How money is­sue could help un­block the EU-Brexit talks

Financial Mirror (Cyprus) - - FRONT PAGE -

So, in­stead of let­ting the United King­dom crash out of the EU then, the talks should now shift to the tem­po­rary “tran­si­tion” that Prime Min­is­ter Theresa May of­fi­cially re­quested last month – and which a strong con­sen­sus among Bri­tain’s busi­ness lead­ers and pub­lic now de­mands. Above all, the ne­go­tia­tors should fo­cus im­me­di­ately on the Bri­tish bud­get con­tri­bu­tions that will be re­quired to make an or­derly tran­si­tion pos­si­ble.

An agree­ment on a mu­tu­ally ben­e­fi­cial tran­si­tion would re­quire some com­pro­mises from both sides. But nei­ther Bri­tain nor the EU would have to aban­don any fun­da­men­tal prin­ci­ples.

For Europe, shift­ing the fo­cus of ne­go­ti­a­tions to a tem­po­rary agree­ment, prob­a­bly modelled on the EU’s re­la­tion­ship with Nor­way, would in­volve only a small loss of face: EU lead­ers would have to con­cede that the se­quenc­ing they orig­i­nally pro­posed for the Brexit talks had to be re­jigged. In­stead of agree­ing on a fi­nan­cial set­tle­ment first, and then mov­ing on to trade re­la­tions, fi­nance and trade would have to be ac­knowl­edged as in­ter­de­pen­dent – and thus be dis­cussed si­mul­ta­ne­ously.

For Bri­tain, a change of fo­cus from per­ma­nent ar­range­ments to the con­di­tions for an or­derly tran­si­tion could trans­form the bud­getary is­sues now pre­vent­ing progress into a key that could un­lock the talks. In a speech de­liv­ered in Florence last month, May of­fered to make EU bud­get con­tri­bu­tions of roughly EUR 10 bln an­nu­ally for a tran­si­tion pe­riod of at least two years af­ter the Brexit dead­line, as well as to main­tain free move­ment of labour and en­force all EU rules.

May hoped that her prom­ise would win over Euro­pean lead­ers – es­pe­cially the big­gest con­trib­u­tor, Ger­many, and the big net re­cip­i­ents, such as Poland and Por­tu­gal. But her of­fer failed to im­press, prob­a­bly be­cause EU lead­ers are less wor­ried about the fi­nan­cial hole cre­ated by Brexit in 2019 and 2020 than they are about the next bud­get cy­cle, from 2021 to 2026.

To sug­gest that Bri­tain should pay bud­get con­tri­bu­tions well into the next decade may seem com­pletely un­re­al­is­tic, given the ve­he­ment op­po­si­tion to all EU pay­ments from Euroskep­tics in May’s Con­ser­va­tive Party. But, on closer in­spec­tion, mak­ing a long-term bud­get of­fer could have two big ad­van­tages for May.

First, tran­si­tional bud­get con­tri­bu­tions could be pre­sented as com­mer­cial pay­ments to sup­port Euro­pean pro­grammes from which Bri­tain ben­e­fits, in­stead of the puni­tive-sound­ing “di­vorce set­tle­ment” of EUR 50-60 bln cur­rently de­manded by the EU. If Bri­tain’s tran­si­tional pay­ments con­tin­ued near the cur­rent level of EUR 10 bln for the five or six years re­al­is­ti­cally re­quired to ne­go­ti­ate a per­ma­nent trad­ing re­la­tion­ship, they would add up to the same amount.

Sec­ond, a Bri­tish bud­get of­fer would be a pow­er­ful tool to cre­ate the “deep and spe­cial part­ner­ship” with Europe that May claims is her ul­ti­mate goal. Un­til last month, May avoided defin­ing this phrase, for fear of an­tag­o­nis­ing her party’s hard­line Euro­phobes. But in her Florence speech, May promised Bri­tish busi­nesses some­thing close to the cur­rent level of ac­cess to EU mar­kets. She also recog­nised that any priv­i­leged ac­cess to EU mar­kets would re­quire bud­get con­tri­bu­tions, as in the case of Nor­way and Switzer­land. The im­pli­ca­tion was clear: some­thing close to the cur­rent level of ac­cess to EU mar­kets would de­mand some­thing close to the cur­rent level of bud­get con­tri­bu­tions. And if May’s “deep and spe­cial part­ner­ship” is to be a per­ma­nent fea­ture of Bri­tish-EU re­la­tions, the bud­getary con­tri­bu­tions will have to be per­ma­nent, too.

But what if May is not re­ally se­ri­ous about that “deep and spe­cial part­ner­ship”? What if her true ob­jec­tive is to sat­isfy Con­ser­va­tive hard­lin­ers by bring­ing about a “clean break” with the EU? Even then, Bri­tain will need to con­tinue pay­ing bud­get con­tri­bu­tions for many years, if it wants an or­derly and non-dis­rup­tive Brexit.

Let’s as­sume that Bri­tain’s ul­ti­mate aim is to cre­ate com­pletely new global trad­ing re­la­tion­ships, with­out any spe­cial EU trad­ing priv­i­leges. These new trade deals will take many years to ne­go­ti­ate, and un­til their com­ple­tion, Bri­tish busi­nesses are des­per­ate to avoid two costly dis­rup­tions: one when EU mem­ber­ship ends in March 2019, and an­other at what­ever fu­ture date the new global trade agree­ments are fi­nal­ized and come into ef­fect.

Avoid­ing such a dou­ble dis­rup­tion is the whole point of May’s pro­posal for a “stand­still” tran­si­tion pe­riod from 2019 to 2021. But achiev­ing that ob­jec­tive will re­quire the stand­still in Bri­tain’s EU ar­range­ments to con­tinue un­til new global agree­ments are ready to im­ple­ment. This im­plies that Bri­tain’s bud­get con­tri­bu­tions must also con­tinue un­til new global agree­ments are fi­nalised.

The prob­a­bil­ity that com­plex ne­go­ti­a­tions with dozens of coun­tries can be com­pleted within just two years of Brexit is van­ish­ingly small. So, even if Bri­tish politi­cians and vot­ers re­ally want a hard Brexit in­volv­ing to­tal rup­ture with Europe, UK busi­nesses will need to pre­serve their spe­cial EU trad­ing ar­range­ments, along with the as­so­ci­ated bud­get con­tri­bu­tions, for at least sev­eral years be­yond 2021.

The up­shot is that, re­gard­less of what type of Brexit the UK wants, any or­derly with­drawal will re­quire con­tin­ued post-Brexit bud­get pay­ments to the EU. The only ques­tion is whether these pay­ments turn out to be per­ma­nent, as they would if May re­ally wants a “deep and spe­cial part­ner­ship,” or con­tinue only for the 5-7 years re­quired to ne­go­ti­ate new trade agree­ments af­ter a hard Brexit. Ei­ther way, May should rec­og­nize that EU bud­get pay­ments will be in­evitable for many years af­ter Brexit. More than that, she should turn this recog­ni­tion into an im­pres­sive long-term fi­nan­cial of­fer to un­block the Brexit talks.

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