European Leaders Back Brexit Negotiating Plan Before Talks

(Bloomberg) -- European Union leaders unanimously approved guidelines for the upcoming Brexit talks, setting the stage for two years of tussles with the U.K. government over finance and trade.

“Unity in action,” European Commission President Jean-Claude Juncker said on Twitter as he announced the 27 EU governments rubber-stamped the negotiating strategy in less than 15 minutes at a summit in Brussels.

Policy makers arrived declaring that they were united in their approach to Brexit and that Britain wouldn’t be allowed to be better off outside the bloc than inside it. Prime Minister Theresa May’s government was told it will have to agree to pay a financial settlement and resolve the rights of citizens before the EU allows discussions to turn to a future trade deal.

The common message underscored the feeling in continental capitals that they have the upper hand in negotiating Britain’s exit. U.K. Brexit Secretary David Davis said today both sides were now clear and that talks will be “tough and, at times, even confrontational.” He warned that some people in the EU and U.K. are trying to undermine them.

May’s administration has shown a willingness to give ground on key matters involving finance, trade and immigration. The British concessions mean EU officials are increasingly hopeful that May will realize that the terms of Brexit will be set by them more than her.

The need for the U.K. to be pragmatic in unraveling 44 years of membership was highlighted this week by German Chancellor Angela Merkel’s warning that May’s government shouldn’t be under any illusion that Europe will be soft on it.

“We need to remain united. It is only then that we will be able to conclude the negotiations,” EU President Donald Tusk said as he arrived at the summit. “Our unity is also in the U.K.’s interest. I am confident that it will not change.”

Deterring Others

Talks are now set to begin after the U.K.’s June 8 election. The drafting of the strategy over the past month has gone remarkably smoothly, said EU diplomats in Brussels and national capitals. The result is a common position based around ensuring Britain pays a price for leaving and that its departure isn’t made so easy that others will be encouraged to follow.

Among the aims listed in the document are that the British agree to pay a financial settlement before they get to discuss a future trade deal and that any transition comes with continued financial, regulatory and legal ties. Britain will be asked to pay at least 40 billion euros ($44 billion) when it leaves and may face as much as 60 billion euros, Luxembourg Prime Minister Xavier Bettel said in an interview.

“The British have been on a steep learning curve when it comes to what the red lines are and what they can reasonably expect to achieve,” said Christian Odendahl, chief economist at the Centre for European Reform. “The EU has been remarkably consistent over the last couple of months when it comes to its position.”

Them and Us

It all contrasts with what they perceive as muddled thinking and unrealistic ambitions on the British side with questions still unanswered on who in government to engage with.

The extent to which Europe believes it has the upper hand was highlighted by Merkel’s wake-up call to Britain on Thursday. That followed feedback she’d received from talks a day earlier between May and EU chief Brexit negotiator Michel Barnier and Juncker, a second diplomat said.

That meeting revealed the U.K. still believes the EU will allow talks on a future trade deal to start before the completion of negotiations on the financial settlement and protection of citizens’ rights, Juncker said at the summit.

“Our British colleagues, as I noticed last Wednesday in London, would like to start talking about the two in parallel,” he said. “That won’t happen.”

May called an election ostensibly to strengthen her political mandate before negotiations begin in earnest. On the campaign trail, May used Merkel’s intervention to warn voters that EU members are lining “up to oppose us.’’ One EU official said on Friday that she’s right.

The British “can’t get any more favors than a nation that isn’t in the EU,” Luxembourg’s Bettel said. “The fact remains that it was their decision to leave the EU.”

Rebuffed

The British premier has already run into the EU’s phalanx. She was rebuffed when she suggested in October that she had given enough insight into her plan for the EU to open informal talks, while an early proposal to settle the issue of citizens’ rights was rejected.

Since she triggered two years of talks in March, May has seemed to dilute her stance on several occasions. She appeared to accept that the U.K. would still need some EU oversight and free movement of labor through any post-Brexit transition and that any trade deal won’t be signed until after it’s left the bloc.

May also refused to rule out continuing to make payments into the EU budget and she talks less about no deal being better than a bad deal, or of turning her country into a tax-haven if she fails to get her way.

Avoiding Cliffs

EU officials suggested the softer tone from Britain reflected the realization that a collapse of talks without an agreement -- the so-called cliff edge scenario -- would hurt the U.K. more than the EU.

Several EU diplomats warned this week that such an event along with the imposition of World Trade Organization tariffs still can’t be excluded. Morgan Stanley economists reckon there is a 50 percent chance of the U.K. ending up with disruptive trade barriers after Brexit.

That said, European governments may help give May political cover by allowing Brexit talks to look at trade before the two sides agree to the bill for leaving the EU, two people familiar with the plan said this week. And to Iain Duncan Smith, a former leader of May’s Conservative Party who campaigned for Brexit, Europe’s approach is nothing more than posturing anyway.

"People go: ‘Oh look they are showing resolve and their strength.’ Well, what would you expect?’’ he told Bloomberg. “They are about to head in to a negotiation. You know, I have been in business. You always start in your firm position.’’

--With assistance from Tony Czuczka Esteban Duarte Lyubov Pronina Nikos Chrysoloras Stephanie Bodoni Alexander Weber Mark Barton Dalius Simenas Viktoria Dendrinou Marek Strzelecki Ed Ludlow Jones Hayden Arne Delfs Andrew J. Barden John Follain Marine Strauss Radoslav Tomek and Jonathan Stearns

To contact the reporters on this story: Ian Wishart in Brussels at iwishart@bloomberg.net, Stephanie Bodoni in Brussels at sbodoni@bloomberg.net, Dalius Simenas in Vilnius at dsimenas2@bloomberg.net.

To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net, Simon Kennedy, Rodney Jefferson