20 July 2017

At a press conference today with EU Brexit negotiator Michel Barnier and his British counterpart David Davis, it appeared that one of the biggest two sticking points remains the “financial settlement.” A closer look reveals that some progress has been made on the issue, even though we are still far from a deal. The overall amounts which are being suggested, estimated to range from 30 billion euro net to 100 billion euro gross, aren’t that gigantic in the grand scheme of things, and of course money is always useful to smooth any deal.

What has changed recently?

First, there was a statement by British Brexit minister Baroness Anelay, who said that “the government recognises that the UK has obligations to the EU, and the EU obligations to the UK, that will survive the UK’s withdrawal — and that these need to be resolved.” Whether that means that “Britain concedes it will have to pay [its] EU exit bill”, as the Financial Times headlined, is up for interpretation, but reportedly, “the British side sees the statement as an effort to improve the tone of talks, rather than as a concession of substance.” Setting the tone right is important to get to a deal, as we witnessed during the eurocrisis.

Another revelation was that the UK does not intend to agree a final figure on its financial settlement to the EU until near the close of negotiations in March 2019, and will seek to maintain flexibility on the sum until then. That’s not very surprising, but the EU Commission won’t like it, given how it initially wanted a final deal on this issue before even beginning discussions on Britain’s future trade status, a stance which it has had to moderate to only requiring “sufficient progress”. At the press conference with Michel Barnier, David Davis refused to say whether acknowledging that the UK has obligations also means accepting there will be a net flow of money to the EU. And if he won’t admit that it’s not clear what’s really changed as the UK position had long been to honour its commitments.

The British government reportedly thinks that it will be able to convince the EU that there is “sufficient progress” if it signs up to the principles of the financial settlement and if it promises that any future UK government will respect the deal. The EU side remains mistrustful that a future UK government could change its mind on whatever is agreed. The fundamental problem remains that there is no simple way of preventing this: at the core of the UK constitution is the principle that no parliament can bind another.

The EU side is not explicitly demanding a deal with the UK on exact figures to conclude that Brexit financial talks have made “sufficient progress”, but EU diplomats have warned that the EU may suspend Brexit negotiations if the British side does not publish its own estimate of its potential financial obligations. At the press conference, Michel Barnier warned that for the EU “to compromise (…) we want clarity on [the financial settlement].” The UK has refused to present such an estimate this week but according to David Davis, “There will be a process of challenge [of the EU’s figures] going on here and that will happen and has started already.” In any case, according to one EU diplomat, the UK’s concession that it does have financial obligations will be sufficient to keep the talks on track. So don’t expect the EU to decide lightly to suspend these negotiations – things would have to seriously break down.

It’s the Council, representing the leaders of the EU27, who have to make the decision as to whether sufficient progress has been made to switch to parallel negotiations on the UK’s trade and other arrangements after Brexit. And it’s unclear whether the EU27 will be convinced that Britain only signing up to the principles of financial settlement, without presenting an actual estimate, is sufficient to green light parallel talks. As the Polish Foreign Secretary commented, the EU27 all agree that Britain should pay as much as possible for as long as possible. On the other hand, they may recognise that locking the UK into a methodology that suits Brussels is the best way of extracting money. It would be very difficult for any UK Prime Minister to agree to pay a large bill without clarity on what was being obtained in advance – delaying agreeing a figure may actually mean that the EU ends up getting more money out of the UK.

What can we expect?

Whatever decision is made by the Council, there still will be at least a year remaining to sort it out. Prominent Brexit supporter and British Conservative MEP Daniel Hannan has suggested that both sides should “just ask an international arbitrator to calculate all outstanding assets and liabilities”. There’s always that option, although then the EU would not then have the possibility to “sell” market access to the UK, just when it will be deprived of Britain’s annual contributions.

It’s important to note that as we get closer to 2021, which is the start of the new 5 or 7 period for the EU budget, EU politicians will get ever more nervous not only on how to fill the “Brexit gap” but also on how to finance all kind of plans for EU spending, for example on defence cooperation.

It looks like Brexit may end up forcing the EU finally to implement serious spending cuts in its wasteful budget, something it is already planning but which is facing resistance from all kinds of vested interests. There’s a long list of things they could address from agricultural landowners receiving a monstrous 270 billion euro of EU taxpayer funds over seven years simply because they own agricultural land, to overpaid EU civil servants.