EU Firms Up Brexit Bill Negotiation Position: Ask of €99.6 Billion Gross Liabilities

The Financial Times provided an update on the state of the first item that the EU wants settled in the Brexit talks, that of the UK’s exit tab. The UK has been whinging that it wants to address the movement of people first, but it doesn’t have any more leverage on the shape of the table than it does on other issues.

The new story doesn’t change the high points of the EU’s position thus far on the Brexit settlement. The Europeans are still expected to start from €100 billion in gross liabilities, with the pink paper confirming that it’s now €99.6 billion. Recall that this was an increase from an earlier estimate of €86.4 billion in gross liabilities as some member states insisted that more items be added to the tally. That’s based on a 13% share of EU liabilities, which includes the rebate negotiated by Thatcher. That equates to what the European Commission says is €60.2 billion in net liabilities. How the gross and net are arrived at is beyond me. This is not net of “UK assets,” since the most generous estimate still puts that at under €10 billion. As the negotiations play out, I suspect we’ll learn a lot more about the gory details.

However, the piece does sort out which parts of the demand are on firm footing and which are likely to serve as trading chips. But the figures are confusing, since they are all larger than the €99.6 billion “gross” figure, and it’s not clear how the lower amounts were arrived at (that they are over time and were therefore discounted? Adding them up and multiplying them by 13% doesn’t get you there either. Anyone who has more insight please pipe up in comments). From the Financial Times:

The demands with the strongest legal backing are based on old commitments signed off in annual budget rounds, with the UK as a member. Those include Britain’s pension liabilities, as well as €251bn in budget commitments approved by the UK before 2019, known as reste à liquider.

An additional €133bn of promises Britain made to back projects are more contentious. These “structural fund” schemes are due to be provisioned for and paid only after Britain has left the union. The EU sees them as “legal commitments” that Britain must honour.

A third tier of demands was excluded from the original approach of Michel Barnier, the chief EU negotiator. Those cover annual EU spending that Britain would say the bloc can easily adjust post-Brexit. That includes €111bn of annual agricultural payments direct to farmers. Most contentious of all, it covers €87bn of other EU administrative and project costs, such as commissioners’ salaries and spending on borders. The EU side knows its argument regarding such areas is especially weak.

But given that the EU has a vastly stronger negotiating position, it’s not clear how much in concessions it will feel it has to give. And some members have targets that are likely more than the UK can stomach politically:

Perhaps more important for the EU, however, is another number. Its first priority is avoiding having to reopen the EU’s long-term budget for 2014-2020. Around €20bn in net payments for 2019 and 2020 would probably be enough to avoid a nasty EU fight over the current budget, pitting net contributors such as Germany and the Netherlands against beneficiaries such as Poland and Hungary.

But more funds would be needed to close a gap after 2020 (there is a big overhang of unpaid bills), making the EU’s discussions on its next seven-year budget much more fraught.

For that reason the EU is looking for Britain to cover at least its commitments under the long-term budget, including the reste à liquider commitments and structural fund promises. That would take the total to €64bn in gross terms and €40bn net. But while such figures would probably be enough for Brussels, they could prove deadly in Westminster.

Recall that €60 billion was bruited about earlier. One wonders if the other demands were added mainly to try to desensitize the UK negotiators and public to big numbers so they could swallow the level the EU needs. And we also have the fraught question of whether the UK will, as it has so far, not recognized that its downside is considerable and it really can’t afford to have no deal. In other words, the first two weeks of the negotiations may so set the tone for the entire affair as to determine its trajectory.

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  1. Frenchguy

    The way I think the figures add up is:

    13% of:

    _€251bn of budget commitments before 2019
    _€133bn of structural fund
    _€111bn + €87bn of agricultural payments and EU administrative and project costs

    This gives €76bn to which you need to add up pension liabilities. A quick search suggests that the EU total for that is around €60bn so the UK share is €8bn which gives a total of €83bn. This is the figure the FT gives for pension and other long-term liabilities but, confusingly, it says that financial commitments the UK made as a member state are €86bn. Close enough I’d say… Finally to that you add €11.5bn in contingent liabilities (loans to Ukraine, Ireland…) and €1.7bn in development funding which gives a total of €96bn (so there are indeed €3bn missing somewhere).

    For the net payments, you need first to substract the €11.5bn in contingent liabilities. Then (here again thx to a quick search…) it seems that lately the UK was getting back a third of its gross contributions (via payments to farmers, structural funds to poor UK regions…) and a third of €76bn is €25bn. So in the end the net payment should be: 100 – 25 – 12 = €63bn. But this is obviously a very rough calculation…

      1. Clive

        Because people who were EU employees had a benefits package which included long-term liabilities such as pension entitlements.

        The liabilities were run up while the UK got the benefit of the work done by the people employed by the EU. You can’t just take the upside then walk away from the obligations.

        Well, you can if you’re a TBTF, the US / “coalition” invading Syracafghanislibyastan etc. But you really shouldn’t behave that badly.

        1. Si

          So all the work for the EU was done by the EU and no UK employees?

          Some more detail would help here as I am really trying to understand what our obligations are to pensions and what we got from the EU employees.

          I dont really understand your dig either…

          1. Clive

            This may sound a tad harsh so please don’t misunderstand me, it’s all very intentional.

            I’ve re-read my response and the quip I ended it with and it all reads correctly, makes a valid and fairly easily understandable set of arguments.

            Frankly, if you’re not intellectually up to very modest challenge that comprehending it requires, you really should not be reading this blog in the first place. Far more mentally onerous matters are frequently covered in posts and later by commentators. I generally despise snobbery in most of its forms, but I make an exception for intellectual snobbishness. The reason is that I suspect dimness is contagious and I don’t want to take the risk of catching it.

            I’m not going to explain and justify my reasoning in words of one syllable for your benefit. If you’re misfortune also extends to living in the UK, perhaps you could go out and buy a copy of The Sun. That has pretty pictures and articles written for K12 reading ages.

          2. Daniel F.

            In the simplest terms: as soon as you start doing EU work, you’re an EU employee. Including simple clerks and MEPs. So when, say, Nigel Farage retires, he’ll be getting his pension from EU funds, for which England will have to pay. This obviously does not include expats or workers from another EU members.

  2. vlade

    To me it looks like some decimal points went missing.
    251bln is 25% of the total 2014-2020 EU budget, so the number is clearly silly. 25.1bln for the 2019-2020 means about 12bln/year, for annual budget of about 142bln, so about 12%, which looks about rightish.

    That said, I can’t see what legal claim EU would have on post 2020 budget, which hasn’t been commited yet. (that is not to say EU wouldn’t be able to get the money in exchange for something else – but the 2020 budget is something where UK is legally bound to pay regardless, so can’t negotiate).

    1. Frenchguy

      There is no claim on post 2020 funding as far as I can see. The EU expects the UK to pay 13% of the €251bn which are payments agreed pre-2019 but not yet disbursed and 13% of the 2019/2020 budget which is: 133 + 111 + 87 = €331bn. For reference, the first proposal for appropriations in 2018 is €161bn so €331bn for two years seems in the right ballpark.

      1. vlade

        “But more funds would be needed to close a gap after 2020 (there is a big overhang of unpaid bills), making the EU’s discussions on its next seven-year budget much more fraught.”

        1. Frenchguy

          The way I understand this is that all the numbers in my comments refer to budget commitments and not actual payments. Given that a lot of EU spending is investment, payments are often spread over several years. The absolute minimum the EU needs from the UK is that they honour their share of payments in 2019/2020 to avoid having to renegotiate the 2014/2020 budget. But then they would also like them to honour their share of commitments made pre-2020 which will be disbursed post-2020.

  3. PlutoniumKun

    I suspect that apart from it being a negotiating tactic, pressure on contributions has come from the east European countries, all of which are determined to ensure they do not pay a cent more in net contributions when Brexit occurs. I believe that this is likely to be a non-negotiable red line for several of these countries, so either the UK pays up, or Germany, etc., pay instead, which of course isn’t going to happen. It should also be noted that Ireland will no doubt be seeking a big lump of money to cover border issues, and someone will have to pay for this – it could well become an addition to the overall costs.

    The election has very significantly changed the political dynamic in Britain. The ‘soft Brexiters’ in the Conservative Party are now in a far stronger position – Hammond (Chancellor of the Exchequer) is in the ascendent and the Scottish Tories and the DUP are softies. Suddenly everyone is talking about the ‘Norwegian option’ or the ‘Swiss option’. The problem of course is that neither option are on the table, and I doubt the EU, or Merkel/Macron see any great reason to offer them. And both of course will be expensive as both countries pay a great deal of money for their easy access to the EU, and the EU would see such contributions as an addition to, not part of, the above figures.

    The dynamic could change of course – if things worsen with the European banking system, or the EU economy takes a significant knock-back, then I think Merkel/Macron might try to change course and offer a better deal. But my reading (from a great distance of course) is that France and Germany are now ‘over’ Brexit, they see it as a done deal, yesterdays news, and are moving on – they are willing to take the initial economic hit of borders going up. They still see no good reason to play nice, or compromise.

    1. vlade

      Well, the main goal for France/Germany in the brexit negotiations always was, and I suspect always will, be to show that leaving EU is possible, but not worth your while (to put it politely). So, humiliating climbdown by the UK would, I suspect, be entirely acceptable to them – especially if it meant little economic impact.

      That’s why both France and Germany already said that if the UK changes its mind, and wants to stay in the EU, it’s possible – but all the perks the UK managed to negotiate (Thatcher’s rebate etc.) would be gone.

      Basically, for them it’s a choice of UK humiliation or UK economic disaster – and the UK is free to chose between those two.

      Since they see it (correctly) as eitirely UK politicians self-inflicted, entirely unnecessarily, at the worst possible time, for purely party reasons, I have quite a bit of sympathy for them.

      1. PlutoniumKun

        I think you are entirely right about that, but the sense I get of schadenfreude over May’s difficulty is that the feeling is that at least part of the required humiliation has now been delivered. Again, this is just a sense I get from reading a random array of articles such as this one, but I think the combination of the FN being beaten back in France and the obvious disarray in the UK has the potential for the main players in the EU to think that there is less to lose now in granting the UK a better deal. That doesn’t mean they will play much nicer, but there is no longer the perception of threat that giving the UK a reasonable deal will encourage eurosceptics in other countries.

        1. vlade

          I still think the UK will get a raw deal (in some sense or another), where EU will be able to point for years to come that they are worse off then before (say Norway/Swiss model goes entirely against the “we want our sovreigny back” – the UK would become a price taker, not maker from EU etc. etc.)

          But I do agree that after Austria, Dutch and French elections, and the UK chaos, lots of EU politicians are feeling right smug. There’s a danger in that too though.

      2. Richard Wyndbourne Kline

        I agree with your assessmen,t Vlade, and with Yves’ broad analysis on the costs of Brexit and the absolute leverage of the EU in negotiations. NO nation can afford to leave the EU, and any nation doing so will suffer massive economic losses and permanent declines not only in living standards but in their international position as well. Europe’s market is simply too big, and too valuable to other players around the world for a refusenik to get good options outside the EU.

        It is not remotely in the EU’s interests to give Britain, or anyone else a good deal to leave. That has been my view since back when Grexit was, briefly, a popular notion. The costs to malcontents need to be raised as high as possible. The EU’s position as stated has been entirely concerned with protecting the rights and standing of their citizens thus far, and will remain so. My view is that France and Germany would prefer the UK to stay in, both to avoid the disruptions of exit, and the even greater disruptions to follow from the disintegration of the UK proper as Scotland leaves and Ulster ulcerates. That said, if the UK leaves it will undoubtedly be a priority of the EU to force much of Britain’s financial services industry to evacuate the UK and onshore to the EU. This will to a significant degree make up for lost exports to the UK on net, if not on a sectoral basis. The outcome would be much as when Britain seized control of international financial markets from the Dutch when the Netherlands back the Continentals in the War of American Independence. Simply put, the EU can say “Us or them” to international capital flows, and much of those will out of self-interest have to choose the EU. The EU can survive very well without the UK; not as well as with the UK in, but the EU can no longer afford UK obstruction to effective further federalism, either. The biggest gain to the EU from the UK sinking its own boat will be the greater possibility of common institutional effectiveness which follows. Everyone in Europe understands this, including others less sympathetic to tighter federalism. This isn’t simply about the economics, its about the institutional future. The EU sees a path it likes, and the major obstacle in the way, Britain, has declared that it wishes to commit suicide. “Take yourself to the devil, and quickly please,” has been the near exact response.

        Personally, I don’t think that will happen. It’s odds on that the UK will climb down. Brexit barely passed: it is absurd to even think of an act of international transition of this kind happening when close to half the population of the UK—at least—opposes it. The costs and pitiful outcomes for the UK will be abundantly clear once British negotiators are thoroughly humiliated over the course of the next six-twelve months and come home empty handed at best—because that is what is certain to result. The larger question, to me, is will the EU give the UK generous terms to climb down. There is where hubris can play hob. To much is in play to handicap that, in my view.

        The UK will be coming to the UK hat in hand to end this, later or sooner. And they deserve to do so. And they will, at the least, likely have to concede most of the exceptions which they extorted in the past simply to remain n the Club.

  4. Gman

    If nothing else this demonstrates the dark, authoritarian underbelly of the European Project to both its supporters and detractors alike…like most of us didn’t already know.

    Much as today’s accompanying Greek debt piece reveals, the EU is anything but the benign, decent, stabilising democratic, unifying force that it likes to be seen as.

    My sincerest wish is that various simmering events catch up with it sooner rather than later, and this whole iniquitous, tawdry sh*tshow collapses under the weight of its own contradictions.

    Brexit will ultimately mean Brexit I believe. The EU politicians and bureaucrats will see to that, but maybe it will prove to be the one thing the British people can rally to and unite behind.

  5. UKStout

    I still find it really amusing that Mr. Smith thinks that the UK negotiating position is so weak in comparison to the EU whose countries are mired in economic, financial and political crisis. Economically real growth is weak to non existent, financially even if relatively a few of the countries can cover their interest payments for a few quarters it doesn’t take away from the fact that two of the main pillars along with most of the weaker countries are bankrupt. And politically people have woken up enough to know that they are being lied to and are looking for alternatives. Unfortunately in the Netherlands and France, those alternatives only came in the form of the extreme right or in someone whose being dressed up as an alternative candidate but is a creature wholly trained and formed by the establishment (i.e. Macron). Yes, granted that because she clearly didn’t understand this about the public across Europe, Theresa May’s blunder in calling for an election has left her with a weaker hand. But as the scandal related to glyphosate along with new health directives banning companies from providing information related to the health benefits of the natural organic foods and supplements that they are choosing to eat to stay healthy have clearly shown, the EU continues to ignore the public and the public is very aware of it. Those in the UK parliament who want a softer Brexit will have a difficult time selling to the public (of whom 70% still want Brexit due to things mentioned above) that it’s going to cost them anything beyond the funds related to budgetary commitments mentioned in your article.

    Sure the UK would like to do a deal towards expats first in order to show progress, but EU transigence has both positive and negative aspects for the UK government. Positive is that immigration to the UK is going down. Negative is primarily the difficulty in attracting some continental talent to the UK. The British expat community is less of a worry since many have been proactive in already applying to become citizens in the countries they have been residing. There maybe some British expats who have not had been abroad for a long enough period of time who maybe adversely affected if the UK was to do a hard Brexit, but it would not be as significant as for continental Europeans many of who would be going back to countries where it will be significantly more difficult for them to find work. From a financial standpoint outside of the things that absolutely must be done on the continent such as some trade and investments, most will still be remaining in the UK. From a business standpoint, most companies will not be moving to continental Europe because (a bit of basic math), when one includes the contributions and corporate taxes that must be made which in most countries in Europe like France are often 3X the base salary of the employee they would have a difficult time making a profit with less personnel than they can hire and fire in the UK! From a economic standpoint there are a wide number of options that exist for the UK to leave with a far better deal than Mr. Smith imagines. Yes, it would need to be sold to both parliament and the public in order to get it approved, but in the political calculus, handing over close to the €100 billion to leave EU is never going to happen. The EU is overplaying their hand and what’s amusing is that Mr. Smith by conveniently ignores things that doesn’t fit into his narrative (such as assumptions that to negotiate a trade deal one couldn’t use existing agreements as a starting point to expedite negotiations or that the EU could take unilateral actions that wouldn’t have an equal or worse impact on continental Europe than the UK or the fragile financial state of most of the continental economies) believes it!?!

    1. Anonymous2

      Oh dear.

      For a start I think Yves would object to be called Mr Smith although she does have a good sense of humour.

      Otherwise, where does one begin?

      Many EU/EEA/EFTA countries are richer than the UK so they must be doing something right. I do not have time to write more so I will leave it there

    2. Yves Smith Post author

      I’m not going to strain myself searching my archives to find the analyses that show that the UK loses way more than the EU does if the UK does not maintain access to the single market. And that’s before you adjust the costs to a per capita basis. The UK is going to suffer a permanent and large decline in its standard of living as a result of its bone-headedness.

      And if the UK crashes out with no deal, it can’t even fly planes to European airports or over European airspace. Wrap your mind around that one, and the many things like that that do indeed give the EU the upper hand here. No deal is catastrophic to the UK. The EU can afford to walk away from the negotiating table. The UK can’t. That gives the EU all the leverage it needs.

      “Economically weak”? Your own Financial Times just wrote about how the UK has replaced France as the “sick man” of Europe. And did you manage to miss that the UK’s biggest export is financial services, when the EU has large banks which are all in the same businesses as your banks? The EU can and will use Brexit to take a chunk out of the UK’s market share. Another big export business is transportation equipment. Airbus has said it’s going to move its manufacture out unless it gets assurances, aka bribes. The Japanese automakers have said the same thing in a more coded manner.

      The north of your country is a disgrace. By contrast, in rural and small town France, people have much better lifestyles and the roads are spectacular. And the French health care system is far better than the budget-starved NHS.

      1. Gman

        A soft Brexit is a no Brexit, let’s not make any bones about that. A post referendum UK will be far worse off and all for what?

        Both the customs union and the single market are pay to play in some form other, and both are effectively manifestations of EU control.

        Hate to play the woman, but I must say I’m consistently and unpleasantly surprised by your contradictory views Yves on the EU, particularly given the ongoing situation in Greece Yves, and your apparent exasperation at events – who’s driving this externally imposed punitive austerity, who benefits and how many years has it been now?

        Brexit is first and foremost a long term political aim rather than a short or medium term economic choice. It’s still a very unfashionable thing to say, but it is about retaining national sovereignty before we, (and others, but that’s their lookout) are subsumed into a German hegemony, and that I’m afraid will likely come at an economic price sadly.

        A hegemony, that granted EU groomed placeman Macron’s recent success seems to suggest the French can still influence, but in all seriousness for how long I wonder?

        By all means trawl through your archives and crunch your numbers Yves, but rest assured not only are you spectacularly missing the point, in my view you are simultaneously undermining your own purported higher ideals.

        1. Mark P.

          Well, that’s not entirely fair to Yves. I’ve had somewhat the same argument with her. But she and this blog do come from a finance-related perspective and through that prism, yes, if one does a ‘realistic’ analysis of scenarios — setting aside higher ideals, as one should — then Brexit absolutely could be a fantastic ‘act of self-harm,’ as one current cliche has it.

          But ultimately, yes, the financial perspective is a limited, unrealistic prism in all sorts of ways. The U.K. was first into the neoliberal acid bath — Thatcher won election in May 1979, eighteen months before Saint Ronnie in the U.S. — and it’s got a chance of being the first society to figure its way out.

        2. Daniel F.

          A soft Brexit will be half Brexit, the proverbial “taxation without representation”. The UK will have to obey laws they had no hand in.
          The UK has almost nothing to win, be it mid or short term. Goldman Sachs has already started moving to Germany, and JP Morgan is also making plans.
          The perceived controversies in Yves’ reporting can be solved very easily: the EU isn’t “sugar and spice and everything nice”, especially with that German industrial hegemony. But leaving it could prove a lot worse, especially in our world of global supply chains and whatnot. The UK is in quite desperate need of workers from the eastern parts of EU to keep its agriculture and the NHS working. Nobody will share their room with three or five people for a non-renewable two-year work permit.

      2. Annonny

        “And if the U.K. Crashes out of Europe … ant even fly planes to Europe or over European airspace”

        And I imagine that the U.K. In response would not allow Europeans to fly over U.K. Airspace. Both would be committing suicide and that is, I hope, very unlikely.

        As a former fan of the E.U. I am now completely on board with Brexit and I hope and pray that the U.K. can make a go of it. Of course it is going to be a hard hard slog, but the alternative – staying in – would be worse.

        The idea that the U.K. can choose its exit (whether soft, hard, red, white or blue) is disingenuous. The EU is not the benign all-loving passive entity it is made out to be. It has become the vicious foreign policy enforcement arm of the German superstate and anyone that get in its way is attacked with an astonishing array of weapons. From a PR machine bought and paid for by the globalists to economic pressure from the ECB (Greece and Ireland), unreasonable demands for payment of huge, made up liabilities (the latest wheeze) and finally, a political triple act of the EU commission, the German government and now the French (a government bought by American new-libs as far as I can see). These forces want a hard exit, they want to humiliate and they are licking their lips at prospect of exploiting a weak parliament and Theresa May’s sadly obvious social anxiety disorder. The EU is going to try to crush the U.K. And I hope and pray that the Brits can find the courage to fight back.

        The U.K. is ill prepared to meet the challenge. Despite that it is the best prepared of the EU bunch to stop this slow march to poverty and irrelevance that continued membership of the EU (read German Superstate) entails.

        With luck, our putative overlords will over-play their hands and the debt problems in Europes periphery will continue to simmer until,some other countries realize that there is a way to fight the stranglehold that Germany has on the rest. Then things will get really interesting.

        1. Yves Smith Post author

          You are a victim of media baron propaganda. Your view is as uninformed as that of the young aristocratic men who volunteered enthusiastically to serve in the Great War, thinking it would be a romp of a few weeks and they’d get bragging rights. Instead, an entire generation of young men was decimated.

          The EU is not the one that is pushing for a hard exit. Your Government’s astonishing refusal to listen to what they have repeatedly said will probably produce that. The EU has said any exit has to fit in the parameter of existing deals. They have also said no unrestricted access to the single market without accepting the “four freedoms” which includes freedom of movement.

          The UK’s position is so ridiculous that objective parties are making jokes about it. For instance, in China, the UK’s Brexit stance is compared to a woman wanting a divorce but still wanting to spend her husband’s money and have sex with him.

          The UK will still be subject to EU rules in order to trade with them. The UK cannot afford not to trade with the EU. It is also likely to have to be subject to EU rules regarding the movement of people, since there will need to be a deal on that too. And that will probably be adjudicated by the ECJ. The only rules the UK will escape are labor rights and environmental regulations, both of which are favored by most UK citizens. The reason UKIP and the Tories were so keen to have Brexit was to crush workers even more.

          Moreover, the UK will not negotiate gloriously better deals. Had you been remotely paying attention, the Foreign Office is starved of staff and is having to hire pricey private sector consultants with no relevant experience just to handle Brexit. The Financial Times has identified 759 international pacts that the UK has to redo, most of them urgently. Many intersect and should not be negotiated in isolation. Anyone knows in a negotiation that a party the needs to get a deal done quickly has no leverage.

          And the idea that the UK was treated badly in the EU is another Big Lie you’ve swallowed uncritically. The UK is tied to the EU by geography whether it likes it or not. It had an exceptionally good deal with the EU yet whinged constantly about it. UK representatives would regularly act as if they were superior to Europeans. And it is May, not any of the EU leaders, who has been strident, arrogant, and ignorant.

          1. Annonny

            I think you are mis-reading my comment. I did not say that the U.K. Was mistreated. I said that Ireland and Greece were mistreated. We can differ on that but I believe that to be true.

            I may indeed be a victim of propaganda but, it seems, so are you. Who cares what jokes the Chinese tell? What EU ” rules” does the US have to comply with to deal with our betters in Europe.

            How do you know what type of exit the EU are pushing for? Negotiations haven’t started yet. I said I believe that the EU, with its cabal of Junker, Markel and Schauble will try to humiliate the U.K. like they did Greece. We will have plenty of time to see if that proves true or not.

            Your argument comes down to the following.The UK should stay because it hasn’t been treated so badly and to get out would be painful and would change nothing cos the U.K. will still have to trade with the EU. In other words, sit down, shut up and understand you are powerless.

            I hope Britain is better that that.

            1. Annonny

              One more thing. No access to the single market without the four freedoms. Who does that benefit, I wonder? Who benefits from the recent huge influx of migrants to the E.U.? Not Eastern Europe, not Italy, Greece or Spain. Not as far as I can see anyway.

              In the end the conversation with Remainers always comes down to this. The EU position is portrayed as a fixed feature of the landscape, obvious, morally neutral and immovable as the Alps. The positions of the others, whether Greece (bailouts), Italy (migrants /deficit spending) or the U.K. (immigration) are swatted aside with the attitude “get over it you malingerers | spendthrifts| racists*” (* delete as appropriate) .

              Finally I didn’t say the U.K. will negotiate gloriously better deals. I said this is going to be extremely difficult and unpleasant but that the U.K. is better off to take the exit path than not. Pointing out the extent of the short term difficulties does not change that opinion.

            2. vlade

              US has to comply with all the EU regulations to sell US originated goods or services to the EU. EU may _choose_ to accept equivalance (subject to the treaties, but those aren’t actually “free trade treaties”. They are technical treaties on recongition of standards, testing bodies, and VERY IMPORTANTLY, processes that govern those).

              Did you fail to notice the large fines that were imposted on Microsoft, and are likely to hit Google, Facebook and others?

              My house, my rules works just about everywhere. But some houses are bigger, and more people want to deal with them.

              1. Annonny

                Fair comment. I was referring to freedom of movement and ECJ jurisdiction and as far as I know, the U.S. is not subject to these rules.

      3. Oregoncharles

        How many flights between Europe and the US or Canada stop at Heathrow? How many fly over UK airspace?

        Is air passage even an EU function? I thought there was an independent, international body that administers air traffic. I honestly don’t know, but the claim seems strange to me. Certainly blocking air traffic would be highly disruptive to business, including those on the Continent. In fact, since they’re collectively much bigger and farther from the imperial master (the US), I think the Continental impact would be larger.

        Expats would be a real issue, as they would then be on the sufferance of the host country. As are the Usians who live in places like Mexico, Ecuador, or, for that matter, Spain. Much depends on just how hostile the split turns out to be.

        1. Yves Smith Post author

          Which hub people use to get into smaller cities in Europe currently depends mainly on your frequent flier and schedule preferences. You do NOT need to go through Heathrow; in fact there are good reasons not to (too short an overnight flight to get enough sleep; if you are American, way more security hassle than European airports. Heathrow is a nightmare while, for instance, Charles de Gaulle is a breeze). You can just as easily get to Europe via Frankfurt (Lufthansa/United), Amsterdam (KLM/Delta) or even Iceland. The losers would be American Airlines frequent flier loyalists.

          1. vlade

            Just one quip – EU-NA flights (principally Amsterdan and Frankfurt, Paris would not have to do that much) would have to take quite torturous route avoiding UK airspace. Still better than UK-to-anywhere-east-of-UK, mostly because of “great circles”. i.e. EU airspace stretches almost to the Arctic, so say you could fly north from Germany and possibly slip betwen Orkneys, and while costly it could be workable, but from the UK eastwards you’d have to fly north to well over 70 degrees north, and it would not be a “great circle” anymore, more like a “great curved leg”.

            Ireland would be buggered though. Not sure whether those fin companies moving to Dublin take that into their calculations.

            1. Anonymous2


              The EU/US Air Transport Agreement is the main text.

              The UK needs the EU’s agreement to allow this to continue to apply to the UK after March 2019. Without the EU’s say-so then the rights it gives the UK fall away.

              That is not the result of a decision by the EU, but because the UK chose to cancel its rights as an EU member with effect March 2019. If it was not happy with the possible consequences of that decision then it should have not proceeded with the decision.

              I expect they could probably negotiate something but of course they will have to give up something to get that. UK restrictions on EU citizens freedom of movement to the UK is one possibility that occurs to me.

              One solution, I guess, might be for all British airlines to become located in the EU 27, then they can continue to enjoy their rights under the Agreement. It is doubtful the UK would ban them from its airspace or airports as to do so would just cut the UK off from the rest of the world.

              A bit humiliating for British Airways to be subsumed into Air Iberia.

              And I guess Heathrow becomes less important and London as well as a result.

    1. vlade

      Well, we got the timing right. second decade of a century, Europe? A large war (backwards: WW1, Napoleonic, War of Spanish Sucession, 30 years war, start of Ottoman-Habsburg war (just), Hussite wars, Byzantine civil war) ..

    2. Mark P.

      ‘This is how wars start.’

      Yup. It could be.

      There’s an assumption that geoeconomic power will remain the primary means of inter-state conflict in a globalized world where nuclear weapons and such have kept classical military war between nations mostly off the table in the last few decades.

      That’s naive.

      1. PlutoniumKun

        Nothing can ever be ruled out of course, but the reality is that the militaries of the major European countries are so intertwined that a war would be more of a civil war than an old style one. The main air superiority fighter is called ‘the Eurofighter’ for a reason, bits of it are made all over Europe (apart from France of course). The worst case scenario would be something like the Anglo-Iceland Cod War in the 1970’s when British warships tried to bully the Icelanders and found out the hard way that having lots of military hardware isn’t much use against a truly tough nation that won’t be pushed around.

  6. Susan the other

    I don’t see how Theresa survives a 100bn euro tab. That might be part of the EU’s strategy. But even before the reality of buying their way out became news, the Conservatives (from Boris’s blurts) were setting up big trade deals with India. And the UK contracted with China for the Hinkley reactor (why not France?). There have been negotiations with us, etc. I almost expect Theresa to tell the EU to stuff it.

    1. Anonymous2

      Sorry, no big trade deals with India have been set up. There have been suggestions that trade with India post Brexit might be increased by 2bn. Trade potentially lost with the EU could be 100bn.

      Contracting with China on nuclear reactors does not earn the UK any money.

      It is the loss of export markets that threatens the UK economy. Could the US replace that ? I doubt it. UK exports are designed for European customers. UK firms have a pretty awful track record on the whole when it comes to cracking the US market, which is in any event pretty open already (see one Donald Trump on the subject).

    2. PlutoniumKun

      The Hinkley C reactor is a French EPR reactor. The Chinese connection is that they are the main contractors and are arranging the financing (on incredibly favourable terms). The Chinese are the only ones willing to take the financial losses that are inevitable in order to gain the economic leverage they want with the UK.

      Quite simply, the Chinese see the UK as a ‘buy’ opportunity, like a vulture fund swooping in to buy property off distressed homeowners.

  7. Oregoncharles

    The confusion probably means the EU pulled the numbers out of their behind, as a way to sabotage the early part of the negotiations – excuse me, as a bargaining chip.

    I’ll repeat my prediction: the negotiations will go very badly until commercial reality sets in, fairly near the end, and the affected companies on both sides start pounding on tables. Then a deal will be made in a rush, based on mutual interest.

    Granted, that’s a lot more optimistic than I usually am.

    1. Yves Smith Post author

      No, the EU has been working on this for quite some time and certainly has backup. Eurocrats don’t wing it the way Anglos do. It means the reporter ran a scoop (this was an exclusive piece) without getting all of the key bits.

    2. PlutoniumKun

      Thats just not the way the EU operates. They would never sit down to negotiate without having secured informal consensus among the member countries (there has been an enormous amount of backroom meetings the past year – the Irish PM talked casually of having been in ‘150 Brexit meetings’). In the EU political requirements always weigh more heavily than commercial ones.

      The reality is that the core EU countries have concluded that Brexit is a UK generated mess, and their only interest is in disentangling themselves from the UK with the minimum damage to EU political aims. If this means a commercial hit, so be it – everyone will know its the UK’s fault, not the EU’s.

      The EU has by far the strongest hand in negotiations. They have no interest in ‘sabotage’. They have been very clear on the priorities – its the UK which has refused to listen and to get its act together. The EU has appointed a team of tough, experienced negotiators who have been told to get on with the job, while Merkel and Macron get on with more pressing matters.

      1. Blisex

        «The EU has appointed a team of tough, experienced negotiators who have been told to get on with the job, while Merkel and Macron get on with more pressing matters.»

        The truly critical difference between UK and EU27 governments, which is implicit in “Merkel and Macron get on with more pressing matters” is that Brexit is a big political domestic issue, one that can swing elections, in the UK, but not in the EU27. The vast majority of EU27 voters don’t care about Brexit, the majority of UK voters do. That has a big influence on the negotiating positions.

        1. Yves Smith Post author

          Not true. The Eastern European governments are keenly invested in getting the UK to pay up pretty big in the Brexit settlement. They are going to be close to non-negotiable on that. And the EU bureaucrats are running the negotiations with their positions agreed in advance by the EU governments. They don’t have to keep running back for approvals. And they’ve already staked out aggressive positions that have been approved by member governments.

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