16 January 2017

Bloomberg: Seven Brexit strategies UK’s May could use to cut EU unity

The UK’s success at undermining the bloc’s united front will dictate whether May can extract concessions from the EU, such as retaining preferred trading relationships and favorable access for London’s financial firms.

Here’s Bloomberg’s guide to how Britain can undermine EU unity:

1. Offer cash

With significant wealth discrepancies between EU nations, money talks. The richest countries contribute most to the bloc’s central pot, helping to pay for projects such as new roads, rail links and urban regeneration plans in poorer eastern and southern countries.

The U.K’s withdrawal from the EU will leave a hole of about 250 million pounds ($304 million) per week in its budget, potentially removing vital funding for poorer nations if that amount isn’t otherwise made up.

After Brexit, there will be “an immediate need to replace the U.K. contribution, pitting net contributors against net recipients,” Iain Begg, professorial research fellow at the London School of Economics and Political Science, said in a note. Before the end of 2018, EU countries will start discussing the EU’s next budget phase, covering 2021-27, and “from past experience, these are fraught negotiations which make an agreement on other matters all the more difficult,” Begg wrote.

• STRATEGY: Diplomats from eastern Europe have signaled, in return for Britain’s continued funding, a willingness to consider giving the U.K. single-market access even if it restricts the free movement of labor, a stance that would put those member states on a collision course with richer, western nations that insist the two policies are inseparable. The U.K. could pledge to pay its EU membership bill until the end of the current budget period in 2020, and even beyond.

2. Play parts of the EU against itself

Since the EU’s 27 countries can’t negotiate with the U.K. at the same time, they’re relying on the bloc’s administrators in Brussels to do the drudge work. The problem for the EU is that there’s a long-standing rivalry between the bloc’s institutions that’s as old as the union itself.

The tension has already been in evidence with the European Commission (the executive arm) squabbling with the Council (the body that represents national governments), with both naming a point man for Brexit and then fighting over their roles. Add to the mix the European Parliament (the directly elected assembly), which has named its own Brexit chief because it has to give its consent to the final deal.

• STRATEGY: May can capitalize on the power struggles by trying to deal directly with national capitals. This could blindside the commission, which is supposed to be leading the negotiations in Brussels. Many national governments already have deep distrust of the commission, believing that it doesn’t always reflect their interests.

3. Exploit splits over Trump and Putin

Donald Trump’s election victory in the U.S. and his comments about European defense could give May some unexpected leverage.

With the president-elect casting doubt on the U.S. commitment to NATO, the EU knows that it would gain from keeping ties to Britain’s military and intelligence capabilities, especially amid worries about the proliferation of terrorism and the expansionist aspirations of Russian President Vladimir Putin.

“Even after Brexit, the EU and the U.K. will have a mutual interest in close defense and security relations,” Sophia Besch, research fellow at the Center for European Reform, said in a note. “While it would make sense for Europeans to coordinate their response to Brexit and the Trump presidency in defense matters, unity is by no means predetermined.”

The U.K. has the second-largest defense budget in NATO and officials in May’s government have already said they see an opportunity to win goodwill from other EU nations by continuing cooperation.

• STRATEGY: Make defense a bargaining chip. The EU has made no secret that any Brexit deal must safeguard the stability of the bloc. Eastern European countries in particular are open to continued assistance from the U.K given Putin’s aggression close to their borders. What can they allow in return?

4. Tempt industry

When Nissan Motor Co., which has a manufacturing base in Britain, said in October it had secured enough assurances to keep investing in the U.K., the move gave an early hint about May’s Brexit strategy. The government said it promised the Japanese automaker that Britain would seek to maintain tariff-free access to the EU once it left the bloc. Other industries such as finance and pharmaceuticals are following the car sector’s lead in demanding support.

Additionally, firms based on the continent, which sent more than 300 billion euros ($314 billion) in exports to Britain in 2015, will want to retain access to the U.K. market and push for a Brexit deal that gives them that flexibility. Bank of England Governor Mark Carney said on Wednesday that an abrupt U.K. departure from the bloc would pose a greater financial danger to the EU than to Britain.

Carney told lawmakers in London that the EU relies on the U.K. for a large portion of its hedging, foreign exchange, lending and securities activity and should “think very carefully about the transition.” U.K. Foreign Secretary Boris Johnson said on Tuesday “it would be the height of insanity” to imperil investments in both Germany and Britain that underpin hundreds of thousands of jobs.

• STRATEGY: The U.K. knows that certain industries in the EU want to keep selling to Britain tariff-free. While the EU governments have stuck by their line that May can’t “cherry pick” access to the single market, the U.K. understands that by keeping leading companies in Britain and presenting the case for free trade as beneficial to the wider European economy, it has a powerful argument.

5. Leverage EU citizens living in the U.K.

Three million EU citizens live in Britain and questions remain about their ability to stay and work there after the U.K. leaves the bloc. Diplomats in countries with sizeable communities in the U.K. have said that the status of their nationals is one of their biggest concerns in any agreement on a future relationship. Brexit Minister David Jones told lawmakers in London on Tuesday that he wants the rights of European citizens in the U.K. to be among the first issues settled.

• STRATEGY: While Britain’s leverage in this area is diminished because the U.K. also wants to safeguard the rights of British nationals living in the EU, making commitments to protect Europeans who moved to the U.K. under EU free movement rules could win May some early goodwill.

6. Threaten tax cuts

The U.K. already has among the lowest business tax rates in the EU. And even though the government has pledged to cut rates to 17 percent by 2020 from the current 20 percent, it has hinted that it may reduce them further to woo companies from other EU nations if Britain doesn’t get its way in negotiations. May’s advisers have floated the idea of bringing the headline rate down to as little as 10 percent, the Sunday Times reported in October.

German Chancellor Angela Merkel said on Thursday that with the prospect of lower tax rates in the U.K., the EU would have to work on more harmonization of corporate taxes. “It will become a question about how we in Europe can come to a more fundamentally joint position,” Merkel told reporters in Luxembourg.

• STRATEGY: Slashing Britain’s corporation tax rate would have a direct impact on EU economies and any threat to do so may pressure governments to agree to a trade deal that’s advantageous to the U.K., or allow financial-services firms continued access to the single market.

7. Hope that Europe is distracted

It might come as a shock to some in Britain, but Brexit isn’t the EU’s biggest concern this year. EU leaders are grappling with elections in France, Germany and the Netherlands that threaten the status quo, the challenge of what to do with more than a million migrants from the Middle East and Africa, as well as an anemic euro-area economic recovery.

“The EU is beset by multiple disorders and crises as well as insurgent challenges to established political parties and governments -- Brexit and the election of Donald Trump have heightened these trends,” said Michael Leigh, senior fellow at the German Marshall Fund. “In these harsher conditions, Europeans will struggle to uphold the EU’s founding principles.”

• STRATEGY: The U.K. can’t plan for all the distractions that might keep the rest of the EU busy over the next two years but it can use unpredictable events to gain some leverage. While there’s an argument that governments with other things on their minds means the more ideological and rules-based European Commission plays a bigger role in negotiations -- and that’s bad news for the U.K. -- an uncertain and unstable Europe will find it harder to stay united.

Full article on Bloomberg

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