The EU took a tough stance in Brexit negotiations, formalizing previous warnings in negotiating guidelines that European Commission president Donald Tusk sent to 27 EU capitals.

Bloomberg notes EU Says U.K. Only Gets Trade Talks After Progress on Brexit Bill.

In draft guidelines for the talks released to the bloc’s 27 other capitals on Friday, EU President Donald Tusk said discussions over future commercial ties would not take place until “sufficient progress” was made resolving thorny topics such as borders and budgets. May was also told any transitional period to ease the exit would require the U.K. paying money and accepting EU laws.

The tough stance, which formalizes the previous warnings made by EU officials, implies a quid pro quo in which May gets a shot at securing tariff-free trade ties with the U.K.’s biggest market only if she quickly strikes a deal over the bill the bloc wants to impose.

EU Guideline Highlights

  • Negotiations under Article 50 TEU will be conducted as a single package. In accordance with the principle that nothing is agreed until everything is agreed, individual items cannot be settled separately.
  • The two-year timeframe set out in Article 50 TEU ends on 29 March 2019.
  • The European Council expects the United Kingdom to honor its share of international commitments contracted in the context of its EU membership. In such instances, a constructive dialogue with the United Kingdom on a possible common approach towards third country partners and international organizations concerned should be engaged.
  • Arrangements ensuring legal certainty and equal treatment should be found for all court procedures pending before the Court of Justice of the European Union upon the date of withdrawal that involve the United Kingdom or natural or legal persons in the United Kingdom. The Court of Justice of the European Union should remain competent to adjudicate in these procedures.
  • Any free trade agreement should be balanced, ambitious and wide-ranging. It cannot, however, amount to participation in the Single Market or parts thereof, as this would undermine its integrity and proper functioning.
  • After the United Kingdom leaves the Union, no agreement between the EU and the United Kingdom may apply to the territory of Gibraltar without the agreement between the Kingdom of Spain and the United Kingdom.

Domino Theory

The EU fears that if one country leaves, more will follow. That stance is akin to Vietnam War “domino theory“.

The domino theory, which governed much of U.S. foreign policy beginning in the early 1950s, held that a communist victory in one nation would quickly lead to a chain reaction of communist takeovers in neighboring states. In Southeast Asia, the United States government used the domino theory to justify its support of a non-communist regime in South Vietnam against the communist government of North Vietnam, and ultimately its increasing involvement in the long-running Vietnam War (1954-75).

The EU strategy is also similar to gang membership. It’s far easier to get in than leave.

Germany Insists On No Tax Dumping

In addition to Tusk’s demands, Germany Warns U.K. Against Tax ‘Dumping’ as Brexit Era Begins.

Chancellor Angela Merkel’s government will insist that the U.K. rules out tax “dumping” as part of any trade deal struck during Brexit negotiations, according to a senior official from the German economy ministry.

The concern is that Prime Minister Theresa May could choose to resurrect the threat to turn Britain into a low-tax Singapore of the West as a way to extract trade concessions and secure a no-duties deal down the line.

Any future trade agreement between the European Union and the U.K. will only be possible if it’s accompanied by a pledge by the May government to avoid harmful competition in tax and regulation matters, German Deputy Economy Minister Matthias Machnig said in a Bloomberg Television interview.

The latest caution shows that Merkel is firm that some things are not up for discussion. Back in January, German Finance Minister Wolfgang Schaeuble told Bloomberg in Davos that a “race to the bottom” on corporate taxation would not be tolerated.

“We can only conclude a fair trade agreement with advantages for both sides if there are reasonable framework conditions in the areas of tax, regulation and the like,” Machnig said. A race to the bottom in tax and regulation matters “would make trade relations difficult,” he said.

Which Side Is In Control?

Finacial Times writer Philip Stephens proclaimed Brussels Takes Back Control of Brexit.

All the power lies with Europe and Britain holds no cards in the coming negotiations,” says Stephens.

No UK Cards?

  1. The UK can and should walk away from a €60 billion exit price.
  2. The UK can stop EU fishing rights.
  3. The EU will suffer much more than the UK in a trade war, especially with the collapse of the British Pound.
  4. The UK can and should lower corporate taxes more.

For sure, the EU can take such a hard stance there will be no deal. The UK can do the same. How the heck does that put the EU in control?

And the more demands the EU issues, the more likely it is for the UK to say to hell with it all.

Control of a Sinking Titanic

The idea that the EU is in control of anything is like saying the captain of the Titanic was in control of the ship going down.

The danger to the negotiation process is if the EU actually believes the delusional nonsense from Stephens that the EU is in control.

Perhaps this tough stance is just standard negotiation hype. But never discount the stupidity of politicians, especially when 27 nations all have to agree.

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Mike “Mish” Shedlock