The chaos that awaits

I saw two things bout Brexit in the newspapers this week that, for the first time in a while, made me smile. Well, smirk, actually.

The first was under the headline "British drugs face Brussels ban". The Sunday Times* said that biotech bosses would be meeting regulators on Wednesday this week to try to work out how to ensure that drugs shipped out of the UK aren't rendered illegal by Brexit. So this seemed to be a another trade/economic downside for us.

But what is worrying the industry is that medicines manufactured and packaged in Britain won't be recognised by EU laws when exported to Ireland, Malta and Cyprus. Eh? The reason is that there is a complex system in which drugs with instruction leaflets printed in English can be sold in those EU countries. You know, those irritating leaflets that none of us read anyway and I usually throw away so the foil will slide back into the packet. If drugs in these so called "multi-country packs" shipped out of the UK are no longer authorised for sale in the EU, stocks held in warehouses could become illegal overnight when we exit/crash out/plunge over the cliff, or whatever pejorative phrase you prefer.

So, another irritating complexity that needs to be fixed. But for who? If the regulated information packs were no longer valid outside the UK, it could mean that Ireland, Malta and Cyprus are pushed to the back of the queue (to use an Obama phrase) after Brexit as pharmaceutical companies concentrate on getting things sorted for their bigger markets. Sounds like a bigger concern for the EU consumers than for our industry to me.

This was to be discussed at a meeting of the European Medicines Agency this week. As the Sunday Times noted, a bigger concern for the EMA, which eurocrats announced with glee would be moved from London straight after we invoked Article 50, is the continuity of its operations when it relocates. A number of countries are jostling in the unseemly bid to host the EMA, but the relocation poses "a real threat to public health" according to the European Federation of Farmers. Sorry, Pharmas. (It's real title is European Federation of Pharmaceutical Industries and Associations, but that's a big pill to chew on). This club of drug pushers, sorry trade body, carried out a study to find out how many of the EMA's staff would quit when the agency moves from London. If those London dwellers aren't prepared to relocate there could be disruption and delays with medicine approvals meaning Europe could fall behind countries such as America and Japan in this key, competitive global market.

The EMA is currently pretty efficient, judging by the simple fact that the public version of the minutes of its 5 October Management Board meeting had already been published by 6 October**.  It is silent on the issue of multi-country drug packs, though there is an anodyne comment about the board being informed about the next phase of the EMA's Brexit preparedness business continuity plan. We will see for ourselves as the minutes go on to say, confusingly, that the plan will be released next week but launched in January (must be some form of slow release medicine then?). A key part of this plan will be staff retention when the agency moves: "The capacity of the new host city to retain current staff and attract new people at the same level of quality is key..." As there are a lot of French people, for example, living in London who don't seem at all keen to move back to France, it will be interesting to see whether they prefer to go with the EMA or find new jobs in their adopted city. I'm sure the EMA will eventually attract enough of the right sort in its new, no doubt palatial accommodation. But the troublesome transition doesn't just affect the UK.

The second smirk came when I read "EU faces Brexit chaos in threat to £20 trn deals"***. Hmm, twenty trillion is a lot of dosh. As well as the druggies, the banks are gearing up for complex negotiations, in their case about derivative contracts. Sounds even drier than a drug information leaflet but bear with me. These financial trades are widely used by thousands of businesses and banks to guard against sudden economic changes and, without a deal being agreed, the derivatives traded between EU and UK banks would have no legal basis after we depart. The Bank of England is in talks with the dealers' trade body, the International Swaps and Derivatives Association (one wonders just how many obscure trade bodies there are!) but governor Mark Carney says the problem can't be solved by the relevant institutions, the Bank or the UK government, it needs the UK and EU27 to solve it. Well, it could be solved by London-based lenders setting up a European operation and shifting their contracts into it, but this is complicated, expensive and apparently would take longer than the 18 months while Barnier's clock ticks before its battery runs out.

So these derivative contracts are meant to protect against sudden economic change but lapse on Brexit, which is the current clear and present danger in terms of financial risk. A fascinating example of what, in risk analysis, is known a common-mode failure.

There are similar issues in the insurance market. You won't be surprised to hear that one of the many issues to be untangled concerns data security, as Brussels only allows non-EU nations to store information about its citizens if it considers their rules to be adequate.

Underlying the banking issue is the simple fact that, while Frankfurt and Paris are fluttering their eyelashes at London based banks and would dearly like a bigger piece of the action, they could only swallow a small piece. London is the world's biggest financial market and, even if the continental banks thought they could take over large chunks of what London does, the French and German governments would probably throw their hands up at the level of risk. London has the lion's share of the people who understand these risks and not only can no-one acquire that overnight in the necessary numbers, it probably wouldn't happen in several decades. If London were to lose its pre-eminent status as a financial centre, the spoils would go to New York or the Far East, not Europe.

Anyway, hallelujah. As I thought it must, the cliff edge works both ways.

That of course doesn't mean that solutions will just appear. Barnier & Co won't allow the UK to get any of the benefits of club membership without being a member, or at least paying. They'll close their eyes to things that rub the other way wherever they can, or just try to bully us into giving them the things they need. A transitional deal in which, basically, nothing changes and we continue paying so they don't have a hole in their budget, buys time. But it really only kicks the can down the road. There's no point in staying in the departure lounge indefinitely, at some point we have to jump. So I am in agreement with people who say any transitional deal must be time limited.

Many people think these kind of difficulties are being exaggerated. Can't they all just agree to carry on as before? Can't we all just be friends, as it were. Well, no. Rules and regulations are there for a purpose and can't just be hand waved away. But even if that was agreed, it wouldn't last. To understand why, just imagine it is agreed that, as part of a "frictionless" trade deal goods can continue to move across the border between the UK and Europe without customs controls. And, of course, between Northern Ireland and the Republic. Imagine now some hullabaloo when, say, there is a terrorist incident on mainland Europe and it turns out that the weapons had come into the UK and then to Ireland and on to mainland Europe via a container of supposedly everyday goods. The agreement to carry on as before couldn't possibly survive such an event. So even if there were such an agreement it would, in my view, be fragile.

I also predict (this doesn't need any kind of crystal ball) that there will be much noise about how long the transition should be, whether it should be time limited or keep on being renewed until everything is sorted and whether we should stay in some kind of half way house purgatory, in the single market and customs union and unable to consummate our own trade deals, checked out but never actually leaving. And after all of that the arguments will begin about whether we should have left and whether we should rejoin.

If you thought this Brexit malarkey had already got very boring, I'm sorry but it hasn't really even started yet.

*Sunday Times Business 1 Oct 2017
** http://www.ema.europa.eu/ema/index.jsp?curl=pages/news_and_events/news/2017/10/news_detail_002824.jsp&mid=WC0b01ac058004d5c1
*** Daily Mail, 2 October 2017