UK faces hefty Brexit bill as EU negotiators take tough stance

The EU’s Brexit negotiators are pushing for a draft UK exit deal by mid-2018 as part of a narrow, divorce-first negotiating approach that would demand an exit bill of as much as €40-€60 billion.

Brussels’ rigid plans for the process show it is making a priority of a clean separation settlement – and Britain’s payment of a hefty exit charge – over London’s desire to focus on refashioning trading relations.

Assuming Britain starts formal article 50 divorce talks in March 2017, the EU aims to complete a draft exit deal by autumn 2018 at the latest, leaving at least six months to ratify and prepare for Britain’s full exit at a set date in 2019. The European Commission recommends no detailed trade talks be carried out before a draft agreement on article 50, but envisages transitional arrangements being tied to the exit deal.

Hardline commission negotiators in Brussels see no option but to take a step-by-step approach to Brexit, moving from divorce to transition to a trade deal over a period of five or more years.

But some European officials fear that such a narrow, divorce-focused agenda will significantly increase the risk of political breakdown and an unfriendly British exit without any withdrawal agreement. “This is all very dangerous,” said one high-level participant in talks.

Michel Barnier, the commission's chief Brexit negotiator, has indicated to colleagues he will pursue Britain for an exit bill based on an expansive view of its liabilities under the EU budget.

His team is looking at a gross upper estimate that includes unpaid budget commitments, pension liabilities, loan guarantees and spending on UK-based projects. This would significantly exceed the Financial Times' estimates of a net bill of € 20 billion, which strips out UK-bound spending and contingent liabilities.

The commission is also leaning towards assuming Britain remains on the hook for some of the EU’s long-term budget beyond 2019 – planned spending that was promised to member states but not yet marked as a “commitment” in a budget year.

Taking account of these broader assumptions of liability, the commission's opening demand on Britain's gross bill would approximately range from €40- to €60 billion, according to research by the Financial Times.

Mr Barnier believes the exit bill would be potentially reduced by a transitional agreement, whereby Britain continues to make full budget contributions even after leaving the union as a full member.

Conditions

However the EU is preparing to insist that any extension of Britain’s single market privileges be conditional on London accepting free movement, EU rules, and the jurisdiction of EU courts. Such conditions would be extremely difficult for Downing Street to accept, particularly if they continue after Britain’s 2020 general election.

Theresa May, British prime minister, told the ruling Conservative party conference last month that the country was not leaving the EU "only to give up control of immigration again" or to "to return to the jurisdiction of the European Court of Justice".

Senior European diplomats fear the substantial exit bill will be intolerable for Westminster and kill the prospect of an amicable divorce. “There is a serious risk the Brits say to hell with it, you can sue us,” said one.

Some EU countries plan to push back against the narrow negotiating approach during planned meetings with EU negotiators in coming days. “They want it boxed off, to focus on divorce, to link budget contributions to the exit terms,” said one EU diplomat involved in talks. “Other governments are more interested in the future relationship, rather than the divorce and the money.”

Mr Barnier has toured almost a dozen national capitals already, explaining a perspective on talks that one host described as "absolutely rigid". He will join aides to Donald Tusk, the European Council president, this week for separate "confessional" meetings with representatives from the remaining 27 EU nations.

It is the first stage of what might become a more fraught political battle for control of the Brexit negotiations between the commission and member states. One option is for EU-27 leaders to discuss a structure for Brexit negotiations at a meeting in December, including mechanisms to oversee the commission as chief negotiator.

Under current plans, after a UK notification under Article 50, the EU would respond by adopting guidelines for the negotiation. These are expected to offer a similar level of detail as Britain’s negotiating objectives.

At this point, some officials in Brussels expect Britain’s requests and the EU’s guidelines to be relatively limited and vague.

Mr Barnier is telling member states that the divorce agreement must resolve several issues: Britain’s departure bill; the status of EU agencies in London; border issues in Northern Ireland and the status of Gibraltar; and acquired rights of cross-border British and EU citizens and companies.

EU officials acknowledge a transition deal partly depends on a shared goal for future relations. But Brussels officials see outlines of a trade relationship being expressed as a political aspiration rather than the type of detailed, legally binding agreement sought by London.

It is unclear how much of a transition deal could be included in an article 50 settlement, and whether a separate transition treaty would be needed. A second deal would seriously complicate the ratification process and potentially require a sign-off from 38 national and regional assemblies, including six in Belgium alone.

Copyright The Financial Times Limited 2016