Brexit Briefing No.16

A rumoured divorce bill deal and crisis averted in Dublin even as Ireland appears a major stumbling block to a Brexit agreement; it has been another fascinating week as negotiations move head first towards the crucial December 15th Council meeting where the EU governments will decide whether enough has been agreed in the first round of negotiations to move to trade talks.

European negotiations tend to move slowly, meandering along until something major happens then in a blink of an eye, a breakthrough is found and everything starts moving very quickly.

The German government negotiations are a key example of this. Last week, after weeks of discussions, the potential “Jamaica” coalition of the Conservatives, Liberals and Greens broke down, with the expectation that a snap election would follow. However this week Angela Merkel headed off that threat by starting negotiations with the Socialist SPD Party for a new grand coalition. In reality this would be a continuation of the existing coalition, albeit a weaker one and one in which the socialists would have far more power. This could have a major effect on Brexit with SPD leader Martin Shultz so far rejecting any transition period after the UK leaves the EU in March 2019.

However, the coalition negotiations will not be easy and this was demonstrated this week when the German government officially voted for the renewal of glyphosate (a weed killer) in an EU vote. This was despite the Socialist Environment minister ordering the Agriculture minister (from the Merkel-affiliated CSU party) to abstain. Germany’s vote was the swing one, giving glyphosate just enough votes for its short term renewal.

Reichstag

Before news about a possible deal on the divorce bill broke, Brexit negotiations appeared to have hit a brick wall, with the Irish Prime Minister threatening to veto the EU moving to trade talks until the UK has given guarantees about the Northern Irish/Ireland border remaining open.

As the UK has already given these assurances and as the specific details cannot be worked out until the trade discussions start, it seems, on the surface at least, a strange position for the Irish government to take, as denying or delaying trade talks only makes the no deal scenario much more likely which would, with certainty, bring a hard border.

However the old adage “all politics is local” is worth remembering here. The Irish government was on the verge of collapse until the Deputy Prime Minister dramatically resigned at lunchtime on Tuesday. A snap election had seemed highly likely and Sinn Fein, the party most opposed to the UK or Northern Ireland leaving the customs union, is in the ascendancy. What they would most like, along with most politicians in the Republic, is that Northern Ireland stays in the customs union, even though that would be economically disastrous for Northern Ireland, as most of its exports go to the rest of the UK. It would also be politically challenging as the UK would no longer exert the same sovereignty over Northern Ireland, which would contravene the Good Friday agreement and most peculiarly, it would mean that UK firms would face blocks to selling goods and services within a part of the UK.

Now an election seems unlikely in the short term, the challenge is how to manoeuvre the Irish Taoiseach off the cliff-edge he has talked himself on to, something made all the more difficult by internal party criticism sweeping over him as the immediate danger of an election has receded.

Irish government buildings

Barely 12 hours after the crisis in Ireland had passed news leaked of a major development in the talks over the budget. Both the EU and the UK government have said there is still more negotiating to be done, but it appears that there has been a significant breakthrough which should help unlock trade talks in December.

The key breakthrough is that both sides have roughly agreed on how to calculate the UKs financial obligations and that the UK has agreed to meet its financial commitments when they fall due, i.e. to pay for future commitments that may be due years after the UK has left, such as pensions for UK staff in the European institutions.

More work is still to be done though. For example, the UK will come forward with which commitments it wishes to honour. As a result there is no formal figure yet, although figures of between £40 and £55 billion have been touted.

However the key point is that these commitments will be paid over a significant period of time, possibly up to 40 years, which means that there will be no upfront bill, and many of the payments will be wrapped up in the UK’s continued participation in certain pan-European research and cooperation programmes.

This long term commitment helps in a number of ways - it obviously spreads the load, but in some areas it may help reduce the UK's obligations; on the EU's pension scheme for instance, the financial liabilities may reduce as we return to more normal interest rates in future decades.

The UK had always accepted there were certain long term obligations, for example, after the dissolution of the League of Nations, the UK has continued to pay the pensions of former employees. The long term payments also mean the UK and EU are bound to maintain a form of relationship with each other, which can help create a much closer relationship with regards to future trade relations.

The UK is looking at ways to further reduce its obligations. The drop in the value of sterling will reduce the percentage of the UK contribution. The UK is also seeking to use cash assets of the EU to reduce its total obligations, and to take into account money the EU commits to spend but never does because national governments do not put up their share of jointly financed planned projects. So it is clear there will be discussions and haggling on the figures for many months to come, but the principles are agreed, which is the important objective to move on to stage two.

divorce bill

The good mood was only dampened on Wednesday by the Commission’s Chief Negotiator Michel Barnier appearing to claim the UK was walking away from the fight against IS in a speech in Berlin. It has already received a fierce response from London and would appear to be at odds with both the facts (the UK is the biggest European contributor to the anti-IS effort in Syria) and Mr Barnier’s previous rebuttals of the UK offer to remain part of EU anti-terror cooperation instruments.

These remarks only added to a general sense, certainly in the UK, that the EU isn’t playing fair on some issues, such as the outstanding uncertainty on citizens’ rights, where the EU is refusing to allow Brits resident in Europe to be able to move freely across the EU-27 or to guarantee voting rights in local elections. There is a feeling that perhaps the EU has overplayed its hand, or that it doesn’t really want a deal at all.

The transition deal remains a worry. The general view in the UK is that this is more or less a done deal. The UK will leave the EU in March 2019 but continue to apply the same rules for a transitional period. However in Brussels the view is very different. Many don’t want a transition deal and don’t believe it is inevitable or even desirable. Any discussion on the future trade relationship next year will therefore focus entirely on the transition rules. It is very unlikely that anything further ahead can be discussed or agreed at that stage, given the difficulty in even starting the transition talks.

So we are getting to the business end of the negotiations and although all the risk seems to be on the UK (that is the way it is perceived by the EU), there are huge risks for the EU in this as well.

If the UK and EU can’t do a deal, even a transition deal, in addition to losing any UK payment into the budget, there will be justifiable questions about who the EU can do a deal with. They have so far failed to agree trade deals with any of the world's biggest economies, with only a Japan deal looking possible in the near future. Canadian negotiators were frequently exasperated with the EU negotiating position, especially when the EU demanded Canada included human rights clauses designed for developing countries and then when Wallonia temporarily vetoed the agreement for no real reason (Wallonia does virtually no direct trade with Canada).

So if talks are to progress at all, the EU probably needs to show the UK that it does want a deal in force at the end of March 2019, because at the moment it’s not clear at all. The European Council meeting on the 15th December is the chance to finally formally move onto trade talks, but given the situation in both Germany and Ireland and the other difficulties outlined above, there is no guarantee that this will happen.