An amicable divorce?

Ready. Aim. Fire! The notorious Article 50 of the Treaty of Lisbon (2007) was “triggered” by the United Kingdom last night when Prime Minister May signed off a historic letter to Donald Tusk, President of the European Council. This was delivered by hand by Sir Tim Barrow, our man in Brussels, at 12:20 BST this afternoon. What are the likely outcomes of the first phase of negotiations that will take at least two years (and probably longer) – and how will the markets respond early on?

Not a love letter

This must be the most anticipated plea for divorce in history. Both sides have now had nine months to position themselves, marshal their armies of lawyers and mutter to friends and family about how awful the other is. And yet, there is so much uncertainty about what happens next.

What we can expect in the first instance is that a meeting will be scheduled between the EU’s chief negotiator, Michel Barnier, and the UK Brexit Secretary, David Davis, (and their teams) for possibly mid-May. (The French presidential elections, the second round of which takes place on 07 May, are likely to cause delay.) Of all the millions of pages of accord and regulations that Britain has signed up to over the last 44 years, there will be three items at the top of the agenda at that first encounter.


The first is the future status of the 3.2 million EU citizens living in the UK – and correspondingly the 1.2 million Britons living and working in EU countries. (These numbers have been questioned, by the way – there are a lot of EU nationals in this country who do not have NI numbers – but let’s go with them for now.) The second item is the little matter of the UK’s financial obligations to the EU – the exit bill, if you wish. And the third is the delicate issue of the future of the land border of Northern Ireland with the Irish Republic.

Migrants’ rights

The Liberal Democrats have attempted to whip up anxiety on this matter: Nick Clegg MP fears that his elderly Dutch mother and his Spanish wife may be about to be deported. I don’t think so. Not even the most swivel-eyed Union Jack-waist coated Brexiteer has ever entertained the notion that well-paid professional Europeans in the City, or wherever, should be shown the door.

But the majority of people who voted Leave on 23 June last year (and actually many who voted Remain) believe that it is feasible and desirable to halt the flow of unskilled workers from nations with lower wages and benefits levels than our own. In the weeks and months to come the UK Government will unveil a work permit scheme whereby UK employers will have to apply for work permits for new staff arriving from EU countries. These will most probably be granted automatically to any worker paying income tax at the higher marginal rate (that is, one who earns over about £45,000 per annum).

The Government has also hinted that all EU workers who have taken up work in the UK before today’s date will get work permits automatically. The alternative – mass deportations – would be ethically questionable, unworkable and calamitous for the UK’s image abroad.

Not even the most swivel-eyed Union Jack-waist coated Brexiteer has ever entertained the notion that well-paid professional Europeans in the City, or wherever, should be shown the door.

Whereas the vast majority of the 3.2 million EU citizens in Britain (that number includes a large number of their children who are in British schools) are in work here, or are looking for work, many of the 1.2 million Brits in Europe are retired people. There are more than 300,000 British retirees in Spain alone. Although the latter may have recourse to the Spanish healthcare system, they receive UK State Retirement Pensions and do not represent a significant burden on the Spanish welfare system. It is highly improbable that the Spanish would wish to send these people packing.

As for tourist visas, I see no reason why they should become necessary for tourists travelling in either direction across the Channel. It may be necessary to restrict reciprocal access for EU and British tourists to healthcare while travelling on holiday, though I cannot see this becoming a major stumbling block for either side.

Of course, EU countries would respond in kind to any work permit scheme that the UK Government imposed. But, in terms of the overall negotiations, this is not a big deal and is likely to be resolved almost immediately. Nick should stop worrying.

Your bill, Madam

We are told that the first thing Monsieur Barnier will do is to hand the UK a bill for €60 billion (just over £50 billion). Supposedly, this is the total sum of the UK’s financial obligations (liabilities) outstanding to the EU. (Guy Verhofstadt MEP, in an interview on Newsnight, even said the figure was €600 billion – but it was late at night.) We know very little about how this figure was calculated, though there is a constant refrain about the need to meet the pension obligations of EU civil servants.

I have just done one of my back-of-a-spreadsheets calculations. If there are 50,000 EU officials for whom the UK is responsible, each with a pension of €75,000 per year (Lords Mandelson and Kinnock enjoy much bigger pensions), the actuarial value of that liability would be €63.75 billion[i]. But it would be absurd for Britain to buy out those pension liabilities like a shamed Sir Philip Green. Rather, it would be appropriate for the UK to transfer them to the UK civil service pension scheme – which is funded, ultimately, by you and me (and the government’s black hole of debt).


Actually, the pension issue is a canard. When Mr Davis and his team go through the €60 billion bill line-by-line they are likely to find that it is made up of spending commitments to numerous grands projets to which the UK has committed over the years. But the UK’s current obligation will be a product of any future payback. It is one thing to settle a bill at a restaurant for what you have eaten; it is quite another to be charged for food and drink that you are not going to eat in the future.

And they cannot determine the bill until they know in which EU activities the UK may wish to continue to participate going forward. By way of example, I see no reason why the future UK out-of-Europe might not want to remain in the Erasmus Programme (by which students are given bursaries to study in other European countries). After all, there are 39 participating nations in this programme, including Serbia and Turkey which are not EU members. The UK will just continue to pay its dues as before. The same goes for continued membership of the European Space Agency (ESA) – and so forth.

I suspect that most of the mythical €60 billion bill consists of contingent liabilities relating to the complex network of EU stability mechanisms which I attempted to unpack last May. Such obligations would be triggered only in the event of a major systemic financial crisis in one or more EU states. Now the exact degree of the UK’s obligations to these mechanisms is already uncertain and the UK would surely argue that, as a non-Eurozone, non-EU state, such notional obligations are now defunct. Even if the UK were to agree to some degree of contingent liability – the Bank of England is likely to remain a shareholder in the European Central Bank – this is not a matter of signing a cheque up-front. Rather it is being prepared to cough up in certain circumstances in the future – politically sensitive, no doubt.

…I suspect that the €60 billion exit bill is a shibboleth – a symbol for Europe’s annoyance.

Taking all this together, I suspect that the €60 billion exit bill is a shibboleth – a symbol for Europe’s annoyance. The veiled threat by the French to cut off the supply of nuclear fuel to our nuclear power industry is a much more serious matter. When Mr Davis receives the dodgy bill he will read it, sigh, and hand it back to Monsieur Barnier, saying “I’m sorry but we can’t even consider this until the substantive terms of our withdrawal are determined”.

To which Monsieur Barnier might respond: “Well in that case, I am afraid there is no purpose in continuing our discussions”. And he will address the expectant posse of journalists in Sturgeonesque terms – brick walls of intransigence etc.…

Overall, I think this scenario has a less than 50 percent probability of happening – the Germans do not want this. But it would spook the markets. And possibly irreversibly: that first meeting will colour the mood of the entire two years of negotiations. It will be a pivotal moment.

That’ll be a border? Or no border at all at all?

The issue of the Irish border – the only land border that the UK shares with another EU country – is poorly understood by Leavers and Remainers alike. Let us just rehearse a few historic facts.

Ever since the foundation of the Irish Free State in 1922 there has been a common travel area between the two nations – long before the Schengen Agreement was a gleam in Jacques Delors’ eye. Moreover, citizens of both countries even had reciprocal voting rights if they lived in the other country. The reason why the border was so tightly policed in the inter-war years was that the Irish government imposed swingeing tariffs on agricultural products imported from the North. And the reason why the border was made a “hard” one during the Troubles was the issue of security.

Ireland – like Britain – never signed up to the Schengen Convention of 1990 and both countries received opt-outs from the Treaty of Amsterdam provision for open borders (1997). When EU citizens (except UK citizens) arrive in Ireland they are required to show identification. Since the Good Friday Agreement of 1999 the border between the Irish Republic and Northern Ireland has become (in the current lingo) frictionless. It is in no one’s interest that this be reversed.


So long as no tariff barriers are imposed on goods crossing the UK border, and so long as no extraneous customs regulations are imposed (i.e. non-tariff barriers) there would be no reason for either side to impose a “hard” border. EU citizens entering the UK from Ireland would still need work permits to work in the UK so a “porous” border is not an issue.

Just as the Lib Dems have stirred up anxiety about migrants’ rights in England and the Scottish Nationalists have used Brexit as a pretext to trigger another referendum on independence, so Sinn Fein has sought to politicise the border issue for its own ends. In fact, the border issue comes down to the overwhelmingly important issue…

Trade

These three appetizers, important as they are, will be as nothing to the main dish. This will be the terms by which the UK trades with the EU post-Brexit. The official position of the EU is that the terms of Brexit must be agreed first; and only then, after the divorce is finalised, will they be able to talk trade – and that will take several years after 2019. That is sophistry. The real meat of the negotiations will be how trade is conducted with Britain outside the Single Market and much of the Customs Union – everything else is secondary.

There is no way that Britain can remain a member of the Single Market and the Customs Union (such as it is) and yet regain control of its borders, cease to pay massive transfers to the EU and escape the jurisdiction of the European Court of Justice. Not to mention the ability to make bilateral trade deals, most urgently with the CANZUK nations (Canada, Australia, New Zealand and UK). As Mrs May said in the House of Commons today: “We are going to make our own decisions and our own laws”.

But as I have written before, countries can have access to the Single Market without being in it. And many non-EU countries have favourable customs arrangements with the EU without being fully in the Customs Union. Turkey is a case in point. There is a risk – perhaps a significant one – that the Europeans’ desire to punish Britain will overcome their perceived self-interest. (Perhaps partly to discourage any other states from leaving.) In which case there could be a trade war which would be highly disruptive for all parties. Just consider that the Germans sell about 20 percent of their car output to the UK.

I am guessing that reason will prevail over pique. But one can never be sure.

[i] I assume an average pension life of a further 20 years to run and a discount rate of 1.6 percent, which is roughly the yield on 30-year gilts.