Brexit Briefing No.15

Things are beginning to hot up this week.

Brexit budget deal still holding up talks, German government coalition negotiations collapse and Catalonia remains a tinderbox - it was another dramatic week in Europe and we are still no closer to having any real idea of what the final Brexit deal is going to look like.

At the start of the week all the focus was on Berlin, where Angela Merkel’s attempts to put a four party coalition together failed after the Liberal FDP party pulled out of the talks. It was always going to be tricky for Merkel to put together a coalition including the centre-right CDU, the Bavarian CSU, the Liberals and the Greens. On several issues the Greens and the Liberals were diametrically opposed, especially on reducing taxes and on refugee policy. However, there was still shock in Germany and wider Europe at the collapse of the talks, a first in modern Germany.

There are now three options available to the German Chancellor: she can try a grand coalition with the Socialists, although the Socialists have to date completely rejected that; alternatively, she can try to run a minority government, which will be very tricky; or finally there will need to be new elections, probably early next year. The Chancellor has indicated that new elections are her preferred outcome, and there is a decent chance she would still emerge in the lead and best placed to form a new government after them, although polling is not indicating much change to the current numbers, meaning it may be just as hard to form a government.

The failure to form a government leaves a vacuum at the heart of Europe, the effects of which on the Brexit talks are not clear, but it may make it harder for the Commission to move from the current agreed negotiating position, potentially delaying agreement on progress in some areas.

money

Monday night saw the Brexit cabinet committee agree to increase the UK’s financial settlement offer to the EU from £20 billion to a rumoured £40 billion. Nothing has been confirmed on the record by the government, but it has also been reported that this offer is conditional on the EU opening up trade talks after the December council summit. As both sides have always said, nothing is agreed until everything is agreed, and any financial commitment from the UK will be conditional on what it receives in return. However, already senior figures in Brussels have been quoted as saying that £40 billion is not enough to unlock talks, to no one’s great surprise. A period of horse trading in the coming weeks is likely.

The budget issues are the biggest stumbling block because of the problems in general with the way the EU budget works. The UK pays its annual fee (currently around €18 billion) as part of the Multiannual Financial Framework (MFF) which runs until 2020. The UK receives money back from Brussels in a variety of areas such as research, regional development and agriculture, but is a significant net contributor to the EU budget. The initial £20 billion sum that the UK offered in September was to meet its commitments under the current financial arrangements that all EU countries agreed to in 2013. If the UK leaves without a deal, and therefore doesn’t pay anything into this fund,  the current EU budget will face real shortfalls in 2019 & 2020, which means there is also huge appetite from the EU side to ensure that talks do not fail completely.

However, there is a second part to the budget dispute which relates specifically to the way the EU budget works. Although the budget agreement only runs to 2020, the EU has liabilities which run way beyond 2020, known as commitments in EU speak. These liabilities are for projects that the EU has agreed to fund in the longer term or for projects where the payments are only due after 2020. The problem for the UK is that these commitments are backloaded, peaking in around 2021-2022 before falling back. So the complexities of the budget questions are not easily resolved, and political willingness for a deal is crucial.

Taoiseach Building

Outside of the financial settlement issue, the Irish Taoiseach Leo Varadkar found himself in a war of words with Unionists in Northern Ireland, accused of playing politics with the peace process, after he made a series of remarks last week on not just the financial settlement but also proposing a customs border between Northern Ireland and the UK. He has a complex political situation to manage at home and his remarks can also be seen in that context. This week was another reminder of how difficult the Ireland issue is and the importance to the process of retaining good relations between London, Dublin and Belfast.

Another controversial remark this week came from Michel Barnier, who said that the UK would need to continue to follow all EU rules and regulations to secure a comprehensive free trade agreement (FTA) with it. That is not the case with other FTAs the EU has negotiated with third countries and reflects a very real fear in Brussels that the UK might follow a deregulatory approach in areas where it has opposed European legislation as unnecessary or even harmful. The risk from the Commission's point of view is that the UK may demonstrate the lack of need for much of this regulation. These remarks can also be perceived by more optimistic observers as an opening salvo ahead of the imminent commencement of trade talks.

So, in summary, expect more wars of words, some conciliatory talk as well and a continuing cloud of information and misinformation as we inch closer to the December Council summit and the possible opening of the second phase of negotiations. It is that phase which really matters to everyone, setting out the terms of a future UK-EU relationship on trade and other areas.