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Brace for a 60-Billion Euro Brexit Battle

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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Like many a divorce, the U.K.'s separation from Europe threatens to get bogged down over money. While the U.K. wants to focus straight away on building a post-European Union identity, for the EU the first order of business will be the 60 billion euros ($64 billion) the bloc says Britain owes it.

QuickTake Describing a Post-Brexit Trade Deal

Prime Minister Theresa May plans to formally trigger Brexit by the end of March, with parliament expected to pass the relevant legislation within the next few weeks. Negotiations will start soon after. That's when May is likely to get presented with the EU's final invoice.

A senior Brexit negotiator for the EU told me last week that the EU will be obliged to force Britain to meet its financial commitments; otherwise its own credibility would be undermined. Moreover, the EU will demand an early acknowledgment from May that she's willing to pay the exit bill before the rest of the discussions can proceed, the negotiator said.

The EU says that Britain owes money for civil-service pension liabilities, projects already underway, loan guarantees and other unpaid budget commitments. While 60 billion euros is the top estimate, even the lowest figure I've seen mentioned by any EU official comes to 40 billion euros -- about the same as total U.K. central government spending on education each year.

That EU demand for money is bound to lead to an awkward conversation. One piece of propaganda used by the pro-Leave camp in the referendum campaign was the claim that Britain's EU contributions could be diverted instead to the National Health Service. "We send the EU 350 million pounds a week," was the slogan emblazoned on the side of a campaign bus. "Let’s fund our NHS instead."

That implicit pledge of more money for the health service was swiftly abandoned once the referendum was over. That claim was always absurd; it didn't take into account that Britain gets a rebate, which is applied straight away (or indeed any of a number of other EU payments that would stop).

Still, Brexiters are likely to kick up a fuss about the prospect of handing money over to leave the bloc. John Redwood, a Conservative member of parliament, said earlier this week that talk of the U.K. paying to leave the EU is "all nonsense." Here's what he wrote on his personal web site:

There is no power in the EU Treaties to impose an additional one-off levy on a state as it leaves the EU. Nor is there any power in the Treaty to demand any continuing budget contributions after departure. This is wise, as of course once a state leaves, it leaves behind the judicial authority of the EU which would be the means of enforcing any such payment. Article 50 is clear. Once the state leaves it has no further rights and benefits, and no further duties or obligations.

The departure bill isn't the only obstacle the talks will have to surmount. The U.K. remains an EU member during the two years set aside for negotiating its exit, so in theory it can participate in setting rules and regulations that will apply the the remaining member states after the U.K.'s departure. That arguably gives Britain an unfair advantage.

There's also the U.K.'s desire to work now toward trade agreements with non-EU members. That's a sensible approach to creating a post-Brexit mercantile environment, and one that the EU can probably support. But it will demand some finessing of the existing rules -- which requires agreement from Britain's EU partners -- that bar EU members from making solo arrangements.

At the moment, the talk is tough. A British threat to turn the nation into a tax haven by cutting the levy on corporations has angered EU officials including Dutch Finance Minister Jeroen Dijsselbloem. In retaliation, EU negotiators are mulling "a clause in a future deal with the U.K. that would void all undertakings if London were to depart significantly from its current economic and social model," the Brussels-based news service MLex reported on Friday.

It's a reminder that the U.K. isn't negotiating in a vacuum; each of the remaining EU 27 members has its own agenda, and some of those will conflict with British desires. "The hardliners are more numerous than it appears," Mario Giro, Italy's deputy foreign minister, told the Guardian newspaper in an interview published on Monday. "This will be an economic war. Let's say an economic cold war, and we are not in favor of it."

If the EU insists that May pays her way out of the bloc and May refuses, the talks could be over before they even begin. May said earlier this month that she's "sure that no deal for Britain is better than a bad deal for Britain." But the same may be true for the rest of the EU. And while it's hard to envisage exactly what "no deal" would look like, it's clear that an impasse would benefit neither side in the divorce.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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