EU Uses Sleazy Negotiating Tactics To Extort More Cash In Brexit Talks

As we discussed (see here) when Brexit talks resumed this week, the EU is piling pressure on Theresa’s May’s weakened government to extort more money out of the UK in the divorce settlement – now termed “moment of clarification” in EU parlance. Despite rumours before the latest talks began, that Theresa May was prepared to increase the UK’s offer, if this was the case, the EU wasn’t impressed. In the post-talks press conference. the beleaguered Brexit Secretary, David Davis, stated that there is positive momentum in the negotiations…

There is no doubt that we have made, and continue to make significant progress across a whole range of issues. Across the board we made progress to resolving some really difficult questions. That, of course will continue, at pace, between now and December.

…and the markets seemed to believe him. Sterling caught a bid, although it probably had at least as much to do with stronger-than-expected industrial production and a narrowing in the UK’s trade deficit. Meanwhile, the EU side did its fearmongering best to give the impression that insufficient progress will be made to progress to trade talks when the European Council meets in December. Bloomberg reported on comments from EU chief negotiator, Michael Barnier.

European Union chief negotiator Michel Barnier raised the prospect of Brexit talks failing to reach a breakthrough by year-end, saying the U.K. has two weeks to come up with a better offer on the financial settlement.

 

Barnier called for “real and sincere progress” on the three divorce issues, which include the separation bill, the rights of EU citizens and the Irish border, which has erupted back onto the agenda this week.

 

“I have to present a sincere and real picture on those three subjects to the European Council and the European Parliament. If that is not the case, then we will continue, and that will put back the opening of discussions on the future,” Barnier said at a news conference in Brussels on Friday with Brexit Secretary David Davis. Little progress had been expected in this sixth round of talks, as the focus has been on whether a breakthrough will be possible by December.

Prior to the resumption of talks, Davis had toured of European capitals trying to drum up support for the UK’s position. One person he met was Poland’s European Affairs minister, Konrad Szymanski. Szymanski was the first person this morning (before Barnier) to highlight the prospect that talks to resolve the financial settlement (and the Irish border – see below) could drag on into March next year. From Bloomberg.

“I think a satisfactory deal will be reached at the very last minute,” Polish European Minister Konrad Szymanski, who met Davis this week in Warsaw, told reporters on Friday in Brussels. “It could be March but it would be better in December.”

If agreement was delayed to March 2018, Szymanski noted that it would be difficult to negotiate a trade deal before Britain is due to exit the EU in March 2019. While Davis referred to “a few outstanding, albeit important, issues”, thanks to the EU, this is no longer just about money. A new “spanner” was thrown into the works by the EU on Thursday night. This is the border agreement between the Republic and Northern Ireland after Brexit. Perhaps not fully appreciating the EU’s negotiating tactics, we sighed when we saw a Bloomberg headline (with our emphasis) “Irish Border Throws Unexpected Hurdle Into Brexit Talks”. From the article.

The future of the Irish border erupted unexpectedly into Brexit talks this week, as the European Union made new demands on Britain that risk distracting from efforts to reach a breakthrough by year-end. The EU circulated a document to diplomats that called for Northern Ireland to maintain the rules of the customs union and single market after Brexit. It says there must be no hard border on the island, meaning regulations have to be the same on each side of the line that will become the U.K.’s land frontier with the EU after Brexit.

 

The Irish issue, while one of the three divorce issues that need to be settled in the first phase of talks, had taken a back seat in recent months as the U.K. argued that it would be easier to find an agreement on the gnarly border issue once the future trading relationship was clear. Its re-emergence as an obstacle late Thursday distracted attention from what appeared to be some carefully choreographed efforts by the U.K. government to get euroskeptic critics onside as it prepares the ground for the concessions it may have to make to Europe in the next few weeks.

Late last week, Theresa May had set out the specific hour which the UK will leave the EU – 11pm GMT on 29 March 2019 – in an amendment to the EU Withdrawal Bill to please those “critics”. “There in black and white” she said, warning that she would not tolerate any attempts to block Brexit in parliament.

However, May’s attempts at “choreography” were overwhelmed by the EU’s machinations and, coincidentally (or not), comments from Lord Kerr hitting the media this morning. Lord Kerr, if you weren’t aware, is a cross-bench peer in the House of Lords who drafted Article 50, the formal procedure for leaving the EU. Kerr gave a speech in London today, leaked beforehand in the media, in which he stated that the UK electorate had been misled and the Brexit process could still be reversed. According to the BBC.

(Lord Kerr) will give a speech in London later in which he will say: "We can change our minds at any stage of the process. We are not required to withdraw just because Mrs May sent her letter (to Brussels). Actually, the country still has a free choice about whether to proceed. As new facts emerge, people are entitled to take a different view. And there"s nothing in Article 50 to stop them."

Lord Kerr, it happens, is a "big time" globalist, having been a former member of the Bilderberg Steering Committee, Executive Committee member of the Trilateral Commission and Ambassador and UK Permanent Representative to the European Union.

As Bloomberg noted, it’s virtually impossible for the UK to meet the EU’s latest demands on the Irish border, which was almost certainly the point.

The EU’s demands on Ireland in the memo are all but impossible for Britain, unless the whole U.K. stays in the customs union, which Prime Minister Theresa May has ruled out. Allowing Northern Ireland to stay in the customs union could mean putting a border between it and mainland Britain. That’s unthinkable for the U.K., and more so at a time when the Conservative government is propped up by the pro-U.K. Democratic Unionist Party from Northern Ireland. The DUP would quit before accepting a border in the Irish Sea.

 

“We recognize the solutions to the unique circumstances in Northern Ireland must respect the integrity of the EU single market and customs union,” Davis’s department said in response. “But they must also respect the integrity of the United Kingdom.”

 

…Ireland has consistently argued that the U.K. remaining in the customs union would be the easiest way to avoid a new border. But May insists Britain will leave as it can’t strike trade deals around the world otherwise -- a key part of the pro-Brexit narrative.

We assume that Theresa May, David Davis and their colleagues have grown wise to the EU’s sleazy negotiating tactics and leaks to German newspapers (after Juncker has dinner with May – twice so far). Nonetheless, the ministerial resignations, party infighting and complaints from banks and the business community about the lack of clarification on the details and a transitional period are making it increasingly difficult for the UK side. However, we suspect that if the UK offers something approaching 60 billion euros, rather than the 40 billion euros it wanted to pay, the Irish border issue and others will magically melt away. May and Davis might see this as a price worth paying to stop having to be nice to the likes of Juncker and Barnier. And...the UK won’t have to cough up when a large German, French or Italian bank requires bailing out.

European Commission Responds To Theresa May Speech

As promised, the European Commission responded promptly to Theresa May"s speech with remarks from Michel Barnier hitting the tape, in which he says that "Prime Minister Theresa May has expressed a constructive spirit which is also the spirit of the European Union during this unique negotiation" and notes that "Today, for the first time, the United Kingdom government has requested to continue to benefit from access to the Single Market, on current terms, and to continue to benefit from existing cooperation in security. This is for a limited period of up to two years, beyond its withdrawal date, and therefore beyond its departure from the EU institutions."

Commenting further, Barnier said that "if the European Union so wishes, this new request could be taken into account by the EU and examined in light of the European Council stated in its guidelines of 29 April 2017: "Should a time-limited prolongation of Union acquis be considered, this would require existing Union regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures to apply."

While the remarks are hardly surprising, the one section that appears to be grabbing attention is the following: "The fact that the government of the United Kingdom recognises that leaving the European Union means that it cannot keep all the benefits of membership with fewer obligations than the other Member States is welcome. In any case, the future relationship will need to be based on a balance of rights and obligations. It will need to respect the integrity of the Union"s legal order and the autonomy of its decision-making."

He also said that "Prime Minister May"s statements are a step forward but they must now be translated into a precise negotiating position of the UK government" and adds that "The EU will continue to insist on sufficient progress in the key areas of the orderly withdrawal of the United Kingdom before opening discussions on the future relationship. Agreeing on the essential principles in these areas will create the trust that is needed for us to build a future relationship together."

Indeed, this is what will be the focus of the Brexit process as it moves on to the next phase of the "divorce" proceedings.

Full Barnier statement below (link).

European Commission - Statement

Statement by Michel Barnier

Brussels, 22 September 2017

In her speech in Florence, Prime Minister Theresa May has expressed a constructive spirit which is also the spirit of the European Union during this unique negotiation.

The speech shows a willingness to move forward, as time is of the essence. We need to reach an agreement by autumn 2018 on the conditions of the United Kingdom"s orderly withdrawal from the European Union. The UK will become a third country on 30 March 2019.

Our priority is to protect the rights of citizens. EU27 citizens in the United Kingdom must have the same rights as British citizens today in the European Union. These rights must be implemented effectively and safeguarded in the same way in the United Kingdom as in the European Union, as recalled by the European Council and European Parliament. Prime Minister May"s statements are a step forward but they must now be translated into a precise negotiating position of the UK government.

With regard to Ireland, the United Kingdom is the co-guarantor of the Good Friday Agreement. Today"s speech does not clarify how the UK intends to honour its special responsibility for the consequences of its withdrawal for Ireland. Our objective is to preserve the Good Friday Agreement in all its dimensions, as well as the integrity of the Single Market and the Customs Union.

The United Kingdom recognises that no Member State will have to pay more or receive less because of Brexit. We stand ready to discuss the concrete implications of this pledge. We shall assess, on the basis of the commitments taken by the 28 Member States, whether this assurance covers all commitments made by the United Kingdom as a Member State of the European Union.

Today, for the first time, the United Kingdom government has requested to continue to benefit from access to the Single Market, on current terms, and to continue to benefit from existing cooperation in security. This is for a limited period of up to two years, beyond its withdrawal date, and therefore beyond its departure from the EU institutions.

If the European Union so wishes, this new request could be taken into account by the EU and examined in light of the European Council stated in its guidelines of 29 April 2017: "Should a time-limited prolongation of Union acquis be considered, this would require existing Union regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures to apply."

The sooner we reach an agreement on the principles of the orderly withdrawal in the different areas – and on the conditions of a possible transition period requested by the United Kingdom – the sooner we will be ready to engage in a constructive discussion on our future relationship.

The EU shares the goal of establishing an ambitious partnership for the future. The fact that the government of the United Kingdom recognises that leaving the European Union means that it cannot keep all the benefits of membership with fewer obligations than the other Member States is welcome. In any case, the future relationship will need to be based on a balance of rights and obligations. It will need to respect the integrity of the Union"s legal order and the autonomy of its decision-making.

The EU will continue to insist on sufficient progress in the key areas of the orderly withdrawal of the United Kingdom before opening discussions on the future relationship. Agreeing on the essential principles in these areas will create the trust that is needed for us to build a future relationship together.

David Davis and I will meet in Brussels next Monday to begin the fourth round of the negotiations. As always, we are preparing the upcoming round with the 27 Member States and the European Parliament. On Monday I will have a discussion with the European Parliament in its Brexit Steering Group, as well as with all Member States in the General Affairs Council.

We look forward to the United Kingdom"s negotiators explaining the concrete implications of Prime Minister Theresa May"s speech. Our ambition is to find a rapid agreement on the conditions of the United Kingdom"s orderly withdrawal, as well as on a possible transition period.

How Do You Like Your Brexit In The Morning - Hard, Soft, Smooth, 'English', Or Late?

British Prime Minister (for now) Theresa May is desperately cobbling together a deal today with a small Northem Irish political party that she needs to stay in power after a disastrous election that destroyed her authority days before Brexit talks are due to start.

So how did we get here? Hedge Fund CIO Eric Peters succinctly sums up the state of play...

"We"ve had austerity rammed down our throats, it’s brought about inequality, it’s brought about the type of society that nobody wants - a low pay, race to the bottom society,” announced Mcluskey, leader of Unite, Britain’s largest trade union.

“Jeremy Corbyn came along and offered an alternative.”

And the Brits ate it up. Particularly youngsters, our future. 63% of 18-34 year-olds voted Labour, 27% Conservative.

And they didn’t vote moderate old Labour, they voted new Labour, led by an unreformed Marxist.

“Ms. May made a fundamental strategic error with plans to overhaul social care, which became known as a dementia tax,” confessed a Cabinet member. “I don"t think you can underestimate the achievement of what we’ve just managed,” said a Tory MP.

“Instead of talking about Brexit and the strong economy - we ended up talking about social care, winter fuel payments, and taking lunches off children,” he continued, remarking, “We didn"t shoot ourselves in the foot, we shot ourselves in the head.”

However, despite all this drudgery, the politicial propaganda is running at full steam. As one wise veteran of the British empire noted (h/t Steve C):

The Conservatives claimed victory as they were the largest party.

Labour claimed victory as they had substantially increased their share of the votes.

The Lib Dems were ecstatic as they won more seats than last time.

The SNP were over the moon as they were still the largest party in Scotland.

Even UKIP were happy as they only lost 1 seat, 12 fewer than the Tories!

In fact, it"s very difficult to find a party who aren"t putting a positive spin on their party"s result.

But still, the big question is what happens next?

Well, as Reuters reports, first things first, this week is going to be a busy one for May...

MONDAY, JUNE 12

- Northern Ireland talks

The DUP and Irish nationalists Sinn Fein are due to restart talks to form a new power-sharing government in Northern Ireland and avoid devolved power reverting to the British parliament in London for the first time in a decade.

The sides have until June 29 to secure a deal, but observers fear any concessions to the DUP by May"s Conservatives could complicate the talks, deepening the region’s political crisis.

- May"s top team of ministers to meet

May has confirmed five of her most senior ministers will remain in their pre-election roles, but has yet to announce whether there will be any changes to other jobs within her top team of ministers, known as the cabinet.

Defence Minister Michael Fallon said on Sunday the cabinet would meet "early next week". Cabinet meetings usually take place on a Tuesday but British media have reported it could meet on Monday.

TUESDAY, JUNE 13

- May to meet with DUP leader Arlene Foster

Discussions were held between May"s Conservatives and the DUP over the weekend with a view to the Northern Irish party supporting May"s minority government on key votes in parliament.

Foster is due to travel to London on Tuesday to meet May to discuss the details of a possible arrangement.

- May meeting with Conservative lawmakers

May is due to meet with Conservative lawmakers in parliament. The chairman of the influential 1922 Committee of Conservative lawmakers Graham Brady has said the meeting is due to take place on Tuesday but could be brought forward to Monday.

British media have reported that moves were afoot within May"s party to dislodge her after her election gamble - aimed at increasing her party"s majority in parliament ahead of Brexit talks - backfired.

A leadership contest can be triggered if 15 percent of the Conservative"s 318 lawmakers write to Brady saying they no longer have confidence in May.

- Parliament returns to elect speaker

Parliament reconvenes following the national election to elect a speaker for the lower house, the House of Commons. Swearing in of lawmakers will then begin, and continue for the rest of the week.

THURSDAY, JUNE 15

- Bank of England"s Mark Carney and finance minister Philip Hammond speak

The two men in charge of Britain"s economy deliver their annual Mansion House speech on Thursday when they are likely to try to calm businesses and investors worried by May"s precarious grip on power and the uncertain outlook for the UK economy which has lost a lot of its momentum of 2016.

MONDAY, JUNE 19

- Brexit talks begin

Talks on Britain"s exit from the European Union are due to begin. May has said her government will go ahead with these discussions as planned.

- State opening of parliament and Queen"s Speech

Parliament is due to be formally reopened. Queen Elizabeth will deliver the "Queen"s Speech", setting out the government"s plans for the new parliamentary session.

The debate on the Queen"s Speech usually lasts about five or six days. The vote at the end of this debate is considered an important symbolic test of the ability of a government to command the confidence of the House of Commons.

If May can get through this vote with the help of the DUP she can continue in government. If not, the opposition Labour Party would expect to have an opportunity to put forward an alternative Queen"s Speech and see if it could win the support of a majority in parliament.

If neither party can command a majority in parliament for their Queen"s Speech, it is likely a fresh election would be called.

And, if all that goes as planned, the fun really begins with Brexit negotiations kicking off.

As Reuters" Alastair Macdonald reports, Theresa May"s insistence on starting Brexit negotiations next Monday is questioned by Britons who think the prime minister"s calamitous election setback means she should now seek to stay in the EU single market. However, in the year since Britain voted to leave the European Union, the other 27 EU states have hardened their common position and narrowed British options for avoiding a "hard Brexit". The following scenarios touch on what may happen now voters have dashed May"s hopes for a bigger majority to negotiate and left her dependent on pro-Brexit Ulster Protestants and on political rivals reportedly eyeing their moment to oust her.

1. HARD, SMOOTH BREXIT

May, a former supporter of EU membership, filed for divorce in March, meaning Britain would leave the single market and customs union and end EU court oversight, EU budget payments and free migration from the EU to Britain.

After a transition period, May wants an EU-UK free trade pact.

Under Article 50 of the EU treaty, Britain will no longer be a member on March 30, 2019, whether or not the two sides agree a deal to avoid leaving businesses and citizens in a legal limbo.

The EU priority is "damage control" by limiting the economic disruption and saving the Union. That would curb discord and any further breakaways by showing Britain was no better off out.

EU Brexit negotiator Michel Barnier has instructions to seek a deal that preserves the rights of 3 million EU citizens in Britain, recovers money owed by London (possibly $65 billion) and limits any damage to Irish peace from a "hard" EU-UK land border.

If "significant progress" is made on that, EU leaders may then open talks on a transition to a free trade agreement.

In this ideal scenario for Brussels, the outline divorce is set by the end of this year, agreed in full by late 2018 and ratified by lawmakers by March 2019.

There would then be several years of transition to a new treaty, even deeper than a trade pact with Canada, plus close cooperation on security and science.

BUT...Brussels hoped May would win a big majority to help her sell compromises needed for this scenario. Some EU officials now doubt she can remain in power if she accepts too many European demands.

2. HARD BREXIT WITH NO DEAL

May has said "no deal is better than a bad deal".

BUT...EU leaders think she is bluffing because no deal would spell economic and legal chaos. Yet EU officials have grown increasingly worried that both sides may box themselves in, with little time left.

Before the election, May and her ministers said they would not pay the EU billions on leaving and want trade talks now. Barnier, meanwhile, cannot stray from his mandate without a new, unanimous agreement of the 27.

While neither side of the negotiations wants potentially chaotic limbo, a breakdown could leave both with a messy and unpopular last-minute fix.

3. NO BREXIT

A year ago, 48 percent of Britons voted to stay in the EU, including most lawmakers from the main parties, most Scots and most in Northern Ireland. Some still cling to the hope of the Brexit process being reversed.

BUT...That hope seems forlorn now that both big British parties now accept Brexit, as does Brussels.

• First, Britain would need a new government which wants to stop it. Neither a Conservative party coup against May nor a left-wing coalition led by Jeremy Corbyn"s Labour, possibly after a new election, seems likely to deliver that.


• Second, it would have to overturn a British legal opinion that the request to leave under Article 50 cannot be revoked.


• Third, it would need the EU to agree, most likely by unanimous vote of all 27. And it might mean taking time for another British referendum.

Formally, EU leaders insist they would rather Britain not leave. But the prevailing view in private is that the Union is safer without a big member that has always been lukewarm on the project and is now so divided as to be unreliable.

4. LATE BREXIT

Political chaos in Britain has prompted calls for more time to negotiate, possibly on different terms from those May has sought. Article 50 allows for an extension to the two-year deadline if the other states unanimously agree.

BUT...EU leaders will hesitate to open a divisive issue among them and want Britain out before European Parliament elections in May 2019. The two-year deadline is designed to weaken the leavers" hand.

5. ENGLISH BREXIT

Scotland"s government wants a special deal to stay in the single market or, if not, to secede and stay in or rejoin the EU.

Ireland"s EU commissioner has espoused the idea of keeping Northern Ireland in the EU customs union. May"s unionist allies in the province also want to avoid a hard border.

BUT...On Scotland, May and the EU doubt a "differentiated deal" on trade and migration can work, while Spain, battling Catalan separatists, may block it. Electoral losses for the Scottish nationalists have also weakened their hand to threaten a new independence vote.

On Ireland, such a scenario appears hugely complicated without raising some form of trade barriers between Northern Ireland and the rest of the UK. That would be anathema to the hardline Protestant DUP.

6. SOFT BREXIT

This could be the key battleground in the coming months.

Many Brexit opponents suggest that, if it goes ahead, Britain should at least stay in the single market for the sake of jobs and trade.

BUT...While EU leaders do not rule that out, they have set tough conditions similar to those imposed on Norway, which can access EU markets in return for cash contributions, taking EU migrants as well as refugees and observing rules overseen by EU courts.

Such terms are far from what Brexit supporters want and also rob Britain of its big say on EU policy.

And Europeans, as well as May, rule out "cherry picking" deals that give Britain access to certain EU markets, like banking. EU leaders say that would risk undermining the whole single market.

British proponents of soft Brexit say the EU, especially big exporters to Britain, could be persuaded. But the bloc seems for now committed to not breaking ranks. So talks on "soft Brexit" could be a waste of time.

In October, EU summit chair Donald Tusk said: "The only real alternative to a "hard Brexit" is "no Brexit"." Pushing soft Brexit over hard is seen increasing the risk of replacing a smooth Brexit with rough.

For now, the delusion remains as Bloomberg reports that some of Theresa May’s most senior ministers are plotting to soften her plans for a hard Brexit, even suggesting the U.K. could stay in Europe’s single market and customs union, as the prime minister fights to stay in power.

Chancellor Philip Hammond is said to be positioning himself as the grandfather of a softer Brexit. He told May he would only agree to serve in her cabinet if she gave him more influence over the withdrawal negotiations, according to one person familiar with the matter who declined to be named on confidential discussions.

“It’s very hard to see how a hard or disruptive Brexit can come out of this,” Tony Travers, professor of politics at London School of Economics, said in an interview.

The British public have in effect voted “to leave the European Union but in a way that doesn’t affect their lives or their jobs or anything to do with them or their sector,” he said.

Which of course is farcical. How anyone can imagine EU dureaucrats now backing down and allowing UK to leave with anything other than pain inflicted is a joke... "whatever it takes" was what Draghi said and they"re not about to flex to the Brits and offer every other marginal nation under their union the chance for a soft exit from their control.

The economy is likely to face a number of headwinds over the next two years of negotiations with the EU including a squeeze on real incomes and uncertainty about future trade arrangements once the country leaves the bloc in 2019, and as Bloomberg Intelligence"s Dan Hanson notes, the loss of growth momentum at the start of 2017 is likely to mark a period of sub-par expansion for the U.K. 

The Bank of England will probably continue to prioritize growth and look through above-target inflation, keeping policy unchanged until after the U.K. has left the trading bloc.

Prime Minister Theresa May"s loss of her majority in Parliament increases the risk of a disorderly Brexit. Even a smooth transition to a limited trade deal is likely to leave the economy smaller. BI Economics" forecasts output being 2% lower by 2021 than if the U.K. had voted to remain.

The Definitive Brexit "Wall Chart"

Yesterday the UK government triggered Article 50 and fired the starting gun on a two-year negotiation towards the UK"s exit from the EU. These negotiations will be complex and contentious, and as Goldman writes this morning, the open question is whether they will prove constructive or adversarial.

While Goldman provides an extensive analysis of next steps, including a framework of the three most imporant issues to watch, what we found most useful for readers is the following "Wall Chart" which lays out in clear detail not only what the next two years will look like for the Brexit process, but superimposes on it parallel key events from across Europe.

Brexit wall chart -- The Long March: A crowded schedule for the two-year negotiation

With that out of the way, here are excerpts from Goldman"s take on Article 50 and the long march to Brexit, as well as the three main issues to watch:

By Goldman analysts Andrew Benito, Huw Pill and Dylan Smith

Article 50 and the long march to Brexit — Three issues to watch

Yesterday (March 29), the UK government triggered Article 50 and thus fired the starting gun on a two-year negotiation towards the UK"s exit from the EU. These negotiations will be complex and contentious. The open question is whether they will prove constructive or adversarial.

In the context of political negotiations in general — and EU negotiations in particular — process is an important determinant of outcome. Keeping track of process is central to understanding whether we will end up with a mutually beneficial agreement or a Brexit that is unnecessarily costly for both sides.

Given each party has its own interests and domestic political constraints, EU negotiations inevitably require an element of compromise. By broadening the set of issues that the contracting parties can trade off against one another, two mechanisms underlying EU negotiations promote such compromise: (1) the principle that "nothing is agreed until everything is agreed"; and (2) the practice that agreement is only achieved at the last moment.

Applying these mechanisms to the Brexit negotiation may improve the chances of a constructive final outcome. But they imply that few concrete decisions will emerge in the coming months. In the meantime, businesses are left in limbo.
We identify three indications that would suggest Brexit negotiations are proceeding in a constructive rather than adversarial manner, increasing the likelihood of a benign outcome:

• Substantial discussions on a broader final agreement (including on post-Brexit trading arrangements) start before agreement is reached on the mechanics of the exit itself.


• The EU-27 show flexibility over the timing (and thus immediate magnitude) of payments to settle the UK"s legacy liabilities to the EU, which would avoid them becoming an obstacle to constructive negotiation owing to domestic political resistance in the UK.


• Most importantly, the UK government shows a preparedness to accept ECJ jurisdiction over any transitional phase after Brexit, even if this entails a political climb-down from its established "red lines".

* * *

What to watch #1. Whether difficulty in reaching an exit agreement (in particular, over its financial aspects) holds up progress on other dimensions of the negotiation will be an important early indicator or whether the Brexit discussions are amicable or adversarial.

Even if they improve the chances of eventually reaching a mutually agreeable compromise, these two procedural mechanisms come with costs. Businesses have to plan ahead. Lack of any concrete agreement until autumn 2018 at the earliest leaves their decision-making in limbo. Contingency plans have to be activated. From the UK perspective in particular, the risk exists that nothing being agreed until everything is agreed at the last moment leads to a closing of the political barn door after the economic horse has bolted.

A changing political context — in both the EU and the UK

For many continental European politicians, Brexit is an unfortunate and (in their eyes) unnecessary distraction. They have plenty on their plates already: fixing Euro area governance; dealing with immigration from the Middle East and North Africa; facing down the rise of Eurosceptic populism at home; addressing security threats from Russia and the Middle East; and managing the economic nationalism of the new US administration.

In the face of these challenges, progress in deepening European integration has stalled, as tacitly acknowledged at last week"s summit to celebrate the 60th anniversary of the Treaty of Rome. The recent Commission white paper was realistic in sketching out scenarios for the future of the EU, where the prospect of further integration was limited.[1] European leaders have publicly (although not uncontroversially) discussed the potential for a "multi-speed" Europe.

There are those on the UK side who believe a fractured and weakened EU will be forced to accommodate British demands within the Brexit negotiation, particularly on immigration issues. While there is validity in this view, we believe an important distinction needs to be drawn between public concern over immigration from outside the EU (which is rising in many EU countries, in sympathy with concerns in the UK) and heightened concern in the UK over immigration from within the EU.

More generally, the sustainability of the EU in its current form is open to debate over the medium term, since it is widely accepted that institutional and governance reforms are needed to make the Euro area more workable. Electoral risks in France and Italy over the coming year cannot be ignored. But even if a troubled EU may create some tactical advantages for the UK"s Brexit negotiators, they need to be careful what they wish for: an EU in chaos is directly damaging to the UK"s economy and financial system, and is unlikely to constitute a rational and attentive negotiating partner.

Our working assumption is that the EU-27 will continue to operate on broadly the current basis through the two-year Brexit process. We are sceptical that fundamental changes to the EU will take place over that horizon which create greater flexibility to accommodate the UK in a form of associate membership.

In parallel, the political situation within the UK may also be in flux: political uncertainties are not one-sided. PM May"s overall parliamentary majority is small. Internal division within the ruling Conservative party over the character of Brexit and the compromises with the EU-27 that are possible persists. Calls for a general election to bolster Ms. May"s political position are returning. The weakness of the Labour opposition has re-opened questions about a realignment of political parties.

Moreover, the territorial integrity of the UK is again being questioned. Less than three years after the Scottish referendum, Scotland"s Parliament has again called for a vote on independence on the grounds that the nature of the UK union will fundamentally change upon Brexit. Albeit for longstanding historical reasons more than over Brexit, Northern Irish politics is in turmoil. Commitments to maintain a "soft" border between the north and south of Ireland after Brexit raise questions about whether a similar soft border could be established between Scotland and England, allowing the former to remain within the single market as its government has proposed.

Brexit negotiations will take place in a context of political and institutional uncertainty.

* * *

What to watch #2. Transitional arrangements between Brexit in March 2019 and agreement on a new UK/EU relationship are key. Flexibility on the UK side towards accepting ECJ jurisdiction during this interregnum despite the political climb-down from established "red lines" this would involve would be a signal that a constructive outcome can emerge.

As Brexit becomes more immediate, parts of the UK government have started to show greater flexibility, at least with regard to the transitional arrangements. In part, this reflects practicalities. While accumulated European regulation and directives (the acquis in Eurospeak) can be transposed directly into UK law via the envisaged Great Repeal Bill, the regulatory authorities to implement those rules in the UK simply do not exist at present. Even if the expertise required is available domestically, creating, staffing and funding those institutions takes time.

Relying on the existing European institutions beyond March 2019 may therefore simply be a matter of necessity in some cases. Recognition of such necessity may open up scope for a constructive compromise for the transitional period despite the political obstacles, and thus for less adversarial negotiations about the final arrangements. But should a hard line be imposed by the Eurosceptic hard Brexiteers, this would damage prospects for successful conclusion of a mutually beneficial final deal.
Agreeing a new trade relationship

The UK government"s negotiating position establishes that it does not seek to participate in the EU"s single market or customs union. As regards trading relationships, the "deep and special partnership" sought by the UK with the EU after Brexit (to quote from yesterday"s letter triggering Article 50) is therefore likely to take the form of an Free Trade Agreement (FTA).[4] But — notwithstanding its name — an FTA represents a significant degradation in the nature of that trading relationship relative to the status quo.

An FTA is likely to neglect trade in services and focus on trade in goods. Unless agreements on services — which typically involve much deeper (and more politically sensitive) treatment of regulation and labour mobility — can be established in parallel, this implies a significant deterioration in the UK"s access to EU markets in the services sector within which it has specialised.

By their nature FTAs require local content rules. Otherwise third countries could circumvent trade restrictions of some members of the FTA by exporting to the member with easiest access. (The distinction between an FTA and a customs union is that the former allows participants to run their own commercial policy with the rest of the world, whereas the latter requires adherence to a single common commercial policy.) But policing local content requirements is potentially bureaucratic and invasive.

One way of overcoming the shortcomings of an FTA would be to create sector-specific carve-outs, whereby certain industries or activities are treated on a different basis from the normal rule. Such an approach has been entertained for the UK post-Brexit (e.g., in financial services, where the City of London plays a special role as a financial centre; and/or for the auto sector, where pan-European supply chains are the norm). But defining sectors may prove controversial. As with local content requirements, the bureaucratic process of policing sector-specific deals (and their limits) threatens to be costly in time and efficiency, and thus may mark a significant degradation in trading arrangements to that currently available within the single market.

All in all, the more ambitious the scope and depth of any FTA, the more that it will rely on goodwill and trust among the contracting parties. This is one of the mechanisms whereby the process will determine the outcome of the Brexit negotiation. If trust is lost early in the discussions (e.g., over the financial cost of exit), the more difficult it will be to find a constructive way to address the practical difficulties of policing local content requirements and industry or sector borders, which are likely to be crucial elements of any future trade agreement.
Settling outstanding bills

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What to watch #3. Understandably, the EU-27 will expect the UK to cover the costs of any reliance on EU institutions or programmes after Brexit. Flexibility on the EU-27 side regarding the timing (and thus immediate magnitude) of payments to settle the UK"s legacy liabilities — thereby avoiding these becoming a domestic political obstacle to constructive negotiations in the UK — would represent a positive signal for a mutually beneficial final outcome.

The long march to Brexit

Brexit negotiations are complex. Little concrete can or will be finally agreed until the end of the Brexit process. This leaves business decisions in limbo.

We identify three indicators of progress in the negotiations: (1) willingness to conduct exit negotiations in parallel with discussion about the new UK/EU relationship; (2) EU-27 flexibility over the timing of UK payments to meet legacy financial obligations; and (3) UK government flexibility over the jurisdiction of European courts and institutions during any transitional phase after Brexit. We believe these indicators will signal whether a constructive or adversarial approach is being adopted by the negotiating parties.

The immediate reaction to PM May"s Article 50 letter has not been constructive. British Eurosceptics have been understandably rigid on the government"s red lines, while Germany"s Chancellor Merkel has emphasised the EU-27"s insistence on sequencing exit negotiations ahead of talks on a new EU/UK relationship. But much of this reflects attempts to harden opening bargaining positions.

If such rigidity were to be maintained into the fall of this year, we would become more concerned that an adversarial negotiation could lead to "cliff edge" outcome on Brexit, with the likely economic disruptions that would cause. But our base case remains that an agreement can be found for tariff-free trade in goods between the EU and UK, an outcome that would require some flexibility on both sides. Nonetheless, this outcome falls well short of the status quo.

Brexit Reality: "Paying Any Exit Fee Is Absurd"

Via Mike Shedlock of MishTalk.com,

The EU demands the UK pay Brexit costs of €60 billion.

I have commented for months on the absurdity of pay such demands.

And that reality is finally hitting home.
 

Collision Course

Please consider U.K. May Be on Course for Early Clash With EU Over Brexit Costs.

U.K. Prime Minister Theresa May’s government looks set for an early clash with European Union leaders over the terms of Brexit as a report suggested it can leave the bloc without paying a financial settlement.

The Times newspaper on Saturday said government lawyers concluded there is no law or treaty to compel the U.K. to pay the bill EU officials have estimated at about 60 billion euros ($64 billion). That echoed a newly published finding of a House of Lords committee.

“Even though we consider that the U.K. will not be legally obliged to pay into the EU budget after Brexit, the issue will be a prominent factor in withdrawal negotiations,” Committee Chairwoman Kishwer Falkner said in a statement. “The government will have to set the financial and political costs of making such payments against potential gains from other elements of the negotiations.”

Haggling over how much Britain owes appears set to provide an early test of the formal negotiations, which May has pledged to invoke by the end of March. Austrian Chancellor Christian Kern became the first EU leader to put a value on the bill when he told Bloomberg last month that Britain should be charged about 60 billion euros.

That sparked anger from May’s Conservative Party, with former leader Iain Duncan Smith calling it “nonsense.” Trade Secretary Liam Fox has dismissed the idea of paying anything at all as “absurd.”

Upper Hand

The EU nannycrats have long insisted they have the upper hand in negotiations. The reality is the UK is not obliged to do anything, including a filing Article 50. The UK can tear up the treaty tomorrow and be done with it.

Walk Away

The primary problem in these negotiations is the EU nannycrat fools believe they can force the UK to pay ridiculous exit charges on top of other demands.

The ideal approach for the UK is to simply walk away. What can the EU possibly do that does not hurt the EU even more than it does the UK?

The sooner Theresa May sets the appropriate tone for negotiations the better off everyone will be.

I wrote about this long ago in Brexit Stacked Deck? Which Way? Don’t Negotiate, Just Leave!

Serious negotiations can only begin once Theresa May sets the proper tone. The proper tone is the UK is prepared to walk away and pay the EU nothing.