28/11/2016 BrexitnegotiatorsidentifyUKsacesinthehole

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Brexit
Brexit negotiators identify UKs aces in the hole
London is condent it has a strong hand the question is how to use it

FT montage

15 HOURS AGO by: Alex Barker in Brussels

WhenSirJeremyHeywood,Whitehallsmostseniorofficial,gatheredhistopteaminthe
immediateaftermathoftheBrexit(https://www.ft.com/topics/themes/Brexit)referendum,
heposedastarkquestion:Whatisourleverage?

Theblankfacesstaringbackathimthatdaywerethestartofagovernmentplanningeffort,
nowfivemonthsold,tomaptheinterestsofEUmemberstates,weighupoptionsandsharpen
BritainsbargainingpowerinBrexittalks.Sincethen,workonwhatofficialscalltheLword
hasbeeninoverdrive.

Today,Britainstopnegotiatorsareconfidenttheyhaveastronghandtoplay.FromLondons
perspective,itisfacinga27countryblocthatremainseconomicallyfragile,worriedabout
security,underpopulistassaultanddividedoverthecrisisoflegitimacyfacingitscentralEU
institutions.

Britainisthedemander,butinitsfavourarethefruitsofdecadesofeconomicintegrationand
nearirreplaceablecontributionstocommonEuropeaninterests.Ithasleverage.Thebig
questionishowtoplayit,andwhetheritisenough.

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28/11/2016 BrexitnegotiatorsidentifyUKsacesinthehole

Thecalculationsarelikenoothernegotiationeventradetalksareapoorguide,asthey
typicallyinvolvewillingpartnersaimingforfutureliberalisation.

Brexitisacompletelydifferentdynamic,saidStephenAdamsoftheGlobalCounseladvisory
group.YouhaveanunwillingpartnerontheEUside.Theaimisnothypotheticalnewmarket
accessbutdetermininghowfartorollbacktheliberalisationofbillionsofeurosintradethat
isalreadyflowing.

Forthisreason,BrusselsseesBritainrunningheadlongintoanegotiatingtrap.Itissmaller
thantheEU,hasmoretolose,andwillbenegotiatingagainstadeadlinecontrolledbythe
EU27.Crucially,itcanlargelyonlyexerciseleveragebyhurtingitseconomyorcitizens.The
Britshavesocorneredthemselvesthatitisanunequalsituation,whatevertheydo,saidone
seniorEUofficialinvolvedinBrexittalks.

Londonsleverageoptionsclusteralongfourthemes:commoneconomicinterestsBritains
contributioninmoneyandpowerthethreatofahardBrexitandtacticalopportunitiesto
dividetheEU27.

Britains contributions

Bloomberg

BritainisanetbenefactortoEuropeintwoimportantareas:theEUbudgetandEuropean
security.

BritainsexitblowsaholeintheEUbudgetandwillbecostlyforsomemembers,stoking
tensionsbetweennetcontributors(suchasGermany,FranceandtheNetherlands)and
recipients(manyeasternmemberstates).

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28/11/2016 BrexitnegotiatorsidentifyUKsacesinthehole

TheUKistheEUsthirdbiggestnetbudgetcontributor,paying140bnsince1973.More
importantlyitisscheduledtopayanothernet60bnintheEUsagreedlongtermbudgetto
2020/21,including26.4bninthetwoyearsafter2019,itsexpectedexitdate.

IfaspartofatransitiondealBritainagreestocontinuepaymentsto2021,itwouldhelpthe
EU27delayadivisiveinternalbudgetdebate.ButitwouldalsomeanTheresaMay,UKprime
minister,goingintoa2020electionwithoutanyEUbudgetsavingstoshow.

BrusselsisalsoawareitisintheUKsintereststoremaininsomeprogrammes,likeresearch
funding.ForeverypieceofinfluenceitwantstoretaininEUpolicymakingitwillhavetopay
aprice,saidAndrewHood,aformerUKgovernmentlawyernowatDechert.The
commission,meanwhile,ismoreworriedaboutBritainsexitbillfromoutstandingliabilities,
whichrunsto40bn60bn(http://next.ft.com/content/480b4ae0aa9e11e69cb3bb8207
902122).

DefenceandsecurityisanotherUKstrongsuit.GordonBajnai,theformerHungarianprime
minister,arguesthatacommonEUforeignandsecuritypolicywouldbeveryweakinthe
futureiftheUKissomehownotkeptinthesystem.TheUKcouldaskformuchmorein
Brexittalksifitsomehowremainspartofsecurityanddefencestructures,hesaid.

Butthisisacardthatmaybedifficulttoplay.EvenaftertheelectionofDonaldTrump,Nato
alliesmayseeBritainsdefencesupportasunrelatedtoBrexittalks.Tyingthetwocould
reallybackfire,saidoneseniorEUdiplomat.Second,ifthedefenceandsecuritycooperation
istorunthroughEUstructures,MsMaycouldlackthepoliticalsupportinWestminsterto
makeasubstantialoffer.

Economic self-interest

Bloomberg
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28/11/2016 BrexitnegotiatorsidentifyUKsacesinthehole

ThisisthetrumpcardforardentBrexiters.Boileddowntoitspurestterms,itwouldinvolve
theUKeffectivelyconfrontingtheEUwithachoice:continueazerotariffpreferentialtrade
arrangement,oracceptWorldTradeOrganisationterms.TheUKwouldrecommendthe
former,butcouldlivewiththelatter,saidagroupofproBrexitformerministers,including
PeterLilleyandJohnRedwood.

UnderlyingthisstrategyisconfidenceintheEUstradesurpluswiththeUKandtheeconomic
painfromunwindingthedeepcrossbordersupplychainsinindustriessuchascarmaking.
BorisJohnson,foreignsecretary,hassaiditwouldbeinsaneforGermanytoimposetariffs
whenBritsbuyafifthofallitscarproduction.

Thestrengthofourpositionisoureconomicweight,saidDominicRaab,aproBrexitformer
minister.Ifweendupwithaworstcasescenario,onWTOterms,ithitscontinentalexports
disproportionatelyhard,costingEuropeancompaniesprofitsandjobs.Theirrationalself
interestistoavoidthat.

Withtime,MrRaabexpectsbusinessgroupsandunionstopresspoliticianstoavoida
masochisticoutcome.Sofar,though,officialsinBrussels,Paris,RomeandBerlinseea
differentbalanceofinterests.CarloCalenda,Italyseconomyminister,mostvividlysummed
upthemoodwhenmockingMrJohnsonswarningoverItalianproseccoexports.Illsellless
proseccotoonecountryandyoullselllessto27countries,wasMrCalendasreply.

Threats to the status quo

Singapore's central business district Reuters

SomeBritishministersreckonthatEuropewilleventuallyrealisetherearenegative
consequencesforallsidesfromahard,sharpBrexit.

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28/11/2016 BrexitnegotiatorsidentifyUKsacesinthehole

OneisthecompetitivethreatposedbyaUKunbound.DubbedtheSingaporemodel,thisis
ascenarioofBritishtaxandregulatorydumpingthatEuropeancapitalsfear(http://next.ft.
com/content/765a1f2aacba11e69cb3bb8207902122).Britainistoobig,toocloseandtoo
similaraneconomytonotworryaboutbeingundercut.Thetroubleisthatwhilethishas
movedupthelistofconcerns,atpresentitisconvincingcountriessuchasDenmarkand
GermanytotakeaharderlineinBrexittalks(http://next.ft.com/content/f854b316ac2711e6
ba7d76378e4fef24).

ThesecondistheCityofLondon.ThisremainsEuropesmainfinancialhubandahardexit
couldraisecostsforcorporateEuropeandinflameweaknessessuchasItalianbanks.

DavidDavis,Brexitminister,hasnotedthatmoreEUcompaniesrequestafinancialservices
passporttooperateintheUKthanviceversa.Asaresult,ournegotiatingleverageinthis
areaisatleastreasonable,hetoldtheCommons.

Thethirdthreatconcernstherightsofmorethan2.5mEUnationalsinBritain.Thisisatop
priorityformanyEUstates.ButanyBritishattempttoexploitthiswouldbeextremelyrisky,
notleastbecauseitcarriesthethreatofretributionon1.2mUKnationalsresidentinEurope.
Thesimpletruthisthattheyarenotbargainingcounters,MrDavistoldtheCommonsin
October.

Tactical opportunities

Francois Hollande, Angela Merkel and Matteo Renzi address a press conference after the Brexit vote AFP

Atpresent,theEU27lookmoreunifiedonBrexitthanonvirtuallyanyotherissue.Butthese
areearlydaysandEUofficialsknowthatsquabblingcomeseasilytothebloc.

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28/11/2016 BrexitnegotiatorsidentifyUKsacesinthehole

Britainfacesanegotiatingpartner,intheEuropeanCommission,withmixedauthority.While
theblocmustspeakasoneonsomeEUissues,suchastradetermsongoods,itcanspeakas
27onotherareasofnationalcompetence,suchasresidencerightsandsomeareasoffinancial
servicesauthorisation.

ThatopensthedoorforsomecraftyBritishdiplomacy.WhileBritainmaynotthreatento
throwoutexistingEUresidents,itcouldvary,countrybycountry,thegenerosityofofferson
futureresidencerights.

Thesamegoesforfishingrights,securitycooperation,orbilateraloffersoffinancialsupport
toeasternEuropeanstateslosingEUbudgetreceipts.SuchsidedealswouldchipawayatEU
unity.

OnepotentiallydecisivefactorisoutofBritainscontrol.ShouldantiEUforcesmakemore
headwayinnationalpolitics,mostnotablywithaMarineLePenvictoryinFrance,itcould
transformthecontextforBrexittalks.EUunityonBrexitcouldreachatippingpoint,where
theEUstartstofragment,helpingBritaintonegotiateamorebespokedeal.

Again,thisisextremelydifficultforBritaintoexploitwithoutsouringtalks.Whenmeetingthe
EUside,MrDavishasstressedthatBritainsinterestliesinastrong,stable,effectiveEU.
Thatiswhathesays,saidoneseniorEUnegotiator.Andwedontbelievehim.

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