The Brexit Negotiations and Financial Services: A Two‐Level Game Analysis

Abstract This paper examines the state of the art of the Brexit negotiations in the area of financial services. It uses a two‐level game model to first explain the positions of UK and EU negotiators on the basis of the domestic constraints they face, and second, to consider the scope for final agreement based on the ‘win‐set’ of both sides. The paper analyses the preferences and power of three main groups of players within the UK and EU : the political authorities, financial regulators, and the financial industry. We argue that the scope for agreement on financial services has been severely hampered by political and regulatory constraints which forced UK and EU negotiators to adopt early hawkish negotiating positions, and by the absence of a unified position from the financial industry. After the 2017 general election, the position of the UK government and UK financial industry briefly converged, thereby narrowing the domestic win‐set, but also increasing the scope for agreement. However, the July 2018 ‘Chequers’ deal represents a hardening of the UK government's position on financial services. We argue that this reflects the fact that the twin pressures facing UK negotiators—acute political constraints at home and bargaining weakness in Brussels—has become more, not less, acute over time.