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Analysis

EU’s exaggerated UK exit bill

Barnier should leave room for bargaining

by Brian Reading in London

Fri 3 Mar 2017

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Michel Barnier, the European Commission's chief negotiator on the UK’s European Union withdrawal, has outlined plans to present Britain with a €60bn divorce settlement bill. He has indicated that discussion of other UK-EU exit terms, including a new trade settlement, will be off the agenda until an accord is reached on the amount Britain owes.

The bill is exaggerated. And Barnier’s provocative demands – which appear to be winning support in several EU capitals including Berlin and Rome – are likely to be counterproductive.

The risk is that Barnier’s negotiating ploy will backfire by making an amicable divorce impossible. All sides – the British and the other 27 member countries – would suffer from such an outcome. An impasse on the divorce bill would do nothing to alleviate the budgetary strains the EU is bound to face in coming years when the UK, as a major net contributor, leaves the bloc.

Another large issue clouding the political atmosphere is the future of EU residents in Britain and UK residents in the EU. This is a vital question that requires immediate attention. At stake is not just for the peace of mind of hundreds of thousands of people, but the future flexibility of labour markets in the UK and elsewhere.

The House of Lords, the UK’s upper legislative chamber, has voted in favour of an amendment to the UK’s EU exit bill, in defiance of Prime Minister Theresa May. The amendment requires the government to guarantee that EU citizens in the UK will retain their rights after Brexit. The vote weakens the government’s bargaining position, and may perhaps complicate an agreed EU stance. There are almost 1m Poles living in Britain, but fewer than 50,000 UK people in Poland. Conversely, the total of Britons (often retirees) living in sunnier climates in southern Europe greatly exceeds the numbers from Spain and other Mediterranean countries in the UK.

The danger is these cross-border residents will be drawn into negotiations like bargaining chips, along with the items in the exit bill. Brexit terms are to be bargained, not unilaterally imposed like reparations on a defeated nation. Either Barnier and his supporters relent, or a hard deal could mean no deal. That would spell defeat for everyone.

The €60bn demand excludes Britain’s share of EU assets. It includes EU funds budgeted to be spent in Britain. The EU multi-year budget, which the UK agreed in 2013, set out 2014-20 spending plans. Barnier’s sums make no sense unless British contributions stop when it gives notification of withdrawal under Article 50 of the Treaty of Lisbon.

If Britain leaves in 2019, its continued contributions will meet its commitments until then. Britain’s remaining liability is for EU spending from March 2019 to December 2020 – not total budgeted plans, only contractual commitments that cannot be changed when Britain triggers Article 50. Brussels appears to want the UK to buy out its share of actuarially determined existing liabilities. However, those terms would be extraordinarily costly when interest rates are so low – and the UK government would be right to resist them.

The UK cannot agree a divorce settlement until all the terms are known. The greater the access to the single market, the more the UK may be willing to pay. Negotiations should take place in parallel. This is what the bargaining is all about. Brussels should not unilaterally predetermine conditions.

Negotiations require a sense for political reality. If Barnier’s current stance is seen as an opening gambit, it is maladroit. This says little for the Commission’s vaunted negotiating skills. Most members want a decent deal for all sides, not punishment for Britain.

Brian Reading was an Economic Adviser to Prime Minister Edward Heath and is a Member of the OMFIF Advisory Board.

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