In her 6-page letter to European Council President Donald Tusk, May writes three times that “it is necessary to agree the terms of our future partnership alongside those of our withdrawal from the EU”.
This is directly at odds with European Union leaders’ view that the terms of Britain’s exit agreement from the EU, including the ‘exit bill’ that is demanded from the UK, will have to be concluded first before any talks on the future relationship can begin.
May was praised for the ‘cooperative tone’ of her letter, in which she recognised UK companies will continue to have to align with European rules after Brexit.
But if both sides can’t even agree on the negotiating framework, such an acrimonious start to the Brexit talks doesn’t bode well for a favourable conclusion. “If you start a negotiation taking binary positions, this will make it difficult to come to an agreement,” says Richard Whitman, a EU expert at the British think tank Chatham House.
The probability of the ‘No deal’-scenario coming true, explicitly mentioned by May in her letter, will therefore increase significantly if the EU and May remain on collision course, and this will be priced into markets.
Sterling may be trading below its ‘fair value’ now, but this doesn’t mean it can’t go much lower from here.
Jan Jonker Roelants, a retired Dutch diplomat, believes the question will have to be resolved before serious talks can start. And it’s May who will have to drop her demands, he thinks.
“I can’t imagine the EU-27 will meet May’s demands as they have already said they won’t,” he says. ” Article 50 of the Lisbon Treaty, which includes the provisions of a member state’s withdrawal from the European Union, indeed speaks of two separate agreements: a withdrawal agreement and an agreement about the future relationship.
This suggests the EU should get its way, even though Article 50 also mentions the exit agreement should “take account of the framework for [Great Britain’s] future relationship with the Union”.
The “negotiating guidelines” that Tusk will produce over the next couple of weeks may provide more clarity, but it’s more than likely that the EU will stick to its guns.
“Lots of parallelism”
But Whitman actually thinks “we will have lots of parallelism” in the negotiations which, he believes, could actually drag on “forever”, as is often the case with agreements negotiated by the EU. “The Customs Union with Turkey (which was concluded in 1995), for example, was initally meant as a temporary deal, but it has now become semi-permanent,” he says.
“There has to be found a face-saving formula for both sides of course, but much of the negotiations will be about money. Keeping a firewall between the exit bill and the future relationship will be difficult,” the Chatham House expert adds. It’s likely the UK will be paying into the EU’s budget for years to come, instead of paying a one-off amount to settle its exit, he believes.
“The choreography of the negotiations will be very interesting,” Whitman concludes, saying he doesn’t expect a withdrawal agreement to be concluded any time soon.
“Theoretically the negotiations could only be about the exit agreement, but there are a lot of technical details involved. Most of the iceberg is actually under the water.”
Jonker Roelants believes May will pick her battles. “I think she is just trying to play hard ball by taking this stance,” he says. “It’s partly a negotiating tactic, and partly a way to assure hard Brexiters she will stand her ground during the negotiations. But she will have to back down on this.”
Whatever the outcome of this first of skirmishes in “the Battle of Brexit” will be, it’s for sure there are interesting, and uncertain times ahead. And markets will not always respond the way they did to May’s letter.