Right Now, May Offers No Defense From EU Brexit Demands

Ever since Theresa May invoked Article 50 and began the Brexit negotiations, a united EU has opened up with a fusillade of demands that has left the UK on the defensive and exposed the weakness of May's negotiating position.

Jean Claude Junker's reported statement that May was in a "different galaxy" when she believes that the EU will negotiate a new trade deal while the Brexit negotiations are going on was firmly and publicly backed up by Angela Merkel. That has left some Conservatives talking up the possibility of not coming to a new trade agreement with the EU and letting trade with the Continent fall under normal WTO rules. While that may be a good sound bite, it is willfully ignoring estimates that have shown that moving to WTO rules would shrink UK GDP by 5% to 10% over just 15 years.

In addition, Junker made clear that their would also be a "severance" fee for Britain that is reported to be around $109 billion. This fee would cover the prior financial commitments that the UK has made while still a member of the EU. May's response to that is to say there is nothing in the EU treaty that details such a severance fee, which basically amounts to a threat to take the EU to court. That's not exactly optimal when there is a two-year time window for completing the negotiations.

After Junker's visit, a special EU leaders' summit laid out the European demands for Brexit and they present real difficulties for the UK. The EU wants to legally ensure the rights of its citizens who reside in the UK, ensuring that they maintain the rights granted by the EU. Acceptance of that principle would mean that EU citizens in Britain would continue to actually have more rights than UK citizens, particularly when dealing with bringing family members into Britain. In addition, the demands open up the issue of Gibraltar and Northern Ireland's status to remain in the EU.

But the real jewel in the negotiations for the Europeans is London's financial industry, even if it remains unstated. The European Commission is now proposing that Euro-denominated derivative transactions be cleared through a clearing house located inside the EU or, if not, be regulated by the EU. Right now, around three-quarters of all Euro-denominated derivative trades are cleared in London, primarily by the LCH. This issue is a significant part of the larger question of how much access banks and trading houses will have to the Euro market after Britain leaves the EU. This has already caused a pretty steady trickle of financial industry jobs leaving London and moving to the Continent and all the major banks already have made contingency plans to move significant portions of their business and staff within the EU should it be necessary. Since the financial industry accounts for around 7% of UK GDP, any major changes would be a serious blow to the British economy.

Theresa May's response to all this is remarkably cavalier as she claims this is just the EU trying to interfere in the UK elections. That really is pretty weak tea. But her attitude apparently extends down the Brexit negotiating team, one of whom said about the EU demands for Brexit, "To be honest no-one is paying too much attention to these ‘guidelines’ – I’ve had them in my inbox for two days and not bothered to read them." Comments like that make EU officials wonder if May's government understands the seriousness and difficulty of the task ahead. Said one Senior EU official, "What irritates the EU side is that the British are treating this as if it is a negotiation of equals, as if the interests of one departing state are equivalent to the interests of 27 – the reality is that Article 50 does not work like that."

May will most certainly increase her Conservative majority in Parliament in the upcoming election. But, from a distance, she sounds far too much like Donald Trump when it comes to the Brexit negotiations, that all the details will be so easy to work out. Just as Trump has discovered, they won't. May will have a stronger position in Parliament going forward but the weakness of the UK negotiating position when it comes to Brexit will remain.