As short seller David Einhorn has said, “No matter how bad you think it is, it’s worse.”
I thought I was at risk of being unduly dire in my early readings on Brexit, which was that the two sides have a large gap between their positions and have been talking past each other. Early on, I remarked that the dynamics were troublingly similar to the Greek-Troika negotiations, in which Greece badly overestimated its negotiating leverage, playing a game of chicken and assuming that the Europeans and the IMF would find it necessary to relent from some of their demands to avoid a Greek default. We stressed that the ECB held the whip by virtue of it already bending its rules beyond the breaking point in keeping the Greek banking system on life support. All the ECB had to do was withdraw it and it would bring the Greek economy to its knees. It did that in July 2015 and Greece capitulated in less than three weeks.
Are the EU and UK already playing chicken? The EU and UK now appear to have gone past what was already a dangerous dynamic, of talking past each other, to clearly incompatible stances on multiple issues.
Normally the large distance between the two sides could have been discounted as pandering to domestic audiences. However, the UK had already burned so many bridges with Europe even before the Brexit vote that it effectively has no trust and no good back channels for defusing confrontational and uninformed-looking statements. So what might normally be shrugged off braggadocio and posturing instead looked an awful lot like official positions. And not only is that increasingly the case, both sides are digging in when the gap between them was already so large as to appear unsurmountable.
The level of posturing and rancor, which is coming almost entirely from on the UK side and is being met by Europeans defining red lines unusually early on, is looking uncomfortably like a rerun of the 2015 Greek bailout game of chicken. May has repeatedly taken aggressive anti-EU positions in public. There was a brief period where it seemed as if she recognized how weak the British bargaining position actually was, shortly after filing the formal Article 50 notice, when she softened some of her rhetoric while on an official trip to the Middle East. But having decided on snap elections to deliver a crushing blow to Labour, give her her own mandate, and push out the day of Tory reckoning for Brexit from 2020 to 2022, she’s gone back to her old high bluster to content approach.
By contrast, the Europeans were unusually fast, unified, and firm in their responses to the Brexit announcement, staking out positions from the day after the Brexit vote, such as “No access to the single market without accepting the four freedoms” which includes the free movement of people. Importantly, Merkel backed these statements, as well as other important ones, such as “No cherry picking,” “No negotiations until Article 50 is triggered,” and “No negotiation of a trade deal until exit arrangements have been finalized”. And some of these tough positions weren’t due to the Europeans seeking to be difficult; they came about as the result of treaty requirements.
Over the last few months, not only has the European side not wavered, its internal cohesion has increased. As Greece did in 2015, the UK has achieved the seemingly impossible task of unifying the rest of the EU against it.
May reveals dangerous lack of seriousness about Brexit. The yawning gap between the two sides has been exposed as even larger than most surmised by virtue of a EU-UK dinner at 10 Downing Street last week, headed Theresa May and Jean-Claude Juncker. I’ve never thought I’d come out supporting Juncker, who is regularly self-indulgent and clumsy. But he came off as the adult in the room compared to May, who after the dinner details were leaked to the German paper FAZ, then doubled down on her shambolic performance.
Juncker’s side was obviously the source for the FAZ story. But I’m not unsympathetic. The May/UK positions are so hopelessly detached from any reality that the EU needs to prepare for a disorderly Brexit and give its political and business leaders as much advance warning as possible so as to minimize the damage. That means going public and making clear that the problem is on the UK side, and not due to intransigence by the Europeans.
Here are some of the jaw-dropping May beliefs exposed by the leak:
Recall that the EU has put negotiating the status and protection of expats as the first issue to be resolved. May said she thought the issue could be settled at EU Council sesssion at the end of June. For a sanity check, read this Financial Times article Brexit and the rights of UK and EU expats (Google the headline) and be sure to skim the well-informed comments. Just consider this issue: many UK expats are living in Europe and haven’t registered locally. That means they are freeloading on the health care system (in that the UK is supposed to be compensating Spain, France, etc but isn’t). And they haven’t registered because they are not working, as in retirees. That means their health care is likely to be costly. Now it would be perfectly reasonable for Spain to insist that any UK national that stays in Spain either have the UK foot his health bill or buy private insurance, which is particularly costly for older people. There are literally dozens of issues like that to be sorted out.
May wants the talks to be confidential. Junkcer said that’s impossible given the need for ratification and other member state and European Parliament procedures.
Junkcer tried to explain to May how detailed trade deals were by showing her how bulky Croatia’ entry deal and Canada’s recent trade deals are. May blew that off as if the UK could some get a thin-form agreement. Any UK agreement is certain to be more complex by virtue of needing to negotiate a terms for the financial services industry. Services deals are harder to negotiate and typically more complex that deals only involving only physical goods.
May said the UK would not pay an exit bill. Juncker said fine, you won’t get a trade deal. And that was not bluster. The EU has set forth the order for negotiating exit issues. After sorting out what happens to EU and UK citizens, next is squaring up accounts. And the EU has never budged from the position that the exit negotiations have to be pretty well finalized before they will talk about trade.
And we also have this:
13) She cited her own JHA opt-out negotiations as home sec as a model: a mutually useful agreement meaning lots on paper, little in reality.
— Jeremy Cliffe (@JeremyCliffe) April 30, 2017
15) ie as home sec May opted out of EU measures (playing to UK audience) then opted back in, and wrongly thinks she can do same with Brexit
— Jeremy Cliffe (@JeremyCliffe) April 30, 2017
May puts foot in mouth and chews. May confirmed the EU view of the dinner, that May was disconcertingly poorly briefed, by her attempt to hit back at Juncker. As an aside, May did not deny any of the positions attributed to her in the FAZ account but gave a weak deflection by trying to depict them as “Brussels gossip”.
I gasped out loud when I read this in the BBC:
Theresa May says she will be a “bloody difficult woman” towards European Commission president Jean-Claude Juncker during Brexit talks.
What planet is she on? Juncker isn’t negotiating this deal. Neither is she. It’s Michel Barnier v. her David Davis. Even this blog, which has only been following the high points of this saga, took note of the appointment of Barnier. From a post last July:
The yet-to-be started Brexit negotiations look to be getting off on a tit-for-tat footing. After the new Prime Minister took the provocative step of appointing Boris Johnson as Foreign Minister and David Davis as its chief negotiator, the European Commission has responded in kind by naming Michel Barnier as Chief Negotiator in charge of the Preparation and Conduct of the Negotiations with the United Kingdom under Article 50 of the TEU…
But the appointment of Barnier looks to be a particularly astute move. First, in contrast to the role of the EC in the Grexit talks, where it was a secondary player by virtue of not being a funding source, the Commission legitimately is one of the lead actors. Second, Barnier has extensive international experience, having been France’s minister for agriculture, then its foreign minister, and also a member of the European Parliament. He has also served two terms at the European Commission. In his second post, as head of the single market commissioner, he negotiated post-crisis reforms. The memories of the tough stance he took there has the City in fits.
And what is scary isn’t that May exposed no clue as to who is doing what to whom. It is that she thinks a Prime Minister could handle this task. This is an overtime time job from when the negotiations get started until they get done or fall apart, with at most a truncated version of the European August holiday and a year-end respite. May would have to abandon all her official duties to negotiate, and that isn’t on. And she’s so obviously so far behind the eight ball that catchup would be a huge task.
May got an unusually fast smackdown. From The Times:
Theresa May will be barred from negotiating the terms of Brexit with her fellow European Union leaders, senior figures in Brussels have warned.
In a sign of an increasingly hardline approach, the prime minister will be prevented from joining discussions at future EU heads of state meetings, she has been told. The only person with whom she can sit down for talks is the European Commission’s chief negotiator, Michel Barnier…
A commission spokesman confirmed that, under the EU’s negotiating mandate, talks would be run entirely by Mr Barnier with no discussion at meetings of the 27 leaders and Britain.
Asked if there would be any direct negotiation between Mrs May and the other member states on the divorce settlement, the spokesman said: “No. The commission is the union negotiator and Michel Barnier is the person who will negotiate on behalf of the EU. We are very clear about that.”
May continues to labor under the delusion that this deal is so simple that it can be handled at the executive level. It can’t be and it won’t be.
EU gives May another poke in the eye by upping Brexit exit bill estimate from €60 billion to €100 billion. It may just have been an accident of timing that this story broke on the heels of the Downing Street dinner fiasco, but it sure looks as if the EU has decided it needs to move to Mafia-style negotiating tactics to penetrate the UK’s fog.1 From the Financial Times:
The EU has raised its opening demand for Britain’s Brexit bill to an upfront gross payment of up to €100bn, according to Financial Times analysis of new stricter demands driven by France and Germany.
Following direct requests from several member states, EU negotiators have revised their calculations to maximise the liabilities Britain is asked to cover, including post-Brexit farm payments and EU administration fees in 2019 and 2020.
Although over coming decades Britain’s net bill would be lower than the €100bn upfront settlement, the more stringent approach to Britain’s outstanding obligations significantly increases the estimated €60bn charge mentioned by Jean-Claude Juncker, the European Commission president.
It also reflects the steadily hardening position of many EU member states, which have abandoned early reservations about the bill’s political risks to pile on demands that will help to plug a Brexit-related hole in the bloc’s common budget.
Paris and Warsaw have pushed for the inclusion of post-Brexit annual farm payments, while Berlin is against granting Britain a share of EU assets….
Michel Barnier, the EU’s chief negotiator, has said no figure will be set until the end of the Brexit process and payments could be staggered. But he wants Britain to agree a methodology before trade talks can begin, including a definition of EU liabilities the UK would be expected to share. He will unveil a draft negotiating mandate, including the Brexit bill assumptions, on Wednesday…
According to FT calculations, this brings the upfront gross settlement demand to €91bn-€113bn, depending on how Britain’s share is calculated. Over a decade or more, this would be reduced in net terms to €55bn-€75bn as Britain received its share of EU spending and repaid EU loans.
Using similar assumptions, the Bruegel think-tank estimates that Britain would make an upfront payment of €82bn-€109bn, which would net out to €42bn-€65bn over the long term.
Note also that Poland, which has regularly been depicted in the UK press as being a British ally in the talks, is a hardliner on this issue. And even if one views the German position of excluding the UK assets as a negotiating chip that it expects to bargain away, it won’t reduce the bill to the UK as much as most Brexit boosters seem to believe. The FT reports they are only worth somewhere between €3 billion and €9 billion.
During the Greek negotiations, many readers were upset because we focused on the negotiating positions and relative power of both sides, and were early (indeed, alone) in concluding that the there was no overlap in the bargaining position of the two camps and that Greece would not prevail in a raw power struggle. Many commentors were not prepared to hear that Greece could choose only between bad and worse, and mistook our description of what was likely to (and in fact did) happen as advocacy for the Troika. The fact that the Greeks had the better economic analysis and the moral high ground did not mean they would prevail.
Greece in 2015 had a new leaders who had every reason to try to get the Eurocrats to see reason. Greece had been on the rack for years, and the policy of abusive austerity was a clear failure. Even with the IMF admitting that making depressed countries wear an economic hairshirt only made matters worse, giving Greece a real break would mean that the European countries would need to take debt writedowns, which would in turn mean they’d need to show the losses in their budgets. That was a political third rail.
By contrast, the UK had an exceptionally favorable deal with the EU. Cameron tried to get further waivers and was rebuffed. The Brexit vote was never a serious policy measure; it was a stunt by Boris Johnson to advance himself in the Tories. But years of savaging the EU in the British press meant it was a convenient scapegoat for anti-ordinary worker policies, particularly for labor-crushing immigration policies, when in fact there are more non-EU than EU immigrants in the UK. That is not to say that the EU is entirely blameless for the distress outside the southeast, but Thatcherism is the much bigger culprit.
It is hard to work up much sympathy for what passes for UK leadership, particularly as it is showing itself to be more and more incompetent and reckless with every passing day. Sadly, these failings will be inflicted on British citizens, particularly the ones who believed Brexit would better their lives.
1 Mafia-style negotiations mean that when the party on the other side rejects an offer, the next round offer is made worse. The movie The Godfather gives a prototypical example:
Michael: Well, when Johnny was first starting out, he was signed to a personal services contract with this big-band leader. And as his career got better and better, he wanted to get out of it. But the band leader wouldn’t let him. Now, Johnny is my father’s godson. So my father went to see this bandleader and offered him $10,000 to let Johnny go, but the bandleader said no. So the next day, my father went back, only this time with Luca Brasi. Within an hour, he had a signed release for a certified check of $1000.
Kay Adams: How did he do that?
Michael: My father made him an offer he couldn’t refuse.
Kay Adams: What was that?
Michael: Luca Brasi held a gun to his head, and my father assured him that either his brains or his signature would be on the contract.