Saturday, 18 March 2017

Why Brexit Divorce Talks Don’t Favor Theresa May

In World Economy News 18/03/2017

With a stroke of the queen’s pen, a new act of Parliament gave Prime Minister Theresa May the power to set in motion Britain’s exit from the European Union.
May appears to be in a commanding position. Her main Labour opponents are in disarray, her Conservative Party is as many as 19 percentage points ahead in the opinion polls, and, barring the occasional blip, she’s meeting little resistance in her pursuit of a hard, clean Brexit. Her goal remains, she said after leaving an EU meeting in Brussels earlier this month, to build the “independent, self-governing global Britain the British have called for.”
May’s confident outlook may not last. When she triggers the exit mechanism by invoking Article 50 of the EU Treaty—probably before the end of the month—she starts the clock ticking on a maximum of two years of negotiations on Britain’s departure terms and future trade arrangements. The U.K. will be cast out of the EU at the end of the period, even if no deal can be reached. “To end up with no agreement with our EU partners would be a very risky place to be,” says Dominic Grieve, former U.K. attorney general.
Yet the longer talks go on without an agreement, the more pressure will build on May to accept any terms that she’s offered. That risks “economic chaos,” says Charles Grant of the Centre for European Reform. “So if Britain wants a half-decent deal, it needs the goodwill of its partners.”
Goodwill is in short supply. Interviews and leaked documents have shown EU leaders from Berlin to Brussels vowing to unite in the talks and ensure the U.K. loses more than it gains from quitting the bloc. Germany said the EU won’t splinter or grant too many concessions to the British, while Denmark warned that May’s hopes for a new comprehensive free-trade agreement with the EU could take as long as 15 years. Even traditional ally Ireland sided with its EU partners in pushing Britain to pay an exit fee.
A foretaste of what May is up against comes in a memo circulating within the German government and obtained by Bloomberg. It urged EU governments to “not let ourselves be divided,” because the “foremost priority” must be to protect the bloc’s cohesion. It also stressed that Britain should be made to feel the difference between life inside the bloc and outside it. “Brexit will mean less cooperation and economic integration compared to EU membership,” and the U.K. will be treated as a “third country,” the document said. “Brexit thus becomes a step backward which will have an effect on Britain.”
Even before the talks begin, the British government has squared off against the EU and its chief Brexit negotiator, Michel Barnier, over his suggestion that the U.K. pay as much as €60 billion ($64 billion) to cover what it owes the rest of the EU. The liabilities on Barnier’s list are said to include pensions for EU officials, commitments on infrastructure projects, and financial policies such as the Irish bailout. One of May’s senior ministers described Barnier’s bill as “absurd,” while former Chancellor of the Exchequer Nigel Lawson called it a “ransom demand.”
Irish Prime Minister Enda Kenny warned that May will need to face up to paying for Britain’s previous commitments to the EU. “When you sign on for contracts, you commit yourself to participation, and obviously the extent of that level of money will be determined,” Kenny told reporters.
Barnier is insisting May agree to pay before he’ll even discuss whether to give her a free-trade agreement with the EU’s single market. Germany has sided with Barnier in saying the divorce should be arranged before a new trading relationship is discussed.
Britain would prefer to hold the talks in parallel. May said at the meeting in Brussels that she’s still aiming for a “good and comprehensive” accord and working toward the two-year deadline. She hinted, though, that she wasn’t necessarily talking about the trade deal being fully concluded by then, only its “framework.”
If the negotiations collapse, May says, she’ll walk away without a new commercial framework in place rather than accept a bad deal. All this makes the likelihood of a disruptive breakup “worryingly high,” says Malcolm Barr, an economist at JPMorgan Chase & Co.
May will also need to handle growing threats within the U.K. Scotland’s government is demanding a new independence referendum, which it wants to hold before Britain leaves the EU, while the power-sharing administration in Northern Ireland is also in peril. “This is about as good as it gets for May,” says Mujtaba Rahman, managing director at political consultant Eurasia Group. “Politics are about to get decisively more difficult.”
The bottom line: By seeking an early start to Brexit talks, May risks handing over the advantage to the negotiating team for the EU.

Source: Bloomberg