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July 12, 2017

And now for the real Brexit talks

James Blitz at the FT offers a very useful insight on the state of play in the Brexit negotiations. He makes the point that the biggest problem the process is facing is lack of clarity on the UK side. The next stage in the process will be the second round of talks, starting on Monday, which will be about the single most important issue of all: the financial settlement, or the Brexit bill as it is called in the UK. The problem is procedural at this stage. Without an early agreement on this issue, the EU will not move on to talks on the future trading relationship. And without any idea of what the future relationship will be, there can be no negotiations on the transitional phase either, because this presupposes knowledge of the future relationship. So there is a Catch-22 embedded in the EU’s official position. The statement by Boris Johnson that the EU can "go whistle" over the Brexit divorce bill is clearly not helpful (and makes us wonder why anybody could think that the replacement of Theresa May by Johnson would constitute progress). 

As Blitz points out, the real problem is that the UK has done nothing to prepare the public for this issue. Nor have there been internal discussions within the government or within Whitehall, because continued payments to the EU will have budgetary implications. If the negotiations on the Brexit bill turn into a slanging match, then there is indeed the danger of a no-deal situation.

The way out of this dilemma is to use the transitional period as a financial tool. During that period the UK will have to pay the equivalent of its current contributions. In our view, the period is likely to be longer than the UK officially admits, simply for technical reasons. A five-year transition period could deal with all of the outstanding claims, leave enough time for an FTA to be negotiated and ratified, and give business time to prepare for the post-Brexit future. This is why the transitional period is so important. We think the EU would be ill-advised to insist on an inflexible schedule - full agreement on finances as a precondition for talks on a transition - because the EU badly needs the UK’s contribution at least until the end of the current multi-annual budget in 2020. The EU will ultimately compromise both on the size of the bill and the process, for the simple reason that it needs the money.

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