Dial it down

The rhetoric over the Brexit divorce has gone up by a few notches in the course of recent days. Leaked accounts of last week’s dinner engagement between Theresa May and Jean-Claude Juncker were splashed all over the German press at the weekend. Subsequently, the FT has calculated that the upfront cost of departure is likely to be in the region of €100bn whilst Theresa May today made the extraordinary allegation that “some in Brussels” did not want Brexit to succeed. It might be wise at this point to dial down the rhetoric before things get out of hand.

Dealing first with the politics (I know it’s dull but this whole debate is driven by it), there is little doubt that the European Commission was responsible for the leaks to the Frankfurter Allgemeine Zeitung. The details were too precise to be made up, and it is clearly designed to rattle the UK’s political cage in order to remind the government that it will not get everything it wants during the Brexit negotiations (if indeed, it gets anything at all). It is not very edifying but that’s politics for you.

As for Theresa May’s statement, she is right – except it is probably more accurate to say that “no-one in Brussels” wants Brexit to succeed. Why would they? We have known all along that the EU has no incentive to make life easy for anyone who wants to leave: If Brexit is a success the whole basis of the EU is threatened. If the EU is serious about holding together in the absence of the UK’s departure, of course it wants to see Brexit fail – to suggest otherwise is an act of incredible naïveté. The suggestion that there is any meddling in the election was, however, a step too far. In any case, this unnecessary election is all about the UK’s bargaining position regarding Brexit, so the PM’s comments were a bit rich.

Which brings us to the issue of divorce costs. I have referenced the work of the FT’s Alex Barker before, and I am indebted to his analysis of the data for an insight into where the EU’s increased bill comes from. Previously, the bill was estimated at around €70bn – a figure which included numerous questionable items. The extra €30bn is even more controversial, largely due to the demand for contributions to commitments planned for 2019 and 2020, which occur after the UK has already left the EU and which is estimated to cost between €10bn and €15bn. The EU is also believed to be demanding an upfront payment of €12bn to cover contingent liabilities rather than stumping up at the point when they arise. Finally, France and Germany are also believed to be doubtful that the UK has any entitlement to the EU’s assets – a move which is calculated to wind up the UK government.

It should be stated at the outset that the €100bn is a gross figure. If the UK is paying its full share of the budget beyond 2019, it will be entitled to its normal rebate. Once we add in farm subsidies and other items, it is expected that the final figure will be around the €65bn mark. Of course, like any good dealmaker, the EU is bound to start with a high figure in the knowledge that it will be beaten down, but the higher you bid the more chance of  getting a figure close to what you believe to be reasonable. The ratcheting up of pressure was likely also partly triggered by the recent UK government belief that it can legally walk away without paying anything at all, and this is the EU’s way of letting the UK know it is not in a strong negotiating position. After all, the UK will not get any form of trade deal if it refuses to pay anything (which, of course, the UK knows). More problematic still is that Michel Barnier, the EU’s chief negotiator, will not put a final bill on Brexit until the negotiations are complete – he simply wants the UK to agree on the methodology.

All told, this puts the UK in a difficult spot. David Davis, the UK’s chief negotiator, will not sign up to such a deal – and for once I have some sympathy. The UK will already be asked to contribute to the unattributed parts of the budget which have not been allocated on an accruals basis (the so-called reste à liquider payments), whose provenance is dubious. To deny the UK any claim on EU assets is morally indefensible, particularly since the UK is such a big net contributor to the EU budget. But to pay for budget commitments beyond the time the UK leaves is a red line. It’s like being charged in a restaurant for a meal you already don’t want to eat, but then you are being asked to pay for the next customer’s food as well.

The whole day has been one of high octane posing. As I have said before, there are deals to be done but if both sides continue to antagonise the other, the prospect of successfully concluding one will diminish. My advice would be to turn down the noise – no trade deal is ever concluded with anything other than a cool head.

Aftermyth

There is no real sense that the Brexit dust is beginning to settle. As I warned all along, there never was a Plan B and that if Johnson, Farage et al were to carry the day, they would have to think clearly about what they wanted to do with their new found power. And they haven’t. We have been treated to the spectacle of Johnson backsliding on some of their initial promises and Farage grandstanding from the Brussels bully pulpit.  Meanwhile, the EU leaders try to close ranks and carry on as before and this is where things might get dangerous. The Leavers might have been able to carry off their shtick at home, but it will be whole different set of negotiations to get the EU to cut any sort of deal without triggering Article 50 and I rather think the Brexiters are out of their depth.

Short of actually remaining within the EU there is no alternative deal which offers anything like the same advantages as the one we have now. The so-called Norwegian solution offers most of the costs and all of the benefits bar one – the ability to set the rules of the game, which is by far the most important of the lot. The Swiss option, which involves making a series of bilateral agreements with the EU on a range of subjects, is cheaper (around 40% of current UK levels on a per capita basis) but less efficient, because each subject area has to be dealt with separately, and in any case excludes financial services. Perhaps the UK could do a deal in this area but the costs would likely rise correspondingly. In any case, both of these options would require the UK to keep the borders open to an extent which many voters thought they were voting against. Whilst many people argue that the Norwegian option is economically the best, it would be the height of stupidity to take that deal. Why would any government accept not being to influence the rules and still pay costs which are 90% of current levels? It just defies logic. 

As for what the Leavers are trying to sell at home, they are apparently convinced that they can trade with the EU as before and control borders. But it is not in the gift of any British government to make that promise. The single market belongs to those who remain in the EU and they will determine who trades in it and on what terms.

So what happens now? The EU seems convinced that Britain should do what it promised and trigger Article 50 of the Treaty of the European Union. In other words, start a process of negotiation with the EU on the terms of the post-membership trading arrangements. Naturally, the British don’t like this prospect because they don’t know what the outcome will be and are holding fire. Legally the British have to make the first move. And let’s not forget that since the referendum was not binding on the UK government in the first place, it is rather difficult to envisage the EU being able to railroad the UK into triggering what is an unstoppable process. One you pull the trigger, this baby is well and truly armed.

So what to do? From my perspective the best option would be to not start the exit countdown clock. It may be a live hand grenade but the pin is still in, so put it in the cupboard and forget about it. That, however, is not what the electorate think they voted for. But they will soon realise that the longer the government leaves it, the more they have been taken for a ride. There has been speculation that a new election should be called, which would act as a proxy second referendum. We’ll skip the details but suffice to say it opens up a whole new can of worms, notably a surge in support for fringe parties such as UKIP when the electorate realises that the established parties don’t really want to leave the EU after all. 

Undoubtedly, the other EU countries want to make Britain squirm. It is after all, only natural that after a bitter row during which one threatens to storm out that the other one says “off you go then.” As an exercise in bluff calling, it never fails. But if the Brits don’t really want to go, then you can be pretty sure that the rest of the EU does not want the UK to go either. 

So how about this for a plan: Sack Jean-Claude Juncker and reset relationships. After all, he is a hard liner whose views do not seem to chime with those of Angela Merkel. He is apparently not well liked in parts of central and eastern Europe and he and Cameron famously do not see eye to eye. Thus, for the greater good of the EU, the big nations conspire to get rid of him (don’t forget that the whole Commission was forced to resign in 1999). They find a more emollient candidate who offers Britain most of what it wants; the Brits sell the deal at home that it was Juncker’s fault all along and Article 50 is quietly shelved. Everyone saves a bit of face, the EU is preserved and we move on.

As Peter Cook put it in the famous Beyond the Fringe sketch, The Aftermyth of War:

“I want you to lay down your life, Perkins. We need a futile gesture at this stage. It will raise the whole tone of the war. Get up in a crate, Perkins, pop over to Bremen, take a shufti, don't come back. Goodbye, Perkins. God, I wish I was going too.” 

Jonathan Miller: “Goodbye, sir — or is it — au revoir?” 

Cook: “No Perkins.” 

Sometimes sacrifices are necessary for the greater good, and this may be one of those times.