Brexit negotiations: The real problems have only just begun

Ireland and the ‘Brexit bill’ are proving to be major stumbling blocks and the British Prime Minister Theresa May will soon face the question of putting country before party or even her ability to govern.

THE British Prime Minister Theresa May made yet another pilgrimage to Brussels on Nov. 24 to see whether she could salvage the apparent deadlock of the Davis-Barnier negotiations. She met with the European Council President Donald Tusk, as well as the German Chancellor Angela Merkel, the Danish Prime Minister Lars Lokke Rasmussen and others.

Tusk’s message was clear: He gave the British prime minister 10 days to come up with solutions to the remaining issues of the Irish border, the rights of EU citizens, as well as with a compelling euro number for the exit bill. If she failed to do so by Dec. 4, he claimed to be in no position to recommend that the Brexit negotiations advance to talks about trade and transitional arrangements. The EU Council meets on Dec. 15 and will then give its final verdict on whether the negotiations can move on.

It is vital for the UK economy that negotiations do move on: The EU is by far the UK’s most significant trading partner. The supply chain for the automotive and aeronautic sector is highly integrated with the continent and the city of London stands to lose a lot, if and when it is no longer authorized to be part of the euro clearing system. Most of the big banks and manufacturing companies have warned for some time that they need to understand the “lay of the land” by the beginning of 2018 at the latest. They have big staffing decisions to make. It takes time to relocate employees and systems. So far it all looks rather straightforward. However, for May it is not: She has to decide whether she wants to put country before party and before her own political survival.

Ireland has become the biggest stumbling block ahead of the exit bill. The Irish economy is very integrated with the UK economy, especially with the one in Northern Ireland. Potentially the Irish economy stands to lose more than the UK’s from botched negotiations. The EU and Ireland advocate that the simple solution for Northern Ireland would be to leave Ulster in the single market and the customs union to avoid border checks. It sounds easy but stirs up a hornet’s nest on the Irish Isle. Many in Ulster, especially the Democratic Unionist Party (DUP), staunchly oppose any arrangements that treat Northern Ireland differently from the rest of the Union. The prime minister needs the support of Ulster to govern because she emerged weakened from last summer’s election and the DUP is propping up her minority government. The current woes of the Irish government further complicate the situation.

The “Brexit bill” is the other tricky issue. The EU wants a clear number showing that Britain will honor its obligations to the EU until the leaving date and beyond (where there are pre-existing arrangements). The EU have about €60 billion ($71 billion) in mind. The UK’s going-in position was €20 billion and May is rumored to be willing to go up to €40 million. The number sounds huge. However, it may not be so large, if one takes into account the potential economic cost to the British economy of a hard Brexit (Brexit without any trading agreement). A transition agreement is equally important because business needs time to adjust to the new order.

The UK government risks being penny-wise and pound-foolish. Sixty billion euros is a lot of money, but should be affordable to the world’s fifth largest economy. May also risks frustrating the system with her unwillingness to come up with a precise number.

Prima facie this looks like a penny-pinching exercise that may harm the overall national economic interest. Alas, May is in a bind again: Her government survives by the grace of her “Brexiteer” backbenchers who have a glum view on paying anything on exiting the Union. Recent polls also suggest that an exit payment of €40 million or above may have little support among the population in general.

On citizen’s rights, the EU may leave May no option but to extend the rule of the European Court of Justice during a two-year transition period, should it be in the offering. This will cause further rumbles among her “Brexit happy” backbenchers.

The situation is not easy for the prime minister and she is running out of time. On many issues it will be a question of putting country before party or even her ability to govern.

However, the real problems will emerge once the negotiations advance to trade and the transition period. In many ways the government had it easy until now. The issues are bound to become more contentious, both at the negotiating table and at home.

QCornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources