An eventful week for Brexit

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Welcome to FT Politics, the weekly podcast on British politics from The Financial Times. I'm Jonathan Derbyshire, Executive Comment Editor. And in this episode, we'll be discussing an eventful week in the Brexit debate. Joining me to do this is Sarah Gordon, the FT's business editor, Alex Barker, our Brussels Bureau Chief, and Chief Political Correspondent Jim Pickard. Thank you all for joining me.

The week began with the European Commission announcing that the ball is entirely in the UK'S court where the Brexit negotiations are concerned. And this despite Theresa May's insistence that, following her fluent speech a few weeks ago, the onus is now on the EU 27. Meanwhile, British business leaders raise concerns about the progress of talks on the transition, with Howard Davis, Chairman of IBS, suggesting that the flight of personnel and operations from London in several sectors is likely to accelerate if a transition is not agreed quickly.

The length of any transition remains a subject of fierce debate inside the Conservative Party, as does the question of planning for a no deal scenario. A number of Tory MPs, including some cabinet ministers, have called for the government to increase contingency spending on planning for an exit from the EU without a deal. However, Philip Hammond, the chancellor, told the Commerce Committee that he was against spending just for the sake of making, quote, "some demonstration point."

If that wasn't enough, Mrs. May was unable to give a clear answer when asked in a radio interview which way she'd vote in a new Brexit referendum. Sarah Gordon, let me start with you. Businesses are clearly getting worried about the pace of negotiations and the length of any transition. You argued in a column this week that the government should be using the time to set up priorities for post-Brexit economic policy, but that it isn't doing this, save some Panglossian generalities about seeking the best deal for all British business. What do you think it should be doing?

Well, there are two separate answers to that. And the first thing that it should be doing is making progress on the talks. I mean, it's just absolutely as simple as that.

I think those businesses that are affected by Brexit-- and of course, there are some that aren't-- are feeling increasingly despairing about there being any practical arrangements in place by-- whether it's March 2019 or over a transition period of real arrangements being in place that will enable them to continue exporting, using customs, using the tax system, importing, being part of a supply chain. They're very worried about the nitty gritty of arrangements post-Brexit. And as long as everything is stuck at this very high level, as became overwhelmingly clear-- I'm sure we'll hear from Alex about that later-- but as became overwhelmingly clear today with the different takes on the talks this week from Michel Barnier and David Davis, no progress is being made at that very top level.

And the time is running out to address the nitty gritty at the bottom. We've only got 17 months until we leave the EU. And that's not enough time to put in all the processes that are needed.

And I think one of the other things that they're worried about is this unwillingness by the government to fully acknowledge what a no deal means. They've been congratulating themselves a lot this week about the two white papers on trade and customs that came out on Monday, and which apparently lay a scenario of what a no deal would look like. If you're a company, they lay out no scenario whatsoever. They don't help you deal with a situation where overnight, customs forms are no longer valid, export forms no longer valid, regulatory approval is no longer valid.

So there's that. That's one side of it. The other side of it is the need for a clear vision about what advantages a post-Brexit Britain would have and how it must leverage Brexit to its advantage. And what I was saying in the column earlier this week is that what you haven't seen is a very clear-sighted and ruthless analysis of where that comparative advantage in our economy lies, and therefore, which sectors should be boosted or encouraged or given government support.

Now that's not to say that the strategy at the moment, which business is pushing for, which is a deal for all business and all sectors is the wrong one. What I was saying is, let's inject a bit of realism into this. It is absolutely, entirely inconceivable that a good or preferential deal for every sector in the economy is going to be won. And therefore, we need to focus on which sectors matter most.

There's a broader point here, isn't there, Sarah, about the repeated misfiring of the government's outreach attempts to business on Brexit? Tension between business and the government on Brexit has been the theme of politics in this country since Mrs. May took power in July 2016.

It's definitely developed. But since the election, obviously, you've had government reaching out to business in a number of different fora, whether it's [INAUDIBLE] or at Number 10, or within all the different departments, or the different ministers. And I think business feels very much that actually there are now a lot of people in government, and even at the centre of government in Number 10, which wasn't the case before the election, who are really willing to listen to business priorities.

The problem is, as someone said to me last week, the government is still listening rather than doing. At this point, business doesn't need government to listen anymore. They need government to get on and conclude the negotiations. So they know what the parameters of a final agreement to going to be, so that they can start the practical planning for that.

And Alex, while British business and the UK government try to get their ducks in a row, it's probably true to say, isn't it, that politicians and business leaders in other European capitals are looking covetously at post-Brexit business opportunities? One thinks of euro clearing, for example.

Yes, the story of the last year have been a lot of wide-eyed officials in various European capitals thinking of what they can snatch out of this Brexit process. And that incentive is still there. I think some of them are coming round to realising that they're not going to gain as much as they thought. I'm thinking particularly of Paris in some instances.

But the economic rationale of holding out is still there. Because if they don't necessarily give guarantees on a transition for a few more months, if they play a harder line on the divorce, one of the effects might be that more companies activate transition plans and move to the continent. And they see that as not just an advantage, but reducing the potential damage that Brexit will do for their economy. So that is one factor that has certainly played into Berlin's thinking in taking a harder approach at this point, in terms of whether a transition discussion should start with the UK given that some progress has been made, even if it's not sufficient.

And next week, when we have this key summit on Thursday and Friday, I think that question is really going to be the only important one to come out of it. If transitions talks don't start next week, if Michel Barnier isn't given a mandate to explore this with the UK, a lot of diplomats here think it will be almost impossible to bring everything together into a deal in December. And so you're seeing quite a delay in the Brexit timetable that business are working towards in the UK, and a big spike in the political risks that that would involve.

And this discussion on Friday will be between the 27 leaders. It's the first time they've really grappled with a strategic call on Brexit, really since they've laid down the guidelines for the negotiation. It's going to be quite a big moment.

Jim Pickard, let's move back from Brussels to Westminster. At the beginning of the week, the talk in Westminster was all about what the UK'S red lines in the negotiations with the EU should be, with prominent pro-Brexit Tory MPs like Jacob Rees-Mogg seeking reassurances from the prime minister that the jurisdiction of the European Court of Justice would expire when Britain formally leaves the EU in 17 months' time. But Mrs. May appeared not to concede that when she addressed the House of Commons on Monday, did she? She said that "Britain," and I'm quoting her, "may start off with the ECG still governing the rules we're part of doing an implementation or transition period."

Yes, now the issue of the European Court of Justice is a major hang up for a lot of the euro skeptic Tory MPs. My experience of going around the country during the referendum was that there are probably three much bigger issues that the public cared about. They cared about how much money goes from the UK to the EU, they cared about sovereignty, even if they wouldn't have used that word, and they cared an awful lot about immigration. And you didn't go into the proverbial Dog and Duck and hear people going on and on about the ECJ.

But for Tory MPs, it's a massive big deal. And yes, Jacob Rees-Mogg started the week saying this ought to be a major red line. And when the prime minister came out and said quite clearly that it won't be during the transition period, he says, very disappointed, Rees-Mogg said, it is perhaps the most important red line in ensuring the leave vote is honoured.

Bernard Jenkin, as well, said he'd find it hard to explain to constituents how we could possibly be remaining in that. But interestingly, Boris Johnson, who had also called the ECJ a red line in his controversial Sun interview just before party conference season, seemed to have no problem with it at all. And for him, perhaps redlines can easily become pink lines or amber lines depending on circumstances. And I think we've kind of got through that one. They've accepted that we'll be moving on to the next battle.

Sarah, this is the circle that Mrs. May is trying to square, isn't it, between the interests of business that you were talking about earlier on the one hand, and the preoccupations of pro-British MPs with British sovereignty and the jurisdiction of these ECJ on the other?

I think the problem is that-- as has been the case throughout this process, but I think it's more apparent than ever-- the political imperative is very far away from what is economically sensible. And those two are, in fact, diverging further at the moment. Business, for example, wants to insure a continued supply of the skilled labour it needs.

You've got sectors like hospitality-- I mean, estimates vary. But something like a fifth of workers in the hospitality sector are from outside the UK and from the EU. You're looking at a sector there, which is saying, please, just say to us we will be able to get the labour that we need.

The one issue that there's been absolutely no movement on, and that business really has been pushing government on, is for it to ease its commitment to an end to free movement. As Jim said, that was one of the key issues for voters in the referendum. Teresa May's government has given absolutely no sign of backing down on that. So when you say that she's trying to square the circle, certainly, looking at it from UK business, the circle isn't getting very square at the moment.

Alex, Michel Barnier, the EU's chief negotiator, and David Davis, the UK'S Brexit secretary, met on Thursday. Did the jurisdiction of the ECJ during a putative transition period come up for discussion?

Absolutely not. No, I'm looking up out of my window, and I can still see the flags flying in the negotiating room. And through the last few days, the substantial political issues have basically been [INAUDIBLE]. They hit the buffers on the political side. There were some technical discussions on the financial settlement. In the past, there were some not very fruitful discussions on citizen rights, where neither side was really willing to budge at this point.

And the transition is definitely off the agenda. From the EU perspective, that's about the future. Barnier would need new instructions from EU leaders to discuss that. And so while David Davis has raised it as a potential issue at various points, they've not got into the fine detail.

But what's clear from the EU side on an issue like the ECJ is that they basically see it as non-negotiable in terms of the transition. If you look at the guidelines that the 27 leaders wrote for their negotiator nine months ago, there it's very clear that if there is an extension of EU law, which is basically what the UK was asking for, that that comes with all the kind of architecture of governments that EU member states live under. And that's the ECJ.

If you start deviating from that and setting up a new court or a new mechanism, A, it's almost certainly illegal. B, the ECJ might take issue with it as it did with the first deal with Norway many moons ago. And thirdly, they just don't have time to negotiate something like this. And they wouldn't want to do it for a two year period. And as the EU see it, the transition deal is basically going to be a take it or leave it offer.

Jim, last week's fevered talk about a challenge to Mrs. May's leadership from within her own party appeared to subside as quickly as it bubbled up, didn't it? So much so, that our colleague Janan Ganesh was moved to suggest in his column this week that the deep splits over Europe inside the Tory party could work to the prime minister's advantage, with her colleagues too preoccupied with that schism to demand a new leader. How do you assess the balance of forces inside the parliamentary Conservative Party?

Yeah, I mean, it's incredible how fast this spotlight has moved away from Theresa May and whether she ought to be immediately toppled in a savage coup. And now, people are talking about other issues. I mean, they're not a nest of singing birds, to borrow a Boris Johnson phrase.

And the current knives are out. The euro sceptics want to remove Philip Hammond, and we saw Nigel Lawson, former chancellor, today suggesting that he ought to be removed because [INAUDIBLE] sabotage. And on the other hand, you've got the europhiles and others suggesting that maybe Theresa May ought to think about sacking Boris Johnson. And she herself seems to be sitting pretty once again.

And I think what happened with the coup that never was, was that firstly, the Tory MPs realised that it would look a bit ludicrous to ostensibly remove someone for being a bit under the weather and having a sore throat. I think what weakened it was the emergence of Grant Shapps as the ringleader of the coup. And he's a lovely, cheery fellow. I know Grant quite well and get on with him fine.

He's not really [INAUDIBLE] in Westminster. He has that slight issue of having, in the past, been the author of get rich schemes under the nom de plume of Michael Green, you may remember. So when it emerged that it was him, it was quite an easy person for Tory sceptics of the idea to kick.

But what was quite disingenuous about the whole thing is that most of them do want her gone, they just can't decide when to do it. And I think the momentum is more for her to stay out the process and leave sometime after March 19, and just not straight away. But I thought I was hallucinating on Friday-- when I heard someone who on Thursday had been saying to me, I'm kind of 50/50. I might call for [INAUDIBLE] premise [INAUDIBLE] to go. And on Friday, I heard this Tory MP, in public, suggesting that Shapps was a horrendous individual and the rest of it. So I mean, I've seen some treachery in my time. But that was quite a fun moment.

But regardless of whether she stays or not, she's not a strong prime minister. And it means that any concessions, which are undoubtedly necessary at this point to get the negotiations going again, that any concessions are very difficult for her to make.

Well, they're difficult on one level. But in a way, she's kind of using her weakness like a judo expert. Because she always has that final answer to anyone and anything challenging her, which is if you rebel against me, if you try and do me in, if you even oppose a single policy in the House of Commons, then there is the danger that this whole edifice collapses, and we have a general election. And you don't lose your seats to these Trotskyite hordes [INAUDIBLE] Jeremy Corbyn, do you?

And in a weird kind of way, although her position is weak, it's stable in a peculiar way. And like Janan Ganesh wrote in his column as well, the fact that she's neither strong remain nor strong Brexit, is kind of keeping in place as well, in that the alternative leaders, should she go, might be more remain-y or more Brexit-y. And depending on which company you're in within the Conservative Party, that could be more of a problem than the uneasy status quo that we have.

Alex, this parliamentary imbroglio must look bewildering when viewed from Brussels and other European capitals.

Yes, indeed. And it's one other factor that's playing into those who are saying, look, let's just take our time. Why should we crystallise our position on something like the transition when the UK doesn't know what it wants or even who should be leading the country? Let's take our time and wait.

At the same time, those who are keenest to bring this together towards a deal, look at the situation and think it's probably better that Theresa May tries to resolve the internal domestic issues in the UK as soon as possible. As Jim was saying, there's a kind of stability at the moment that she might not enjoy over the coming year. And she's probably going to become weaker rather than stronger.

And she has two big calls to make. One is the future relationship-- if we reach sufficient progress, what do they want? And is Britain going to be a rule taker, or are we going to take a more independent approach and accept the economic costs of that in the short term?

And secondly, whether she has the authority to make the extra move on the money and the divorce issues and the transition and what the kind of conditions of that would be within the Tory party. And both those things, I hear from Brussels's perspective, if this negotiation is going to go smoothly, you want those done sooner rather than later.

Alex, as we've seen, all the talk in Westminster this week has been about how assiduously the government should be planning for no deal. The assumption made by some ministers is that appearing to take a no deal outcome seriously strengthens the UK's hand in the negotiations. How has that gone down in Brussels?

You know, I was talking to people about this no deal planning issue before the election. And then it was bubbling up. And the response I had from a lot of senior people involved in this negotiation was quite dismissive. I think they look at the regulatory cliff edge the UK would face in that scenario and the practical challenge of coping with that, whether it's two years or one year, as virtually impossible in their eyes. So they see it as a life threat, really.

And ultimately, I'm not convinced that any administration would be able to put in place the contingency plans that you'd need to ensure that this wasn't really harmful in a very, very clear and public way. So they've always aimed off a bit. But at the same time, the no deal discussions have always come at moments where these negotiations are at an impasse, where it's becoming more difficult and dark, and they certainly do worry.

If you look at countries like France, Belgium, Netherlands, with big ports near the UK, they really don't want to have that kind of chaotic situation with a no deal scenario, either. Some of them are starting to think through what they would need to do themselves to try and mitigate some of the effects. But they're looking at it and thinking it's pretty hard as well. You know, even if the UK had a grade A contingency plan, you'd still rely on French customs inspectors on the other side. And it takes three years to train them.

Jim?

[INAUDIBLE] I mean, just as a brief aside, I think this whole question of why isn't Philip Hammond setting aside billions of pounds as a plan for a no deal is basically becoming a stick to beat the chancellor from his euro sceptic enemies, not least in the euro sceptic press. The Daily Mail had a quite aggressive editorial today attacking him. And the point that a senior Whitehall figure made to me this afternoon is that there is such a big difference between a no deal situation and a deal situation that you can't just simultaneously, in parallel, set yourself up for both.

Because in the no deal situation, for example, if the institute for government is correct, we need 5,000 extra customs personnel, we don't need anything like that if we have a decent deal with the EU. So do people really expect Philip Hammond to have 5,000 people lined up, ready to go, and money spent on them, and their uniforms neatly pressed, when we still hope-- the government still hopes-- that we will get a deal.

That's precisely the point that business made. That they can plan for no deal. They're not saying no deal is an utter disaster.

They're saying we need certainty. If we know there's no deal, fine, just tell us and we'll plan accordingly. And business is used to dealing with uncertainty. But the point is that the narrow window is closing where you can actually get the detailed planning for no deal done.

And I think that the sort of top level statements by government this week were simply unhelpful from a business point of view. Because if you are, for example, an airline flying from Heathrow, if there is no deal, it's not only about customs and about those kind of processes. It's also about rules governing data transfer.

At the moment, it is highly controlled how you transfer data and under what sort of legislative and regulatory framework. And someone was saying to me yesterday, it's like the year 2000 bug warnings. The day we leave the European Union and there is no deal, the planes won't fly.

Alex, Michel Barnier, after his meeting with David Davis on Thursday, said, both that the talks were in a dangerous state of deadlock and that decisive progress was nevertheless within the grasp of both parties within the next two months. So which is it?

Well, you've got to remember that they thought decisive progress was going to happen next week. And so you've basically seen a two month delay in the programme that they were hoping for for the Brexit talks. It's not completely off course, but December is clearly becoming an important milestone, where I think both commercial and political timelines are going to be crossing.

If, by December, the talks are looking in the kind of state we're seeing today, then I can imagine in Westminster the calls-- to say, look, it's a waste of our time, let's start preparing properly, and show them we mean it-- will be pretty loud. And similarly, I expect, as Sarah was saying, that companies are going to start thinking that they really need to put money into moving operations and doing things. That's really the horizon we're looking at now.

And for Michel Barnier, he has quite a delicate job. He, as negotiator, is there trying to ensure that he's got a broad enough mandate to be able to bring together a deal. And that really means talking about transition and the divorce at the same time. So that the UK, if it's to pay more money, is at least getting something back in terms of assurances and certainty for a couple of years.

But there are member states, such as Germany and France that have been more reluctant to offer these kind of guarantees early. And on the other end, Sweden, Ireland, and the Dutch, who are more open to that. And he's got to find a middle way between the 27 to keep them unified, gives him a decent mandate to try and close things in December. And this is why that discussion on Friday is going to be so important.

Alex, thanks. And that's it for this week's episode of FT Politics, which was produced by Anna Dedhar. Thank you to my guests for joining me, and to you for listening. We'll be back next week for another instalment.

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