These notes are based on recent meetings in Berlin, with figures in the German government, and in Brussels, with officials in the institutions. Written for friends of the CER, they are not for publication and should not be cited
In Berlin the notes cover the divergent views on how to respond to Emmanuel Macron, and the hardening German approach to Brexit. In Brussels the notes are mainly about Brexit, and in particular the infamous Downing St dinner, the EU’s demand for an increasingly large financial payment, the arguments over the rights of EU citizens in the UK and the emerging differences over future relations and transitional arrangements.
BERLIN
RESPONDING TO EMMANUEL MACRON
Opinions differ sharply between the two sides of the grand coalition. The Social Democratic Party (SPD) is enthusiastic about a ‘grand bargain’ between France and Germany, and believes that Germany has to help Macron succeed.
A senior figure in the (SPD-controlled) Foreign Ministry says that France and Germany should be ambitious for a concordat, cutting across several sectors, stretching from the economy to defence. “Why not have a project for a Franco-German man on the moon? Or a new Elysée treaty?”(That 1963 treaty, signed by President de Gaulle and Chancellor Adenauer, established deep co-operation between the two countries.) He said France and Germany should provide leadership that the rest of the EU should follow.
Claiming that foreign minister Sigmar Gabriel held similar views, this figure said that Germany should compromise on its orthodox approach to the eurozone; Greece and Italy should be given more fiscal freedom Germany should support expanding the EU budget to more than 1 per cent of GDP so that the EU could invest more. He said Macron had to be allowed a “victory” against Germany. “We should spend more on infrastructure. We should do joint Franco-German state bonds as a stepping stone towards eurobonds”.
He said Germany should put the EU’s interests ahead of its short-term national interests – in a nutshell, be more ‘Kohlian’. He claimed that in a new coalition agreement with the CDU/CSU, the SPD would push for these goals and achieve some of them. The party might take back the finance ministry, which had been SPD-controlled in Merkel’s first coalition with the SPD, between 2005 and 2009.
Another senior figure in the SPD establishment was in favour of a broad-based compact between France and Germany, covering security and defence as well as economics. He thought that if France appeared to be doing more to help European and German security – and there has even been talk of its nuclear umbrella extending eastwards – Germany would have to accept some of Macron’s requests on the euro.
However, Merkel’s closest advisers and many senior Christian Democrats take a very different line on Macron. One said that Merkel was not keen on a grand bargain with the new French president. “Germany is not indebted to France, if Macron wants to reform France that is good for France’s levels of employment, growth and self-esteem. The rest of the EU should not pay France to do what is good for France. In any case most French voters care more about things like borders and jobs than eurozone governance.” This adviser nevertheless said that Germany could work closely with France on migration, Brexit, Trump and protectionism. “Much can be done without institutional change or new EU treaties”.
He said a new treaty would not be on the EU’s agenda for a long time because the members were unwilling to share sovereignty. He did not rule out mutualisation of sovereign debt in the long term, but only “if others agreed to clean out the risks in their systems, eg Italy would have to stop its banks buying government paper.”
The adviser denied reports that Germany had become more favourable to the concept of a ‘multi-track’ Europe – the idea that not all member-states have to sign up for the same policies. “We have always said it is best to do things with everybody, and only if that doesn’t work, resort to smaller groups. That is what the leaders of France, Germany, Spain and Italy said when they met in Paris recently, it was nothing new.”
Merkel’s adviser disparaged the idea that Brexit meant that Germany needed France more than in the past. He said it did not change the fundamentals of Franco-German relationship except that some small members were now more worried that Paris and Berlin would dominate the EU, so Germany had to pay extra attention to the interests of small countries.
BREXIT
The SPD and Christian Democrats agree on the key points on Brexit: 1) keep the 27 together; 2) being outside EU must look less good than being in; and 3) develop the best possible relationship with the UK when it is outside. As one junior minister said: “We do see a contradiction between points 1 and 2 on the one hand, and 3 on the other. But there must be a price or others may follow the UK out.”
There is some disdain in Berlin towards Martin Selmayr, Juncker’s outspoken chief of staff. As a Chancellery official put it, “Michel Barnier negotiates for the EU, and we are in close touch with him. The 27 will be in the driving seat, not Selmayr and Juncker.” This official reminded me of Wolfgang Schäuble’s quip: “What is the difference between Selmayr and God? God know he’s not Selmayr”.
A junior minister said he hoped for a lot of co-operation with the UK on security, and the Common Foreign and Security Policy (CFSP) post-Brexit, though it was too early to think about structures. But he was worried about the trend of UK foreign policy: “We see the UK becoming more divergent from the rest of the EU on CFSP because of Trump”. He mentioned the vote in the EU foreign affairs council against reaffirming support for a two-state solution for Palestine; the muted UK reaction to the recent Turkish constitutional referendum; and British defence secretary Michael Fallon seeking to block the EU’s efforts to set up a military HQ. The minister nevertheless said Germany was open to bilateral defence co-operation with the UK, eg joint units or assets.
One of the Chancellor’s advisers – whom I saw just after the infamous Downing St dinner between Juncker and May – thought the British government was deluded, because the prime minister had stuck to the line that “we can do everything in two years, with enough political will.” He worried that the UK government was still saying the future relationship could be frictionless, and that it had not prepared public opinion for what lay ahead.
On financial services, the adviser said Germany was happy, for now, to back the French line that the EU’s negotiating guidelines should not mention financial services (and they do not). When he added that the UK would not get equivalence in that area, the following exchange ensued:
- But surely the current rules allow equivalence?
- They are not designed for a large financial services centre like the City.
- But your finance ministry says it agrees with the British that equivalence should be put on a legally stronger footing, so that the Commission cannot revoke it at 30 days’ notice.
- The finance ministry won’t be leading this negotiation.
- But why not allow equivalence and then agree to consult the UK on new rules for financial services?
- We don’t want new institutional set-ups or an alternative to the ECJ. In extremis we could think about a consultation mechanism, but UK cannot be a rule-shaper like Norway is in the EEA, as it won’t be in EEA. The problem is what happens after the UK leaves, when it alters rules on, say, bankers’ bonuses and then its regulatory regime starts to differ.
- But why not create something like the EFTA court? [which enforces the rules of the EEA in its non-EU members, and which follows ECJ jurisprudence].
- The UK couldn’t put up with that, it wants to take back control.
However, the adviser did not rule out the creation of a new court, modelled on the EFTA court, if the British could live with it.
Why is the EU getting tougher in the argument over money? The adviser said it is not just France and Germany being hard, but the entire EU. He said the “British approach of saying ‘we won’t pay anything’ has provoked us to be harder” and that money doesn’t give UK much leverage over trade relations; “€30 billion compared to €60 billion doesn’t make much difference to us”.
Nor was security a strong British card to play, he said, since the UK needed access to Europol and other EU databases. He reckoned the UK had only one card, fish, since EU boats fished more in UK waters than vice versa.
BRUSSELS
BREXIT
The leaking of the dinner conversation
Those close to Martin Selmayr don’t deny that he leaked the details of the Theresa May and Jean-Claude Juncker dinner in Downing St to the FAZ. They point out that others, close to Barnier, who was present at the dinner, were also responsible for some leaking. However, the leaking from Barnier’s office was about the substance of the conversation, while the leaking attributed to Selmayr was a blow-by-blow account, designed to embarrass the British government.
Selmayr’s motivation remains somewhat baffling. Did he want to strengthen the Tory right so that the talks are more likely to crash? Does he just like being the centre of attention (the leaks didn’t attribute comments to Barnier, which may reinforce the impresson that Juncker and Selmayr are in charge of Brexit)? Was his purpose to persuade the German political class that the British were batty and that Germany should therefore take a very tough line on Brexit? Selmayr’s friends say Juncker was annoyed, shortly before the dinner, to learn about the UK blocking a €6 billion budget adjustment (in the ‘mid-term review’) because of purdah rules that apply during election campaigns. The UK had earlier given its consent to the new budget provisions.
Furthermore, the dinner itself, though polite in tone, revealed Theresa May’s position in a way that shocked her visitors. They felt that May’s table talk showed that the recent work they had done on educating the British had achieved very little. The European Council president, Donald Tusk, had had a similar meal with May a few weeks earlier (which did not leak); he and his entourage heard similar comments to those heard by the Juncker team and were also perturbed. The EU side has also become alarmed by the lack of clarity in the UK over who will be their negotiating partner: Brexit secretary David Davis or his permanent secretary, Olly Robbins. Or, as Theresa May indicated at the dinner with Juncker, she herself – a point which suggested she did not understand that the UK would have to negotiate with the Commission rather than the heads of government.
May’s line seems to be the UK is not obliged to pay money but could do so as part of a deal involving an FTA; but she will only agree to a sum at the end of the negotiations. She keeps saying the FTA can be done in two years; that the deal on citizens’ rights can be done in two weeks; that talks on future relations should start soon and run in parallel to the Article 50 talks; and that she hopes the talks won’t be transparent. As one of the most senior Council officials said, “If she believes these things it is a real problem. But probably she is being partly tactical”.
The senior people in the Council are not happy with the FAZ leak. As for Selmayr’s tweet that the purdah rules must be symmetrical and that talks cannot start till after the UK election, they said that will delay talks by just two weeks (the Commission will only get its mandate approved on May 22nd). Council officials say they cannot stop the Commission deciding to delay talks in this way. The Council says a lot of members are annoyed about the UK blocking the revision to the budget; the extra money would be spent on migration, including refugees in or departing from Syria or Libya, and the Juncker investment plan.
From the British point of view, perhaps the most alarming consequence of all this is the emerging view in the EU’s capitals and institutions that there is a divergence between the top British officials on the one hand, and May and her closest advisers on the other. Senior EU figures say that when they talk to UK officials, they get the impression that the British government is learning about the key issues and becoming more realistic in its expectations. But then when they hear May speak, they realise that some of her views are rather different.
The EU raises the stakes on money
Over the past few months, the EU line has got tougher and tougher, particularly on money. The sums demanded – though no figure has been written into a formal document – have risen in recent weeks. The new line is that the UK must pay everything it would have paid in the last two years of the current multiannual financial framework (MFF), (including payments for farmers and administration, which the EU had not initially demanded), an upfront payment to cover contingent financial liabilities, and a payment to cover political commitments that are not legally binding (such as money for refugees in Turkey). France, Poland, Slovakia and Belgium pushed hard for farm payments due in 2019 and 2020 to be included. The member-states have also decided not to allow the UK its share of the EU’s assets, though the Commission had earlier wanted to allow the UK such a share.
So how much do they want? A senior Commission official said “substantially above €60 billion” but a senior Council official said “a bit less than €70 billion.” He said the British would have to accept some sort of methodology for calculating the payment, before the EU agreed to trade talks. The trouble with this is that it would allow somebody to calculate the rough sum concerned, which the British could not accept before the end of the two years. The principal of paying in something, which 10 Downing St seems to accept (at least some of the time), is not enough for the EU.
A senior Commission person said: “If the UK wants a legal relationship with the EU in the next 20 years, the money issue must be settled”. The EU’s biggest concern is the last two years of the current seven-year MFF, which will leave a hole in the budget of some €17 billion. The EU side would be happy to spread out the payments from the British over many years. “But we’ll need de facto a rough number in 2017”, said a Council official. He didn’t see how the gap on the money could be bridged, and feared the talks could fall apart on this issue. Some British officials share his gloom on the money question.
The British response
No 10 is incandescent about the FAZ leak. “The PM cares about trust, confidentiality and respect,” said a British official. “She particularly dislikes the play-up of splits between ministers and officials.” British officials accept the 27 are getting tougher but say the Commission should be moderating rather than pandering to them. They claim there was no new UK position at the infamous dinner, eg the prime minister’s comment that “everything can be done in two years” was not new. The British reckon the 27 are breaching Article 50 in saying that the money must be settled before trade talks begin; the article says the exit talks must take account of the future framework, which implies parallel negotiations (CER chairman Lord Kerr, the author of Article 50, agrees with the British government on that point).
“In the last two weeks there has been better understanding on all sides but perhaps we all heard what we wanted to hear,” said one British official. He was adamant that purdah rules would not allow the €6 billion budget revision to be approved, but hinted that after the British election the block would be removed. He thought Germany was being so tough on money because it feared the next MFF could blow the EU apart, with North v South and West v East becoming fault-lines. The British absence would, over the seven years of the MFF starting in 2021, leave a €70 billion hole that would be plugged through either spending cuts or through greater contributions from the richer countries. This official suspected that Germany hoped to squeeze the British over Brexit in order to create a financial cushion that would ease future tensions over money.
The rights of EU citizens
The EU will agree to start talks on future relations when there has been ‘sufficient progress’ on Article 50, which means movement on citizens’ rights as well as money. But the two sides appear far apart on rights. The UK has made no proposal but its officials talk of amending immigration rules to give EU citizens an extended right to remain; it envisages its own system of national rules. That is not good enough for the EU, which wants the UK not only to guarantee the rights of EU citizens but also do so it in a way that would entirely replicate the EU system (the EU has even drawn up a list of laws that it wants the UK to copy and paste). The 27 want these rights to be enforceable by the ECJ (some Council officials think that demand for extraterritoriality is unreasonable, given that the UK would have left the EU).
The EU side says that UK talk of a couple of sentences in the next European Council conclusions to guarantee citizens’ rights is not enough. The EU says if the UK doesn’t accept that all current rights will be maintained, and it decides to pick and choose among those rights – and this seems likely – the deal will take ages to sort out.
The EU worry is that the UK will promise certain rights, but then make it difficult for EU citizens to take them up because of long forms and burdensome procedures. Hence the EU’s guidelines say “citizens should be able to exercise their rights through smooth and simple administrative procedures”. Said a top Commission official: “The EU citizens need legal certainty, they cannot rely on a unilateral promise. This matter must be dealt with in the Article 50 treaty with a role for an adjudicating body like the ECJ …We could agree to an EFTA-style court in the long term, but not for the interim deal.”
A senior Council official said the EU needs a detailed agreement on citizens’ rights, though not legally binding, this year. He thought the UK “either doesn’t get technicalities or is playing a cynical game to make us look like the bad guys”. Maybe the UK was trying to play rights as a ‘card’, given that this issue was a priority for the 27.
The Irish border
EU officials say that they cannot make much progress on new arrangements for the Irish border till more is known about the future relationship, and notably its customs procedures.
Is a breakdown of the talks likely?
Senior officials in the Council and Commission think the chances of a breakdown are quite high. One top Commission official thinks the UK won’t move on money this year, so the earliest that the EU could judge there had been ‘sufficient progress’ would be a summit in February or March. There would need to be a new German government in place (expected in December), he said. British officials are more optimistic and hope that ‘sufficient progress’ could be ascertained perhaps in October or more likely in December.
The Commission official thought the UK was unlikely to soften its position without some dramatic and unexpected shock, perhaps economic, that shifted public opinion. In addition, Barnier would have to put pressure on the member-states to soften their position. He thought if there was no deal on an FTA and the transitional arrangements leading to it, there would not be an Article 50 accord of any sort.
In the Council, a senior official said Tusk would work hard as a bridge-builder and that the European Council will remain in control of the negotiations. The problem with this slightly optimistic point is that the member-states are currently hardening their line. In both the Commission and the Council, officials say their biggest worry is the UK press and its interaction with the Tory party.
Future relations
For now, the Brussels institutions are not thinking much about the future relationship, as the focus is on Article 50. Barnier envisages three deals for the future, on trade, security and universities/R&D. British officials understand that a complete deal on the future is not possible in two years but their prime minister apparently does not share their view. One Council official acknowledged that at the moment, EU governments were not concerned about economic outcomes, but thought that could change as the talks on the future progressed.
The City
On the EU side, opinions differ on whether it would be destabilising in the short term to move the clearing of euro transactions into the eurozone. But what the UK is asking for on equivalence – mutual recognition of financial rules and a mechanism for sorting out differences – would be unacceptable to the EU. The 27 fear May will try to ‘cherry-pick’, with special deals for certain sectors like the City.
Financial services have not been included in the European Council’s guidelines for the negotiations, at France’s behest. EU officials say the point they want to make is there is no guarantee of including them in the FTA and that there would be strict conditions if they were included. Apparently no government resisted France’s initiative on this point.
Justice and Home Affairs
To what extent can Britain be ‘plugged into’ various EU instruments on security, after it leaves? There is no precedent for giving a non-EU, non-Schengen member access to the Schengen Information System (SIS). The UK uses the SIS a lot. ‘Data adequacy’, a kind of equivalence for data flows, will be a key issue for Britain’s relationship with the SIS and other EU databases. The US does have data adequacy with the EU, despite having different rules on data privacy.
Existing EU rules allow only member-states to take part in the European Arrest Warrant (EAW). But one possible way forward for the UK could be to follow the example of Norway and Iceland, which recently negotiated a ‘surrender deal’ with the EU, not yet ratified. This agreement gives them a relationship with the EAW that falls short of full membership, and sets up a special court, which is not the ECJ.
What about Europol? The Danes are associated with Europol through liaison officers inside it. But they still have to request information from it and lack direct access. The UK may be able to draw an advantage from its huge contribution to Europol: according to some estimates, 40 per cent of the information flowing into this police office comes from, or is related to, the UK.
Aviation
A senior Commission official involved in transport says that he cannot see a way round the difficulties the UK is creating for itself. It wants to stay in the common aviation area, and also the European Aviation Safety Agency (EASA) regulatory body. Yet ECJ jurisdiction is a requirement of both (Norway and Iceland, in the common aviation area, accept ECJ rulings directly; Switzerland, also in it, agrees to implement ECJ rulings indirectly). The official said that the airlines and the aircraft manufacturers are worried that important parts of the British government appear not to understand the key issues on aviation. If a solution cannot be found on EASA, flights between the UK and the EU would stop on April 1st 2019.
The transitional deal
Barnier says that both sides must leave aside work on the transition for now, until the shape of the future deal emerges. Some member-states agree with him. But the British have an obvious interest in the transition being discussed soon, before businesses relocate away from the UK. Some members-states would also like it tackled soon, according to a Council official – particularly those with a lot of British tourists, or fishermen in British waters, or exporters to the UK. He said the transition could probably be addressed in the autumn in parallel with the other two sets of talks (on Article 50 and the future relationship).
Another Council official said that the British understand very well that the transition will carry a price, if it provides for a continuation of the single market or the customs union. But he added that they have not said what they want, or indicated whether they will pay the price (of ECJ jurisdiction, free movement and budget payments).
Though the Article 50 agreement does not require national parliament ratification, there have been suggestions that some parliaments may demand the right to vote on the transitional deal, especially if it touches on national competences. Some say the Bundestag could make this demand. The Council says the transition doesn’t require national parliament ratification. The Commission also doesn’t want that, as there would be a precedent for other EU treaties.
MACRON AND ITALY
The general view in Brussels is that the Merkel line of ‘no reward for France if it reforms’ is more likely to prevail than the SPD line of ‘let’s do a grand bargain with Macron’. Having a stronger SDP after the elections will not alter the fundamental point that German public does not want a transfer union.
Nevertheless those close to Juncker say the EU will try to help Macron in the short term, between the presidential and parliamentary elections. The Commission may come up with something that the Germans can live with, perhaps involving a roadmap on economic and social convergence, with new joint instruments. The Commission thinks Merkel is open to this. But its officials say this year is too soon to talk of a grand bargain between France and Germany. Next year would be the window for that, and Brexit could help to bring the two countries together.
Juncker’s officials emphasised that it won’t be just the Germans resisting Macron’s desire for a transfer union, but also Austria, the Netherlands and Finland.
In both the Council and the Commission, officials think that new Macron initiatives with Germany to shift the EU’s economic role could help Italy. They worry much more about Italy than France and want the EU to find a way of supporting reform in Italy. Juncker’s aides believe that Germany will be open to helping Italy.
EU officials hope Italy does not go for early elections. By the autumn, they hope, its banks will be looking better and the country will be more stable. They expect the election – as long as it is not early – to produce a moderate coalition government.
Charles Grant, May 2017