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Monday, 8 May 2017

How will the negotiation game between the United Kingdom and the European Union end? Here could be some answers!

The negotiations between the United Kingdom and the European Union about the British “divorce” from the EU have officially started a month ago with the handover of the Article 50 letter from Theresa May.

And although the prelude to the actual negotiations, featuring the chairman of the European Commission Jean-Claude Juncker and British Prime Minister Theresa May, was very rocky – when both had a dispute-laden official dinner at Downing Street 10 and sources around Juncker leaked some of these undisclosed discussion points to the German newspaper ‘Frankfurter Allgemeine’ – these negotiations will soon start for real.

Head of Service Michel Barnier of the European Commission and his team, as official representatives of the EU, will negotiate with PM Theresa May and assistant-negotiator David Davis, who represent the United Kingdom.

To the initial annoyance of the EU negotiators, PM Theresa May suddenly threw in the bombshell of organizing general British parliamentary elections in June, in order to get a stronger mandate for these tough negotiations with the EU. 

However, when the mandate of Theresa May is reinforced indeed after the parliamentary elections, these Brexit negotiations can take off in full force. And all signals do point in the direction of a stronger mandate indeed for May, as the Labour Party of Jeremy Corbyn  is virtually blown to smithereens in the prelude to these elections and the liberals of Nick Clegg could never take over the role of 'classic' Labour for most left-wing Britons.

Even though the stakes of the negotiations are extremely high for both parties involved, the starting point is relatively simple:

The target of both parties is: 
  • (a.) to come to an orderly divorce regarding the partition of the mutual estate and a justified payment of the pending bills and financial obligations that the UK has with respect to the EU and
  • (b.) to reach a series of trade agreements between the UK and the EU countries for the time after the divorce. 
The United Kingdom would like to start both negotiations at the same time, while the EU is adamantly in favour of finishing (a.) first, before starting with (b.).
Both the EU and the UK will initially try to reach the most favourable results for themselves with these negotiations, while trying to give as little away as possible to their opponents. Therefore these upcoming negotiations between the United Kingdom and the European Union can –and perhaps must – be considered as a (very serious) game. 

It is a game in which there can be clear winners and clear losers and in which both parties could lose dearly at the same time. But it is also a game in which both parties cannot both win clearly at the same time (i.e. at least in my humble opinion) and in which the “best result” for both parties is a compromise that probably all people tolerate, but none of the people really love.
I’ve written this down in the following negotiations schedule:

Chart 1 – wins and losses in the game

The stakes and chances for the negotiations game
Chart created by: Ernst's Economy for You
Click to enlarge
The reason that both parties can win the negotiations, but not both at the same time, is that the goals are simply too contradictory for a mutual win:
  • Extremely favourable separation and trade terms with various opt-ins for the UK (i.e. an EU ‘a la carte’ option) and on top of that an effective end to unhindered immigration of EU citizens into the UK would mean a clear victory for the UK, but a dear loss for the EU;
  • A divorce at such unfavourable terms for the UK that it would cause economic hardship and severe loss of prosperity for the country and would scare the other members of the EU away from only thinking of such a ‘~exit’ would be “great “ for the EU, but a terrible loss for the UK;
So the best outcome would be an outcome in which both parties sacrifice some points from their initial tough stance and give some pork away to their opponents, in order to reach a mutually acceptable result. However, this will probably take quite a long time and there might be some very tough lumps to swallow for both parties.

And last, but not least: the funny and at the same time very awkward thing is that both parties can totally lose this game – at least that is what I think. That would be when both parties get so alienated towards eachother in the negotiation process that they ‘punish’ eachother into a mutually terrible deal or perhaps worse: a huge political-economical (or even military) conflict.

These circumstances make it extremely important to play this game “hard and smart”, but with a keen eye for the opponent’s needs, concepts and visions.

I laid down a few assumptions for this game in the following three schedules, accompanied by my comments:

Chart 2 – greatest gain and most feared loss

The greatest gain and most feared loss in the game
Chart created by: Ernst's Economy for You
Click to enlarge
As I mentioned before, the UK wants an ‘EU a la carte’ with all the opt-ins, like free trade and free traffic of goods and finances between the UK and the European continent, but with an opt-out for the now mandatory free traffic of people. All privileges and no obligations towards the EU. 

The biggest fear of the UK in this game is that they get a very poor (or even no) trade deal with the EU members: a situation that brings the UK's citizens and companies economic hardship and massive loss of prosperity. 

Or, perhaps just as important, that the UK has to swallow an enormous lump with regards to the unhampered immigration of European citizens: that they have to carry the burdens of the EU membership, without having the advantages of it anymore.

Where the EU would like to have a trade deal with the UK that is as poor and hideous as possible, but without setting the whole situation on fire, the EU fears most a deal that feels like the dreaded ‘EU a la carte’ that the Britons want. 
When this would happen indeed, this could lead to other countries abolishing their EU membership, under the right circumstances and peer pressure.

The hardest thing is finding a viable and workable compromise here, that meets both parties’ requirements more or less, without both parties giving in too much.

Chart 3 – possible compromises and important influences for both parties

The possible compromises and important influences for both parties
Chart created by: Ernst's Economy for You
Click to enlarge
A few of the most important industries for the United Kingdom as a whole are the financial and commercial services industries, mainly situated in the greater London area. These industries are for me the cork on which the UK floats and these must be protected at all costs. Although the heavy industry and the manufacturing industry are also very important for the country, the UK is not so competitive in these areas. 

So perhaps the UK are willing to give in with regards to the latter industries, to the advantage of the commercial and financial services industries.

This is the reason that I think that a workable trade and divorce agreement with the UK can be found through the EU ‘protection’ of the greater London area and the financial and commercial companies in this area. When a trade deal can be reached here, the UK might be willing to swallow a few lumps with respect to UK immigration of EU citizens and moderate trade levies on other British industries.

A workable solution for the EU would probably be a trade deal that puts some moderate (but not extremely high) levies on British products and services. And such a deal should always incorporate a warrant for the current and future(?) EU immigrants in the United Kingdom, that they can live there and work there for as long as they want, without being hampered or forced out by the UK government or the British population as a whole.

There is definitely some manoeuvering room there, although negotiations should be held very cautiously.

However, what could negatively influence the circumstances for the negotiations is the British ‘once we were an extremely powerful and great empire’-complex, that makes that the UK feels much more powerful and strong than the country actually is at the moment. 

This complex could force the country to play high stakes poker with the EU, which could lead to the dreaded ‘both lose’ outcome of the game.

Other influences are the risk of a future ScoNIxit – an exit from the UK by Scotland and Northern Ireland as a consequence of an extremely unfavourable British trade deal – or an escalating conflict with Spain about the island of Gibraltar.

What could negatively influence the strenght of the EU negotiators is when countries like f.i. The Netherlands and Ireland act as partypoopers / dealbreakers for the EU, when they start to fear for their formerly prosperous trade deals with the UK.

The EU always had a history of acting like 28 (now 27) frogs in a wheelbarrow and henceforth there is a considerable chance that the UK tries to play the ‘divide and conquer’-card with its favorite trade partners, by covertly promising them slightly better trade deals and slightly lower import levies than the rest of the EU. 

These ‘rogue’ trade partners, with their then hidden agendas, could put fierce pressure on the negotiation process and could act as a fission fungus within the EU itself.

Nevertheless, at this moment the EU seems very much one block in the initial negotiations with the UK, as all countries seem to understand the importance of a tough deal for the UK.

 Chart 4 – The ‘first strike’ and the tipping point

The first strike in the negotiations and
the possible tipping point in the game
Chart created by: Ernst's Economy for You
Click to enlarge
As far as I can see from a distance, the current British stance towards the EU negotiators seems to be: “We are the UK and who are you?!”

The Britons seem overly confident in their aim towards their desired ‘EU a la carte’ condition, with plenty opt-ins and no EU immigrant issues for the distant future anymore. They currently try to get the best for free and don’t seem interested in what their negotiating partners think or want. They therefore utterly ignore the desires and demands of the European Union.

This is not a viable option as it will undoubtedly lead  to anger and alienation among the European negotiators. 

The Dutch journalist Joris Luyendijk, who is a steady columnist for the Guardian, already heaved a sigh, when he pleaded in an Op-Ed that the UK could not be considered a serious country anymore:

And then there is Theresa May herself. Her claim this week that the EU is trying to influence the elections in Britain through a leak to the Frankfurter Allgemeine Zeitung is the latest example of a long list of statements that simply make no sense. Britain is not the centre of the world, and the idea that EU leaders would sit together plotting a victory for Jeremy Corbyn is laughable.

Far more likely is that EU leaders decided to leak the proceedings of their dinner on Sunday with May in order to warn their own public about how irrational Britain has become. How the country believes itself to have the upper hand in a negotiation with a group of nations seven times its own size. How it wants to be part of the single market while refusing to recognise the authority of the European court governing that market. And, most alarmingly, how badly informed May still is about the practical consequences both of Brexit and of a no-deal crash out of the EU.

Joris Luyendijk is always quite critical and rocksteady in his approach towards the English and their habits, but what he says definitely makes sense here. 

However, I believe in a tipping point in this game, when the emotions are finally out of the way and when both parties finally try to avoid getting the scenario that they absolutely not want. 

Then is the time to do business, at last!

The EU on the other hand is akin more to Clint Eastwood currently than Clint Eastwood himself: 

“Do you feel lucky, British punkette?! Do you really think you can get away with a Brexit without being severely punished for it? Well, you’re dead wrong, woman! I’ll make you pay for it!”.

But the EU is no Clint Eastwood (because there is only one Clint Eastwood) and they won't manage to stay this tough for two years in a row! 

So in order to prevent from the divide-and-conquer scenario within the EU itself or from a full-blown trade war with the UK, the EU will leave this ultra-tough stance quite soon after the British elections in June. Nobody wants this British stew to simmer for too long and spoil it all. And that might be the tipping point for the EU.

It is an interesting negotiating game and a tough one... And the stakes of it are very high.

These are my ponderings about the outcome of this game. I am sure that some of these concepts might indeed play out, while others might deviate from reality in the coming months and years.

I would put my money on both parties chosing in the end for the ‘no winners, no losers’ scenario, as they gives the best chance for a workable compromise for both parties for the near future.

However, with emotions running very high during the negotiation process in the coming months and years, the ‘complete loss for both parties’- scenario could also play out.

Then we could be in for a hot spring of 2019!  Place your bets! Rien ne va plus!

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