EU Prioritizes Penalties Over Trade

As I have commented numerous times in recent weeks, I am increasingly worried about a collapse in global trade.

Every day there are new stories that suggest this outcome.

Today, EU negotiators prioritized divorce-first penalties over trade relationships in a historic mistake that will gain the EU nothing but pain.

Please consider UK Faces Brexit Bill of up to €60bn as Brussels Toughens Stance

The EU’s Brexit negotiators are pushing for a draft UK exit deal by mid-2018 as part of a narrow, divorce-first negotiating approach that would demand an exit bill of as much as €40bn-€60bn.

Brussels’ rigid plans for the process, outlined to the FT by senior officials, show it is making a priority of a clean separation settlement — and Britain’s payment of a hefty exit charge — over London’s desire to focus on refashioning trading relations.

Michel Barnier, the commission’s chief Brexit negotiator, has indicated to colleagues that he will pursue Britain for an exit bill based on an expansive view of its liabilities under the EU budget.

His team is looking at a gross upper estimate that includes unpaid budget commitments, pension liabilities, loan guarantees and spending on UK-based projects. This would significantly exceed the FT’s estimates of a net bill of €20bn, which strips out UK-bound spending and contingent liabilities.

The commission is also leaning towards assuming Britain remains on the hook for some of the EU’s long-term budget beyond 2019 — planned spending that was promised to member states but not yet marked as a “commitment” in a budget year.

Taking account of these broader assumptions of liability, the commission’s opening demand on Britain’s gross bill would approximately range from €40bn to €60bn, according to the FT’s research.

The EU is preparing to insist that any extension of Britain’s single market privileges be conditional on London accepting free movement, EU rules, and the jurisdiction of EU courts. Such conditions would be extremely difficult for Downing Street to accept, particularly if they continue after Britain’s 2020 general election.

Mr Barnier has toured almost a dozen national capitals already, explaining a perspective on talks that one host described as “absolutely rigid”.

Dangerous Game

“This is all very dangerous,” said one high-level participant in talks.

“There is a serious risk the Brits say, ‘To hell with it, you can sue us’,” said one.

F*** the EU

Essentially, the EU demands the UK to accept all of the EU’s inane rules and regulations without having a say.

This approach by the EU, if they stick to it, is guaranteed to get UK prime minister Theresa May to say “F*** the EU. Hell No, We Won’t Pay”.

Given how attitudes have hardened, I see little hope for a change.

Still More Issues and Demands

To top off the madness, Barnier says “the divorce agreement must resolve several issues: Britain’s departure bill; the status of EU agencies in London; border issues in Northern Ireland and the status of Gibraltar; and acquired rights of cross-border British and EU citizens and companies.”

All of a sudden Brexit negotiations now include Northern Ireland and Gibraltar.

I wrote about Gibraltar earlier and one loyal reader said I was crazy. Well, here it is again, this time from the EU’s chief Brexit negotiator.

Worse yet, all the nations in the EU have to agree to the exit agreement.

Correct EU Response

Given these inane demands by the EU, the correct UK response right now is to file Article 50, walk away from negotiations, tell the EU to get a grip on trade reality and to pick up the phone when conditions have changed.

Such conditions might be sooner than anyone expects. Merkel may soon be gone, and a member of Beppe Grillo’s Eurosceptic Five Star Movement may be Italy’s next prime minister.

Related Articles

Fair Trade

Such discussions inevitably bring up the discussion of “fair trade”. Here are two additional articles to consider.

  1. Reflections and Reader Comments on Free Trade: “China Doesn’t Play Fair!”
  2. Fair Trade is Unfair; In Praise of Cheap Labor; Are Bad Jobs at Bad Wages Better than No Jobs at All?

Deflationary Collapse Coming Up?

Right now a collapse in trade is my baseline scenario. Should that occur, I assure you the result will be anything but inflationary.

For further discussion, please see Mortgage Panic as Rates Rise: Inflation Scare or the Real Deal?

Finally, those who wish to understand how this mess transpired need only read Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold’s Honest Discipline Revisited.

Mike “Mish” Shedlock