EU member states are backing a European commission demand that trade talks can only start once Britain has agreed to pay a hefty Brexit bill, despite fears of a backlash from Theresa May.
The Czech Republic has joined Germany, Italy and France in insisting the UK must come to an arrangement on the divorce settlement, expected to come to about €60bn, before any substantive negotiations on a future relationship.
The move comes despite privately held concerns in Brussels, expressed in a document obtained by the Guardian, that Britain will react badly to the bill.
“The scenario of setting a heavy Brexit ‘divorce’ bill could prove to be risky as it might cause backlash by the UK during negotiations,” European parliament officials told the powerful committee on economic and monetary affairs. It is understood that the commission’s chief Brexit negotiator, Michel Barnier, has also privately expressed concerns about how MPs will react.
The British government has said there should be parallel talks on the terms of the UK’s withdrawal and the future trading relationship. The timeline is key to May’s hopes of completing a free trade agreement by the end of the two years allowed for negotiations under the Lisbon treaty.
However, in recent days the French prime minister, the Italian minister for EU affairs and senior German diplomats have said this will not happen, echoing the commission’s position that the financial settlement must be dealt with first.
In a fresh blow to May, parties in the Czech parliament have also signed a statement backing the commission, despite their hopes that an eventual deal will prevent tariff and non-tariff barriers to trade with Britain.
The UK trade secretary, Liam Fox, has previously described the idea that Britain will be faced with a large bill at the start of article 50 negotiations as “absurd”, while some backbenchers have urged May to walk out on talks rather than engage in discussions about heavy liabilities.
However, a leaked EU internal note, titled Potential impact of Brexit on the EU budget – key issues for the negotiations, says the cost of Britain’s divorce bill could range between €15bn and €80bn, depending on what assets and liabilities are included. “The maximum level of UK gross liabilities could be estimated to amount to around €80bn,” EU officials write.
It is understood that the sum of €57bn was discussed as a likely starting point during a technical meeting between Barnier and representatives of the EU27 earlier this month. That would include spending commitments the EU has made for the coming years, as well as the cost of pensions for staff in the institutions.
The relocation costs alone of the European Medicines Agency (EMEA) and the European Banking Authority, currently based in London, as well as offices of the EU institutions in the UK “could be estimated at the level or less than €10m [based on estimates that the move of the EMEA would cost around €3m]”, the leaked document says.
The money is not strictly a charge for leaving since the bill comprises various financial commitments made during the UK’s membership, such as pension obligations to EU officials and past pledges to the bloc’s budget and projects.
Greg Swift, May’s spokesman, told reporters in London that the final figure for the UK’s Brexit bill will be up for discussion when talks formally begin.
“Sixty billion is a figure that seems to be around,” Swift said. “These are the kinds of issues that will form part of the negotiations and the process of the UK exiting the European Union. The negotiations haven’t begun. This is an area that will be looked at as part of those negotiations.”
Kern also warned the UK against using the threat of becoming a tax haven as leverage. The British government has hinted it could slash corporation taxes to undercut the EU and lure companies to the UK if it gets a bad deal out of Brexit.
“This would of course be a provocation,” Kern said. “If they start to reduce their corporate taxes to an unreasonable level, then there will be a certain reaction from Europe.”
The UK government has pledged to cut the main corporate-tax rate to 17% by 2020 from 20% at present and hinted at the possibility of further reductions if it doesn’t get its way in negotiations. May’s advisers have floated the idea of bringing it down to as little as 10%, the Sunday Times reported in October, taking it below Ireland’s 12.5% rate.
There will be “no free lunch for the British government,” he said. “They need access to the European market and so they have to behave in a decent and reasonable manner.”
May’s spokesman Swift said the UK hadn’t provoked the EU by explicitly proposing to turn Britain into a tax haven for businesses if a good trade deal can’t be secured. “I don’t think we have ever explicitly said we would lower taxes,” he said. “There is a big difference between saying we will set competitive tax rates and saying we are cutting tax rates.”
The Brexit talks will be “lengthy,” and “not as easy as the British expect,” Kern said. He suggested that while agreement on terms of the UK’s withdrawal can be wrapped up within the scheduled two-year timeframe, it’s unrealistic to think the two sides can strike a deal over a wider trade pact in that period.
“The big difference is that May and the British government believe that you can have a very general negotiation and come to a conclusion within two years,” he said. “The most favourable concept from the European point of view is first to talk about a treaty of withdrawal, to regulate the financial obligations and to clarify the situation of British citizens in Europe and in turn European citizens in Great Britain – this should be possible within two years.”
Only after that can the EU turn to discussions about transitional arrangements, foreign policy and a free-trade agreement, Kern said, echoing comments made by the EU’s chief Brexit negotiator, Michel Barnier.
“Brexit is not only about the relation to Great Britain, it’s about the role and unity of Europe itself and so therefore it’s really a very sensitive negotiation procedure,” Kern said.
Sources: The Guardian, Bloomberg