Clean Brexit on its way – finally

Suddenly Brexit looks like a runner, and a sprinter at that. Gone is the waffle over a hard or soft Brexit, or whether the UK can reach some sort of eurofudge by staying in the Single Market and the Customs Union yet agree limits on freedom of movement.

Instead, the mood and tone has changed dramatically over the last few days in both Westminster and on the continent. All the talk is moving on to a clean, crispy Brexit. And if we don’t get a deal for market access with the EU? Well, we’ll become the Hong Kong of Europe; hit back with deregulation and aggressive tax cuts. Fighting bulldog stuff.

First off the mark was the Chancellor, Philip Hammond, who threatened the UK will go ‘offshore’ if we are not given access to the European market. In an astonishingly frank interview with Germany’s Die Welt newspaper at the weekend, Hammond admitted that if the UK were to leave the EU without an agreement, we could suffer economically in the short-term.

But then came his killer line: “In this case, we could be forced to change our economic model and we will have to change our model to regain competitiveness.” And another, more Churchillian in tone, put down: “And you can be sure we will do whatever we have to do. The British people are not going to lie down and say, too bad, we’ve been wounded. We will change our model, and we will come back, and we will be competitively engaged.” That’s code for big tax cuts.

Until now, Spreadsheet Phil has been one of the more careful Brexit players, conscious of the persistent lobbying by the big banks – mainly US ones – which keep threatening they will up sticks if the UK leaves the single market. So his offshore threats all the more sensational, especially as he was a Remainer.

On the heels of Hammond’s threats comes the excellent Clean Brexit report from Dr Gerald Lyons, former economist to Boris Johnson, and Liam Halligan, economist and writer, recommending the UK comes out of the single market and the customs union but that we should also offer the EU tariff-free trade. And if that doesn’t work ? Then they say UK must be prepared for failure, and that we will still prosper with tariffs set by the World Trade Organ­isation.

Backed by Lord Lawson, the Clean Brexit report was pounced on by No 10 within hours of being published, and is now doing the rounds among politicos of all persuasion as the first proper blueprint for exit.

As the report makes clear, there is no point in staying in the customs union because, although there is free trade of goods between members, those country members also have to apply the same tariffs to goods that are imported from outside the union. As Halligan says: “What’s the benefit of that?” More than two thirds of our trading will be outside the EU once we leave. Quite.

Another report from the Financial Services Negotiation Forum – the City’s most pro-Brexit lobbying group among market professionals – published today makes the point that the risks of Brexit are greater for the EU than the UK on many levels; specifically the more controversial one of euroclearing.

It’s also one which that high priest of Remain, Mark Carney, the Bank of England Governor, made when he did his extraordinary flip flop last week warning the EU stands to lose more than the UK. You’ve got to admire his nerve.

Indeed, Daniel Hodson, FSNF chairman, says the EU’s threat to move euroclearing out of London and back to the eurozone could backfire on the Europeans. This could lead to the euro suffering as a reserve currency, as well as an offshore market developing in euros, just as the eurodollar market is now based in the City. (Industry professions say it could cost EU companies up to £63bn in additional collateral and if the business moves, it will be to New York not Paris or Frankfurt.)

What the FSNF proposes instead is an olive branch; that the UK shows goodwill by offering the European Central Bank a degree of supervisory oversight for British euro clearing, along the lines of the ‘ special deal’ that Michel Barnier – the EU’s UK negotiator – has proposed. Even Barnier has worked out finally that a ‘special deal’ with the UK is essential to stop a vengeful City from hurting the EU.

ECB boss, Mario Draghi, has also suggested a similar post-Brexit framework. So the FSNF is taking a clever approach, one which could help allay the ECB fears over the euro’s position as a reserve currency, minimising any impact on systemic risk for the eurosystem and keeps costs low for EU governments, corporates and individuals. And avoids a fortress Europe, and any other silly tit for tat tactics.

That the EU needs us as much as we need them – if not more – has always been one of the most intoxicating of the positive Brexit arguments, and should have been a compelling hand to play in negotiations. Yet it’s not been played well, til now. Slowly but surely its getting through to even the most rabid of Remainers: EU companies and banks need access to the City’s deep capital markets and that the costs of capital could soar for them and the public if we do not to play ball.

Prime Minister Theresa May knows this. It’s why she appears so chipper ahead of her ‘Plan for Britain’ speech tomorrow at Lancaster House outlining her Brexit masterplan. If the 27 EU leaders do not agree to continue trading under existing tariff-free arrangements, then she will walk away. That should keep them running.