Home Flexcit Impact Assessments Monographs Contact

Brexit: it's the money stupid!

2017-01-20 08:00:46

One interesting thing about Mrs May's speech is that the more you look at it, the less depth it has. As Lost Leonardo puts it, this is a woman who shows scant sign of understanding the scale of the task on which the country has embarked. 

The errors alone should tell one that this is a woman who has not mastered her subject, while her supposed negotiating strategy demonstrates a profound lack of clarity, and troubling lack of awareness of what makes the EU tick. She does not seem to have given any consideration to where the "pinch points" are likely to be. 

A knowledge of EU history and of our troubled relations with the Community, however, will quickly draw attention to the early days and the "Bloody British Question". And that will give some clues as to how the battle lines might be drawn up. The early disputes were, of course, about money, culminating with Thatcher's great victory in 1984 at Fontainebleau on the rebate - more than a decade after we had joined the EEC.

As we live, so shall we die. It has always been the case that front and centre of any exit negotiations was going to be the money question. I have been long been predicting on this blog that the "colleagues" would put the financial issues at the top of the agenda, and make a settlement here conditional on dealing with all the other matters.

For Mrs May, therefore, there was the opportunity of uttering some emollient phrases, reassuring the "colleagues" that their concerns were understood, and that the UK was quite prepared to discuss a reasonable severance package, in accordance with the UK's treaty obligations and in a way that did not damage unnecessarily Union spending plans.

Such may not have been music to the ears of the zombies, but the UK is about to enter a complex series of negotiations, on which the prosperity of the nation quite literally depends. Now is not the time to make war-like noises addressed entirely to a domestic audience – and certainly not when, as Mrs May did, you have invited the ambassadors of the other 27 EU Member States to hear your speech, first hand.

But, rather than take the intelligent, diplomatic course, Mrs May chose belligerence. In her one and only reference to Union finances, she told her audience that, "because we will no longer be members of the single market, we will not be required to contribute huge sums to the EU budget".

Apart from the fact that we do not contribute specifically for the maintenance of the Single Market – and were funding the Community budget long before the Single Market even existed (witness Mrs Thatcher's Fontainebleau triumph), this was perhaps marginally acceptable to the "colleagues" in representing the eventual outcome of Brexit, but for what wasn't said.

Instead of referring to outstanding issues, Mrs May merely added that: "There may be some specific European programmes in which we might want to participate", adding, "If so, and this will be for us to decide, it is reasonable that we should make an appropriate contribution".

That, in itself, was clumsy phrasing, and not a little provocative. There is going to be a negotiation and it is for the UK to propose participation in some of the European programmes, but it is for the "colleagues" to decide whether they are prepared to allow the UK access. And they will then propose the price, to which the UK would have to respond.

With that, the Prime Minister concluded that, "the principle is clear: the days of Britain making vast contributions to the European Union every year will end" – again a somewhat provocative statement. It is something of a value (quite literally) statement to assert that the contributions are "vast", and if required for domestic consumption, then the pill could have been sweetened with an offer to deal on outstanding issues.

The inference, of course, is that payments are to stop altogether (apart from programme costs), but the lack of anything else has opened up a situation where the EU response is bound to appear confrontational. This is the way Mrs May – unwittingly or not – has set it up.

And, according to The Times, it has not been long in coming. Yesterday, Joseph Muscat, the Maltese prime minister, currently holding the EU's rotating presidency, made it clear that the UK will have to sign up to EU divorce terms for Brexit. This included a bill of up to £60 billion, which will have to be settled before talks on a trade agreement can begin.

This is exactly what we were saying on Wednesday and hinting at in December. But it also something the UK cannot pretend is a surprise. We were given notice by Wolfgang Schäuble last November. Mrs May was extremely unwise to ignore this issue.

Returning to The Times, we see reported Mr Muscat setting out the "mechanics" of Brexit to MEPs in Strasbourg, but then warning Theresa May "not to belittle" the difficulty of the Brexit talks. "It will be an arduous task", he says, "as our recent experiences with trade agreements suggest. There should never be an underestimation of this task".

Painting a picture so clear that even the Brexiteer zombies should be able to understand it, Muscat then said: "We want a fair deal for the United Kingdom but that deal necessarily needs to be inferior to membership", noting that, "This should not come as a surprise to anyone". Thinking it can be otherwise, he said, "would indicate a detachment from reality".

To a very great extent, though, Mrs May has driven a very large truck up a narrow cul-de-sac, with no room to turn round at the end. And it also appears to be a truck with no reverse gear. Thus, having deprived herself of room to manoeuvre, they fear the Prime Minister will treat the financial demands as her trigger to walk away from a "bad deal".

Her problem will be that the "colleagues" will see it as eminently reasonable that the UK is asked to honour annual payments until the end of the 2020 MFF period, and then contribute to the reste à liquider commitment, plus other outstanding issues, such as pension liabilities.

On the other hand, it takes no great genius to understand the domestic sensitivities of this issue for the UK and it is going to be politically very difficult for Mrs May to make any concessions. But, if there is to be any progress, then concessions there will have to be. To avoid making this appearing to be a humiliating climb-down, the Prime Minister needs to be preparing the ground. Yet there is no sign of her doing that.

Expressing his concern at things to come, we are treated to the views of an EU diplomat, via The Times. "To say she'll walk away hints she will not pay her £60 billion", he says. "If this is the case, how can she strike a good deal on trade? This is only the beginning of negotiations. I hope it is not going to be as bumpy as she hints".

And since all of this is taking place while the clock is ticking, we need to take note of Swedish prime minister, Stefan Lofven, who suggests that two years would be "too short" a period to agree both the divorce agreement and a trade deal. And this is without the talks stalling over the payment issue.

Unsurprisingly, Lord Kerr has also pitched in on this, suggesting that there could be "a one in three chance" that Brexit negotiations will end with no deal between the UK and the European Union. This he says, will result in "serious economic disruption and a degree of legal chaos".

He also warns that the financial negotiations would be "very nasty". "Article 50 is not about trade", he says, "it is about divorce. It's about paying the bills, dividing the property. The money negotiation is going to be a very nasty negotiation".

Lord Kerr then goes on to predict there will be "no serious negotiations before the autumn", adding he expects "this calendar year will be mainly spent in a furious battle about money".

If we ever get past that hurdle, it now looks as if the remaining time will be spent on a series of sector-by-sector transition arrangements with phased rendezvous dates as Britain diverges from the single market with further negotiations foreseen after the Article 50 talks post-2019 to reach what is being called the FTA+.

The aim, it would appear, is to make a political decision on the date that the FTA+ comes into force. This could be as late as January 2025 according to some or as early as 2022 according to David Davis, the Brexit minister.

This, actually, does not compute, and there is still a massive elephant lurking in the room – a secession treaty on which a phased withdrawal will rely for its legal base. A Free Trade Agreement is a treaty in its own right, and this can include details of a phased introduction. But the EU treaties will also need amending, and it hard to see how this can be achieved other than by a full-blown secession treaty.

Then, of course, there is much more to the Article 50 settlement than just trade. Potentially, as we have pointed out, there are 35 "chapters" under which talks may have to be marshalled, with much of the substance coming outside matters covered by an FTA.

According to Article 50, the Treaties cease to apply "from the date of entry into force of the withdrawal agreement" or, failing that, two years after the original notification. It is fairly clear that the FTA, itself, covers the future framework and cannot be the withdrawal agreement.

From this, it seems, that the FTA must be written up in some detail for it to take effect at the same time that we drop out of the relevant parts of the Treaties, suggesting that all this work must be completed within the two-year deadline.

The possible alternative is that the withdrawal agreement is held off and does not come into force until the FTA has been agreed and is in force. If we're talking about 2022-25, then we'll still be in the EU by the time of the general election, and still paying "vast" contributions to the EU budget.

Dare one suppose that Mrs May might by then be seeing the wisdom of taking up the Efta-EEA option, which gives us the trading continuity that we need while being firmly outside the EU.

Otherwise, Mrs May could find herself in Saint Augustine territory (the man who asked of God, "Grant me chastity, but not just yet". I doubt whether the electorate will be forgiving of a message declaring: "Brexit means Brexit, but not just yet". It doesn't have quite the same ring as the original.