A UK promise to pay up during Brexit transition years could break deadlock

13 September 2017 9:17am
Pounds and Euros

11 September 2017. By Simon Taylor.

With Brexit negotiations grinding towards deadlock, Theresa May has one card she can play to move things along: agree to keep paying EU budget contributions for years after the UK leaves the bloc.

Britain's powerful right-wing tabloid press won't like it. But EU sources say such a step could be enough to persuade the bloc's 27 remaining members to agree at an October summit to start discussing the UK's post-Brexit trade relationship with the EU — crucial if Britain is to avoid the economic shock of finding itself outside the bloc without a deal on March 30, 2019.

So the British prime minister will need to show some leadership. Her best option is to pledge to continue paying money to the EU during the transition period between the UK leaving the bloc and the entry into force of a new trade deal.

Britain's premier has so far refused to commit to making budget payments beyond 2019 without EU guarantees that it will negotiate seriously on the future trading relationship. This has left the EU's negotiators frustrated and exasperated: the bloc's long-term financial planning is built on the assumption of continued British payments until 2020.

The EU's lead negotiator, Michel Barnier, says the UK agreed to pay its share of the seven-year budget in 2013. UK negotiators argue that those commitments don't become legally binding until the EU presents a draft budget for the year ahead.

Barnier argued on Thursday that the UK was "backtracking" on its position from July, when the government acknowledged it had obligations that lasted beyond its membership of the EU. The apparent U-turn had created an issue of "confidence" in the UK's willingness to negotiate in good faith, Barnier said.

At the most recent negotiating session, the UK team set out a worst-case scenario for the bare minimum it was prepared to pay if the country was forced to leave the EU without a good trade deal. In this case, the UK would only honor its commitments up to 2019, the year it leaves.

It would also not give any assurances about its contributions to spending programs outside the EU budget such as the 30.5 billion euro ($37 billion) European Development Fund and the 3 billion euro refugee facility.

There are only two Brexit negotiating sessions left, each four days long, before an EU summit on Oct. 19-20*. That summit could allow trade talks to start, if the leaders of the 27 remaining EU countries unanimously agree.

Approaching the brink

The UK stands to lose more than the EU if it fails to get a deal. While EU exports would take a hit under a "no-deal" scenario, the UK's exports to the EU are far greater relative to the size of its economy. So British bluster and brinkmanship are unlikely to force the EU side to blink first.

The EU refuses to give the green light to trade talks without "sufficient progress" on three priority issues: the "Brexit bill" of budget payments, the Irish border and citizens' rights. A significant UK concession on budget payments during the transition period could restore EU leaders' confidence in Britain's willingness to negotiate in good faith.

The UK has already said that it is prepared to pay after it leaves the bloc, in particular in exchange for participating in schemes that it values such as the EU's science and research program, Horizon 2020.

David Davis, the UK's Brexit Secretary, gave what appeared to be a strong hint about this at his joint press conference with Barnier in Brussels last week.

Referring to the discussions on the UK's financial obligations, he said that "the [financial] settlement should be in accordance with law and in the spirit of the UK's continuing partnership with the EU — and I repeat the phrase, in accordance with the law and the spirit of the UK's continuing partnership with the EU."

With little over 12 months left for the UK to agree terms of the withdrawal deal, future trade terms and the transition between its current and future status, May needs to act quickly. If she fails to do so, the already difficult timetable for the negotiations will slide towards the impossible.