City to Michel Barnier: Thanks for the hard line

City lobbyists hope that by ruling out financial services from a post-Brexit trade deal, the EU’s chief negotiator will jolt the UK government into action.

LONDON — At first reading, Michel Barnier’s latest comments appear to be the City of London’s worst nightmare — nixing the possibility of financial services in a post-Brexit free-trade deal.

But City figures reacting to an interview the EU chief negotiator gave to a consortium of European newspapers say that his hardline rhetoric may help their cause by forcing the government to come out fighting early for their cause.

After Brexit, firms based in the U.K. will lose their “passporting” abilities that allow authorized firms in the EU to sell services across the single market. To make up for that, the City has been lobbying hard for financial services to be included as a chapter in the final free-trade deal between the U.K. and the EU.

But Barnier told the Guardian that financial services don’t belong in trade deals. “There is no place [for financial services]. There is not a single trade agreement that is open to financial services. It doesn’t exist.” He said the outcome was a consequence of “the red lines that the British have chosen themselves. In leaving the single market, they lose the financial services passport.”

On the face of it, it sounds like game over.

“It might be Christmas, but Michel Barnier doesn’t need to play Scrooge. Just because financial services have not been encompassed in free-trade agreements to date is no reason to dismiss them from a future U.K.-EU free trade agreement,” said Miles Celic, CEO of TheCityUK.

But for others, it’s exactly the type of threat that the City needs to jolt the U.K. government into action. They want an official U.K. position on financial services now, with the government ready to spend political capital defending it.

“We always thought this was a massive ask … we told the government there is no chance whatsoever of this happening unless the government asks for it … Barnier is totally right. This is not a normal part of an FTA,” said one head of government relations at a bank in London. “What we’re saying to the U.K. government is: ‘In your deliberations in the next few weeks after today’s Cabinet, you really have to decide if you want financial services in a deal.”

Theresa May chaired a full Cabinet meeting Tuesday, after a meeting of her Brexit “war Cabinet” on Monday. It is the first time since the referendum in June 2016 that the Cabinet has discussed what it actually wants from an eventual deal with the EU — that’s why the timing of Barnier’s intervention is so significant.

“We in the U.K. misunderstand how trade deals work. It’s not a normal negotiation. You don’t play things off in the normal way. You put your draft on the table and say ‘that’s what we’re talking about’ …  It’s not a question of poker, it’s a question of who wins the power game,” said another government affairs head at a bank in London. “That said, the U.K. has to say in return — ‘No goods deal for you if no services deal for us,'” they added.

The clock is ticking. The EU will formulate Barnier’s negotiating mandate for Phase 2 between now and March. If Phase 1 tells us anything, it is that once his marching orders are set, Barnier will not move an inch away from them. That means if they want Barnier to be in a position to even mention finance, the U.K. needs to insist it is a top priority on their side.

“They’ve got to have their position now, and be pre-influencing the Commission’s preparation of its guidelines. This is not months, this is weeks away. Really I’m quite worried. Frankly if we don’t get this into the mainstream and part of the expectations for further negotiation, I don’t think we will achieve it,” said the first government affairs head.

If the City can achieve its aim of making Brussels at least talk about financial services, there may be wiggle room. “If his point is that even mutual access needs to incorporate the four freedoms, then that too is a matter for negotiation,” said Rachel Kent, a partner at Hogan Lovells, a law firm that co-wrote one of the proposals for a financial services chapter in an FTA. “Any arrangements would probably need to be proportionate to the access agreed and to take account of any red lines.”