Britain Warns EU It Won’t Pay Brexit Bill Without Good Trade Deal

(Bloomberg) -

Britain has warned that its promise to pay the Brexit bill depends on getting good trade terms from the European Union, as British Prime Minister Theresa May’s team draws up plans to hold back money if the bloc backslides on a deal.

Senior British officials have privately discussed the idea of halting payments to Brussels as a fallback option that could be triggered if negotiations on trade go wrong, three people familiar with the matter said.

The plan is not Britain’s preferred outcome, but some in PM May’s administration believe it could be necessary in case the EU tries to renege on a future commitment to a free-trade accord.

As part of a draft withdrawal agreement reached last December, PM May signed up to paying up to 40 billion pounds ($56 billion) towards Britain’s ongoing liabilities for pensions and the EU budget after Brexit. Talks on the future trade relationship are due to begin next month but a deal won’t be legally enforceable before Britain leaves the bloc, putting Britain in a potentially weak position.

“The withdrawal agreement has to take into account the future relationship,” Brexit Secretary David Davis said on Tuesday, when asked about Bloomberg’s report that the money could be linked to the EU delivering its promises on trade. “They are bound up in one, they’re not separate issues.”

The radical option to hold back the cash comes at a sensitive time, with British ministers seeking in public to build mutual trust with the EU rather than stoke suspicions. Britain is trying to persuade the bloc to cooperate on plans for an ambitious trade agreement, which will come into force after the split.

On Tuesday, Davis outlined his idea for future collaboration, promising the other 27 member countries that Britain won’t try to undercut them by tearing up regulations when it leaves.

PM May is planning to announce her goals for a detailed draft trade accord in a major speech next week, with the aim of having a deal drafted by October to be signed soon after Brexit in March 2019.

But the EU says a full trade agreement will be impossible to finish before Brexit. October’s conclusions are likely to form only an outline political declaration rather than a legally binding contract, raising fears among British lawmakers that Britain could be vulnerable if the EU backslides on the deal.

The idea that Britain could threaten to withhold the cash risks reopening the argument over money that nearly wrecked the first stage of Brexit negotiations last year. In Brussels, negotiators are likely to argue that the bill is for liabilities Britain has already accrued and cannot be opened up for debate or linked to future trade.

As one of the biggest EU budget contributors, Britain could use its promised cash payments to the bloc as leverage, the officials said. “Either the EU gives us a trade deal or they won’t get any money at all,” said Iain Duncan Smith, the former leader of PM May’s Conservative Party. “Everything is agreed, or nothing is agreed.”

Speaking on condition of anonymity, three senior officials said Britain would have the option to halt payments of the Brexit bill if EU leaders tried to cut and run.

One said the precise mechanism for paying the cash had yet to be agreed, leaving open the possibility of holding it back, while another said payments are due to be made for years to come, and could therefore be halted if necessary.

British ministers worry that Britain will lose negotiating leverage in the detailed trade talks that will have to take place during the transition phase because the country will already have left the EU. It will also be legally committed to paying the financial settlement as part of the withdrawal agreement — a pledge that will be binding.

The two sides are locked in talks over the terms of the transition period that businesses want to help smooth their path to Brexit — with a deal due to be agreed at a summit next month. Once the transition agreement is finalized, negotiations will move on to the terms of future trade.

Speaking in Vienna on Tuesday, Davis proposed that so-called “mutual recognition” of regulatory standards should continue after the divorce, to allow cars manufactured and approved for sale on one side of the channel to be approved for sale on the other.

“A crucial part of any such agreement is the ability for both sides to trust each other’s regulations and the institutions that enforce them.”