March 29, 2017
It is B-Day. Theresa May signed the official Article 50 letter, which will be handed over by Tim Barrow, the UK permanent representative to the EU, today. This, not the 60th anniversary of the Treaty of Rome, is the EU’s symbolic moment. For the first time a member state is leaving.
We are ultimately optimistic that an exit deal will be reached eventually. But there will be many dark moments between now and final ratification of Brexit. We expect that our optimism will seem wholly unrealistic for parts - if not most - of the negotiation period, as both sides entered the process with the worst-possible starting positions. The UK is bluffing itself into thinking that no deal is better than a bad deal. And the EU is making wholly unreasonable financial demands. Both sides will have to give in. It is in their overwhelming interest to do so. This is why we are ultimately optimistic, but we all know that political accidents can intrude.
What has changed between June 23 last year and today is that most people have finally come to terms with the reality that Brexit is actually happening. There is still some denial in Germany. We noted an article by Thomas Straubhaar in die Welt who based a renewed Bremain prediction on the idea that the negotiating process can theoretically be extended ad infinitum, which is both true and ignorant of the reality of UK politics. Wolfgang Münchau writes in Handelsblatt that the time for Brexit denial is over, and that Germany in particular should press for a deal. After the US is making a credible threat to curtail bilateral trade with Germany, Germany cannot simultaneously afford an unravelling of trading relationships with its first and third largest trading partners. The volume of Germany/UK trade is €130bn yearly. The surplus in Germany's trade with the UK constitutes 1.6% of German GDP. Add to this the probably larger impact of a disruption of manufacturing supply chains. Get real.
Andrew Duff argues that the UK should stop this no-deal-is-better-than-a-bad-deal pretence, while the Commission should accept that you can, of course, negotiate Article 50 and trade in parallel. Don’t make a fetish out of sequencing, he writes. Article 50 says that the new trading relationship has to be taken into account, so a degree of parallelism is required under the treaty. His advise to solve the financial issue is for the UK to remain part of the EU’s multi-annual framework until 2020.
Werner Mussler offers the most detailed account of the financial issues we have seen so far. The €60bn have several components, the largest being a back-of-the-envelope calculation on the EU’s open positions, also known as "reste à liquider", spending commitments made in the past that have to be paid in the future. They stood at €217bn as of end-2015, and are likely to grow to €240bn by end-2018. Britain’s part would be about €29bn. In reality that position would be lower since many of these funds are never called. We would add to this that there is no obvious legal basis to force the UK to commit to future spending, and agree with Duff that this problem can be solved elegantly if the UK agrees to remain part of the multi-annual framework until 2020, which could also be part of a transitional agreement. So this is a solvable problem - financially, and ultimately politically too. May will have to make compromises in the Brexit process.
The second large position are pension payments to EU employers - not just British - as the EU does not distinguish between UK and other nationals. Locking in a British net contribution for the lifetime of these payments seems ludicrous to us, but it is fair, of course, that the UK pays at least for the pensions of EU employees who are British nationals. If the EU insists on the UK paying for the pension of non-UK nationals post-Brexit, there can be no Brexit agreement. Mussler concludes that the €60bn is a purely political number.
We found ourselves in rare agreement with Holger Stelzner, the FAZ’s conservative economics editor, who asks what kind of community the EU is that wants to penalise a member states for exiting. He also notes that there is no legal basis for the €60bn claim.
And finally, we noted a story in the Independent, in which Brexit secretary David Davis has assured the people of Northern Ireland that the UK government would respect a vote for Irish unification, which would result in continued EU membership for the province (similar to the way East Germany was absorbed into the EU without a separate accession agreement). This will be different for an independent Scotland, which would have to make a separate application to the EU. This, however, is no longer the Scottish National Party’s Position. They are only seeking EEA membership, as they have no intention of joining the euro or Schengen. The Scottish parliament yesterday formally endorsed Nicola Sturgeon’s call for a second referendum. The UK government will eventually accept the request - it has formal veto powers - but insists that the referendum will have to take place after Brexit.