Countdown to Brexit: 28 days – Spotlight on Gibraltar - solve the border issues and it becomes a potential solution for UK financial services

Gibraltar – better than anywhere - illustrates just how tightly the UK and EU have intertwined in 4 decades since Great Britain and Northern Ireland – along with associated territories – joined the Union – its freedoms of movement across borders.

Many of the concerns that will haunt UK-EU relations post-Brexit will be more evident across this land border between Britain and Europe.  Every day, some 10,000 Spanish workers cross into Gibraltar – with its resident population of 33,000 - mainly from the Spanish town of La Línea de la Concepción.

Britain is presently one of Spain’s largest economic partners – with Gibraltar acting as a hub for the finance and insurance industries, online gambling and gaming.  Yet Gibraltar remains a pressure point in UK-EU relations.  Gibraltar is part of the European single market – but it opted out of the EU customs union in 1972 – and has much lower taxes than its European neighbour.  Its corporate tax rate is 10% - compared to Spain’s 25% - and Spain regards Gibraltar as a ‘de facto tax haven’ on its southern border.

The November ‘deal’ comprised the Withdrawal Agreement – setting the terms of a transition period - and a Political Declaration – setting out a framework for negotiating future UK-EU negotiations.  To reflect Gibraltar’s special status, it was the subject of its own protocol in the Brexit Withdrawal Agreement.

Unlike the equivalent protocol on Northern Ireland - which outlines in detail which laws and provisions will apply there after Brexit - the protocol on Gibraltar is relatively sparse.  It simply acknowledges the economic benefits that free movement of people has brought to Gibraltar and Spain - and provides for a joint UK-Spanish coordinating committee to discuss some key issues for Gibraltar’s future.  These include: employment conditions, air transport law, tax and fraud, smuggling and money laundering, waste management, scientific research, fishing and policing.

And unlike the Northern Ireland backstop protocol - which will largely only come into effect after the two-year Brexit transition period ends - the protocol on Gibraltar is only designed to last until the end of transition.  This means that the future UK-Spain-Gibraltar relationship remains unsettled – and especially in a no-deal Brexit.  It will have to be a prominent part of the next round of negotiations.

Above all, Gibraltar highlights the issues in a no-deal Brexit – with a ‘hard’ UK-EU border.  The adjoining Spanish province - Cádiz – benefits from cross-border trade and traffic under the present regime of border controls.  Gibraltar is reliant on Spanish workers, money, goods, and services through eased access to the single market.  We reported the High Commissioner’s view that imposing a hard border will hurt Spain - but that Gibraltar’s economy would suffer “unimaginable and irreparable” damage.

Gibraltar has remained separate from the main UK-EU negotiations - addressed instead through bilateral negotiations between Britain and Spain – with the Government of Gibraltar excluded at Spain’s insistence.  When it comes to deciding what happens to Gibraltar, these bilateral negotiations take absolute precedence over the main UK-EU negotiations.  The European Council’s guidelines for the conduct of Brexit negotiations include an explicit core principle – recognising that the UK and Spain have both to agree on applying any future UK-EU arrangements to Gibraltar as well.

The Spanish position regarding Gibraltar has been unchanging since the 2016 referendum.  If Gibraltar is to have access to the European single market - Spain must be given ‘co-sovereignty’ - at least throughout any transition period.

The UK Government has set its own – diametrically opposing - red-lines.  The entire United Kingdom - including Gibraltar - must exit the EU without any encroachments on British sovereignty.  Although the shenanigans in Parliament this week have hardly created absolute certainty on many topics that the Government had declared settled – including whether or not the UK stays in the single market!

Gibraltarians voted overwhelmingly ‘Remain’ in 2016 - but they support continued attachment to Britain - voting to reject complete or partial Spanish sovereignty in 1967 and 2002.  And the territory’s 2006 Constitution empowers its Government to veto any changes in its sovereignty – creating constitutional difficulties in the Gibraltar Government concludes that this is the only leverage it has over the UK-Spanish negotiations.

Up to present the EU is forced to be a neutral arbiter whenever tensions concerning Gibraltar arise - such as increasing border checks and queues – with UK and Spain being full members of the EU.  As things stand, Spain could reap huge strategic benefit from Brexit over the Gibraltar question – benefits that will take effect at the moment of Brexit on 29 March.  Post-Brexit this ‘joint-EU-membership’ restriction – and with it a key UK leverage – disappears.  The EU will be obliged to side with Spain – and it is hard to see this doing other than Spain hardening its red lines.  Witness Spain’s attempt to re-designate Gibraltar as a “colony” in EU legislation on visa-free travel post-Brexit – a sign of things to come.

In the Brexit negotiations so far, the future of Gibraltar has remained essentially a quiet ‘unknown’.  This is about to change with Brexit and the opening of the next negotiating stage.  Ultimately, it may not be the Irish border problem that proves thorniest for Brexit – it may be Gibraltar and the question of its future border and sovereignty in the light of the conflicting positions of Britain, Spain, and Gibraltar. 

Where will the balance settle?  The parties need to find a harmonious solution without the UK ceding co-sovereignty with Spain - which Gibraltar opposes.  Gibraltar could be given unique privileged access to the single market - which it needs - via a special protocol, in exchange for changes in its tax arrangements that partly eliminate its extreme tax haven status - which Spain demands.  From the British perspective, however, this would in effect turn Gibraltar into a de facto British toehold within the single market.  From a Gibraltar perspective this could potentially offer a neat solution - allowing the main body of the UK to achieve a meaningful Brexit - while allowing British businesses to maintain European access and benefits essentially equivalent to continued EU membership through long established financial services sector resident on ‘The Rock’.

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