sign of the Central and Eastern Europeans accepting quotas on refugees; but the Germans insist they must, saying that contributions in kind are not enough. The Germans say they will be very tough in MFF talks, if the Central and Eastern Europeans don’t soften their stance – that is to say they will play the money card, threatening to reduce structural funds. And ultimately Germany would be prepared to exclude countries that won’t co-operate, including Greece, from Schengen – or perhaps set up a ‘mini-Schengen’ with France and a few others.
The French have a similar view to the Germans and support them on quotas. They worry about the EU-Turkey deal on migration unravelling, and about Greece’s inability to process migrants (it seems unable to distinguish between refugees and economic migrants, which together with a huge backlog of appeals before its courts, explains why Greece is not returning people to Turkey). While EU officials are proud of their efforts to negotiate ‘migration pacts’ with five African countries that are sources of migrants, the French are sanguine about what is achievable. Apparently Niger has agreed to take back returned migrants, but the four other targeted countries – Ethiopia, Mali, Nigeria and Senegal – have not. The key, for the French, is fixing Libya.
NOTES FROM PARIS
THE GENERAL ATTITUDE TO BREXIT
The combination of Brexit and Trump is making the French elite feel very defensive. Under the surface, there is real anger about what the British are doing. And there is a fear that somehow the British will line up with Trump.
Senior people believe that, as a founding member, France has a special responsibility to act for the unity and cohesion of the EU as a whole, rather than consider only immediate national interests. They know that the Germans feel a similar sense of responsibility; the French and German governments are co-ordinating their Brexit positions closely. The French worry that Brexit will reinforce the EU’s centrifugal forces.
Poland is a particular worry – France has a very bad relationship with the Law and Justice government, because of an abandoned helicopter deal and the government’s disrespect for the rule of law. Officials cited Poland as a reason to be hard on the Brits: if Britain got too good a deal, the Poles might want to go to the same place.
Trump is much more traumatic for France’s ruling class than Brexit. He is very unpopular in France, apparently even with Front National voters. His open support for more countries to leave the EU reinforces the fears about centrifugal forces, and makes the French even keener to strengthen the EU’s cohesion. There is a worry that cunning UK diplomacy will succeed in dividing and ruling the 27. Hence France’s strong opposition to any bilateral talks between member-states and the UK, and to ‘cherry-picking’. And the French hope that the EU doesn’t aim for a negotiating mandate for the Commission that is too detailed, since that would divide the 27.
The US’s distancing itself from Europe does increase the importance of good ties with the UK on security, say officials. But they do not appear to be concerned that an acrimonious Brexit would make such ties much harder to maintain. The French are pleased that Germany is gradually taking security issues more seriously; apparently defence ministers Le Drian and Von der Leyen get on very well. But the French still grumble about Germany’s ‘OTANism’, ie NATO-centric reflexes, and its reluctance to prioritise purely military operations.
A TOUGH LINE ON THE CITY OF LONDON
With one exception, nobody I met in Paris had any sympathy at all for the UK view that the City is a European good of benefit to companies across the EU, and that therefore a deal that damaged it would be bad for the EU. Officials recognise that it provides useful services, but think that if jobs relocate out of the City it doesn’t matter. “We can go elsewhere for liquidity” said one. The exception was a close adviser of Emmanuel Macron, who said: “The City is a European asset, so if you weaken the City you are weakening Europe.”
The French have a particular obsession with insisting that the clearing of euro derivatives should be brought back into the eurozone. “Financial centres outside the eurozone pose a risk and entail a loss of sovereignty,” said a senior official. So long as the clearing takes place in London, the French say, a key part of the infrastructure of eurozone financial markets is subject to foreign rules. When I pointed out that an attempt to centralise clearing in the eurozone could lead to some of it shifting to New York, the French said they expected the ECB to order European banks to move this function home.
Said one official: “It is true that the eurozone and the EU get some economic benefits from the City, but we don’t feel vulnerable to a weaker City. In principle we are open to special arrangements for the City but the clearing houses are crucial and the interests of the Union must come first.”
As for equivalence, France supports the Commission line that equivalence should be made more difficult to achieve, for powerful financial centres like the City. Officials say they worry that the UK could change its rules once they have been declared equivalent, and that there is no mechanism for updating equivalence (these officials seemed to ignore the fact that the Commission can suspend equivalence quite easily).
Apparently the British seem to hope that they and the EU will be able to grant each other equivalence, given that their rules are currently the same, and both must follow global standards; and that in the future, if rules change, a joint committee could check whether new rules remain equivalent. The French say they would not accept any such system which gave the British equality with the entire EU-27; EU rules must be pre-eminent and the ECJ would have to be involved.
One French official said that “the key is a level playing field, if the UK wants single market access. We will need a robust system of equivalence to stop unfair competition.”
One of the leading French banks, Société Générale, has 10,000 people in London. It says that 10-30% of them will be relocated, depending on the model of Brexit. But the numbers leaving London could be more than 30% if the clearing houses leave. SocGen will comply with ECB wishes on these matters.
THE MONEY ARGUMENT, AND SEQUENCING
In the finance ministry, senior officials complain that the Commission has been too soft on the money question, since its methodology would allow the UK a share of EU assets. “Why should it get any share, since it didn’t pay for them when it joined?”
When I told officials that, in the Council secretariat in Brussels, they think many member-states are willing to compromise on the €60 billion, they disagreed. However, one French official did understand the need not to humiliate the British government over the money question.
French officials do not back the hard line of Michel Barnier that the EU should not talk about the future relationship until Article 50 and the money is sorted out. Nevertheless there are worries that the UK will try to arbitrage between the two negotiations, and officials feel that there will have to be progress made on Article 50 – creating a good atmosphere – before much can be done on the future relationship. One official sees France as being somewhere between the Commission and the Council secretariat on this issue. He adds: “The Commission is right legally (the EU cannot negotiate with a member-state) but in practice it will be hard to keep the two sides of the negotiation apart (talking is not illegal).”
THE FUTURE OF THE EUROZONE
France and Germany remain very far apart on the future of the eurozone. For France, a eurozone ‘fiscal capacity’ (ie, budget) and a common eurozone fiscal stance are the crucial next step, but Germany is against both. The French are starting to think that even in the long run, after this year’s general elections, Germany may block big changes to the eurozone. The Germans seem fairly happy with the way things are. As a result of this stasis, the Commission’s white paper, due in March, will cover the future of Europe in broad terms rather than lay out a blueprint for the euro. The ‘five presidents’ report’ on the future of the euro has been forgotten.
The view in the French finance ministry is that incremental change is OK for now, but in the long run the eurozone will need a ‘stability instrument’ (ie, a source of money) to insure weaker members against shocks. Michel Sapin, the finance minister, thinks – unlike his officials – that fundamental eurozone reform can be left to the very long term. Officials worry about the divergence of Italy’s and Germany’s economies. Despite their urging of Germany to increase domestic investment, they don’t think the Germans are softening their position.
The finance ministry thinks the priority in the short term is agreement on deposit insurance, and a backstop for the single resolution fund. The prime minister’s office emphasises getting the EU’s macro-economic imbalances procedure working properly, ie pushing the Commission to move against Germany, which is breaching the procedure’s 6% of GDP current account surplus limit. The Matignon is also keen to achieve convergence on tax and social policy, as a way of helping to bring about eurozone convergence – that is to say minimum rates of corporation tax, and EU-wide minimum wages. This could be done without EU treaty change (but might need mini-intergovernmental treaties).
Greece is seen as a containable problem rather than a real threat to the eurozone, but it will need debt relief so that it can borrow again from the markets, in 2018.
A senior German official says that after this year’s elections, for there to be a basis for a Franco-German deal, “we will have to become more ‘French’ on security and they will need to become more ‘German’ on economics”. He says Germany would be broadly happy with either Fillon or Macron as president – its senior politicians know them both.
The French are much more pro-Commission than they were a few years ago, because on the eurozone, at least, it has become more French, slackening fiscal discipline for Italy, France, Spain and Portugal. They welcome Juncker’s more ‘political’ approach, compared with that of his predecessor Barroso, who was less helpful to France. But one official adds: “The only danger is that the Germans get so annoyed that they will back inter-governmental alternatives to the Commission.” (And in some parts of Berlin, notably the finance ministry, such tendencies are already apparent.)
FRANCOIS FILLON’S CANDIDACY
The scandal about Fillon’s wife’s ‘non-jobs’ broke when I was in Paris and is hurting him. Fillon is a pragmatic Gaullist. On EU matters he is an inter-governmentalist, who voted No in the Maastricht referendum but Yes in the referendum on the constitutional treaty. Compared to other Gaullists, he is economically liberal and socially conservative. He’s better at the big picture than detail. Fillon appears to be serious about economic reform, eg of labour markets, public services and the civil service.
Those close to Fillon say that he thinks the Franco-German alliance is necessary but not sufficient; and that he believes if France can win credibility on economic reform then Germany will accept turning the euro into a ‘transfer union’. One adviser said: “we will have a window of opportunity to help Germany construct a new order”. Fillon gets on well with Merkel.
Why is Fillon so pro-Russia? Partly it is the Gaullist tradition, based on historical alliances and cultural ties; and partly a traditional French belief in ‘great power diplomacy’, ie the idea that big countries are special and foreign policy should be broadly realist.
Putin invested in Fillon when they were both prime ministers. They share a common interest in the fate of Christians in the Middle East, notably in Syria and Lebanon. They agree that in recent years the UK-France-US line on Syria has achieved nothing. “So though Fillon knows Putin is dangerous, he will treat him with respect,” says one adviser. “Fillon has not thought much about Ukraine.” Few in France know or care about Ukraine.
One close friend of Fillon says: “Fillon believes Russia can help us fight Islamism; we have similar interests in the Middle East. Also, if we behave in a provocative manner to Russia, the first people to be hurt will be those in the Baltic states.”
EMMANUEL MACRON’S CANDIDACY
Macron is gathering more and more support, and at the start of February overtook Fillon to become second-placed for voting intentions in the first round of the election, behind Le Pen. The polls say he would beat her easily in the second round.
Some of Macron’s support stems from his youth – he is 39 – and the fact that he is from outside the traditional party establishments. The victory of the leftist Hamon in the Socialist primaries, and the defeat of the moderate Juppé in the Gaullist primaries, have left space in the centre ground for Macron. 150,000 people have joined his ‘En Marche’ movement.
Most of the French left-liberal and pro-EU intelligentsia backs Macron, who is a European federalist and an economic liberal, pro-reform but also Keynesian in his macroeconomic views. Many intellectuals well-known in the Anglo-Saxon world, like foreign policy expert François Heisbourg and economist Jean Pisani-Ferry, are now working for him.
Macron’s problem is that he doesn’t appeal to working class voters. He can be branded as the ‘Brussels candidate’ or as a ‘protégé of Hollande’ (for whom he worked as an adviser and then a minister). But he has support beyond the bourgeoisie; apparently small businesspeople like his desire to deregulate the economy – he was the minister who brought Uber and inter-city coaches into France. Some will back him because he is a less ardent economic liberal than Fillon – the latter would scrap the 35 hour week, while Macron would allow the social partners to negotiate it away.
Macron's movement will have a problem with the parliamentary elections that will follow the presidential election, especially if he loses the presidential race. Established parties will be better placed to fight on the ground in constituencies.
MARINE LE PEN’S CANDIDACY
Most observers think it highly likely she will make the second round but very unlikely that she will win. One of her problems is that the Front National is an uneasy coalition of two separate parties. In the north, Marine Le Pen runs an economically left-of-centre party that is fairly liberal on social issues. She has picked up support from former Communist voters who want a big state. The southern party is dominated by her niece, Marion Maréchal-Le Pen. This party is Poujadist, anti-state and illiberal on issues like gay rights.
The tensions between the two factions are huge, even though they agree on protectionism, migration, religion and law and order – and the evils of the EU. However, the FN’s hostility to the euro and the EU is not popular with voters, which explains why Le Pen has recently softened on her hostility to the euro (proposing that it should operate as a parallel currency, alongside a new franc). If Fillon is in the second round against Le Pen, he could steal some of the FN’s southern votes. If Macron fights Le Pen, he would hope to steal a few of her northern votes.
Charles Grant, February 2017