This blog explains the six big challenges that could send the Brexit negotiations into a tailspin before they barely begin

Today marks the start of the long-awaited Article 50 negotiations. As Brexit Secretary David Davis enters the talks with his counterpart Michel Barnier, it is a strange irony that, despite this spring’s tumultuous election being a direct result of our referendum on EU membership, the campaign itself and the shock result has distracted the UK’s entire political class from the impending Brexit negotiations. Yet while MPs have been out on the campaign trail and coming to terms with the hung parliament, EU leaders have been consolidating their opening negotiating position. And make no mistake: their negotiating directives expose the sheer scale of the task ahead.

In the immediate aftermath of the election, the discussion about Brexit has turned to a rethink of what our future relationship with the EU will look like once we leave. The central point of debate so far has been whether the government should continue with the Prime Minister’s original plans to pull out of the single market and no longer be bound by the Common External Tariff and Common Commercial Policy, or instead adjust its approach to seek a softer version of Brexit. But in reality, the first months – even years – of the negotiations will be focused on how to withdraw from the EU, rather than the new deal. The European Commission has made clear that no future relationship will be discussed until sufficient progress is made on the withdrawal arrangements, so the stakes are high for the UK. If it doesn’t get this stage right, then there is little hope of a future relationship of any sort. And, despite the government’s rhetoric before the election, few now would countenance the possibility of ‘no deal’.

The common assumption in the UK is that the withdrawal agreement will come down to money: there’ll be some horse-trading over the total Brexit bill, and a final number will be hammered out that satisfies both sides. But this misses the point that the disagreements in the withdrawal negotiations will not simply be administrative or pecuniary – they will be about fundamental differences in principles. There are six big challenges in particular that could send the negotiations into a tailspin before they barely begin.

  1. Protecting rights – who to protect?

Much has been made of the support – on both sides of the negotiating table – of the principle of prioritising the protection of the rights of those EU and UK citizens affected by Brexit. There’s some truth to this: the broad conviction that rights should be protected is a clear point of unity in the preliminary talks.

But beyond this basic point of principle the unity ends. First, there is a straightforward disagreement over who should be protected. The UK government generally refers to the roughly 3 million EU citizens currently living in the UK and the roughly 1 million UK citizens living in the EU. But the EU27 are clear that they want the rights of EU citizens who formerly lived or worked in the UK to be protected too, as well as all their family members (whether or not their family are themselves EU citizens). This would shift the parameters of the discussion dramatically. To illustrate the shift in scale, the UK’s data on National Insurance number registrations suggest that more than 5.6 million EU citizens have registered at some point in the last 15 years, even if they no longer live in the UK. The government may well balk at offering permanent free movement rights to this large group.

Moreover, the Commission wants all EU nationals who have lived or worked in the UK before the date of withdrawal to be protected. The UK government is concerned that this would precipitate a pre-Brexit rush of EU nationals looking to secure permanent residency rights to the UK. Prepare, then, for the first blow-up of the negotiations.

  1. Protecting rights – what to protect?

The next point of disagreement concerns which rights to protect. The European Commission is clear that all free movement rights should be protected – including rights of residence and work, the right to non-discrimination, the right to access public services and benefits, the right to ‘export’ certain benefits to other countries, the right to bring in family members, the right to aggregate insurance and work periods built up in different EU member states when claiming benefits or pensions, and the right to vote in local elections. It’s likely that the UK government plans to dispute some of these rights – particularly those that have proved the most controversial among the public, such as the right to bring in non-EU family members without needing to meet the income threshold that applies to UK citizens, or the right to claim child benefit with respect to children not living in the UK. So expect further rows here.

  1. The budget – which spending commitments?

We then come to the money. There’s no doubt this will be a major point of debate. But, contrary to the assumptions of some, the negotiations over the EU budget will not simply be a matter of haggling over numbers; there are key differences in the principles behind the calculations which will prove extraordinarily tricky to resolve.

The most troublesome issue, as the FT’s Alex Barker has identified, is the matter of future EU spending commitments that will be made post-Brexit. The EU expects the UK to not only pay its fair share of spending commitments made in annual budgets up until it leaves in 2019 (the ‘resteà liquider’); it also expects the UK to pay for spending that the Commission has legally promised but which will not be formalised as commitments in the EU’s annual budgets until after 2019 (the ‘Significant Legal Commitments’).

From the Commission’s perspective, these commitments – largely for ‘structural funds’ to support economic development across the EU – are legally binding and were made while the UK was still a member, in accordance with EU law, so it is only fair that the UK contribute. But the UK will surely argue that, given this expenditure never appeared as formal commitments in the EU’s budget (and will not do so until after the UK leaves), it is under no obligation to pay. The stakes here are high: Barker estimates that the UK’s contribution to these payments could be more than € 20 billion. And if the UK doesn’t stump up, then other member states will have to make up the shortfall.

On top of this, a recent paper by the Brussels-based thinktank Bruegel has highlighted that ‘Other Planned Commitments’ to be made in the 2019-20 annual budgets could also be included in the final Brexit bill, even if they are not legally binding. (Indeed, this is in line with the position paper on the financial settlement published by the Commission last week.) The EU will argue that the UK is liable to pay, even if they are only committed after the UK leaves the EU, because the UK signed up to the 2014-20 Multiannual Financial Framework, which included ceilings for these costs. The UK will argue that it shouldn’t be obliged to pay for commitments made after it leaves. This is bound to cause more headaches in London and Brussels.

  1. The budget – whose pensions?

Another budgetary issue likely to dominate the negotiations is the payment of the pension liability for EU officials. One of the reasons this matter is so contentious is because the payments are expected to be made over the long term, as civil servants within the EU institutions retire and claim their pensions, rather than in one big sum as the UK leaves. The UK will seek to cover the pension costs of UK officials only. But for the EU, the nationality of its officials is an irrelevance (in the words of Commission President Juncker, they “left their national hats at the door” when they joined). The Commission will therefore want the UK to pay for its full proportionate share of pension liabilities for those officials who were in post while the UK was a member. Barker estimates that this could reach into the hundreds of millions of Euros annually – a hard pill to swallow for a UK government committed to ending large budgetary payments to the EU post-Brexit.

  1. Who keeps everyone in check?

Next comes the question of how the deal is managed and overseen. With agreements of this sort, typically some form of dispute resolution mechanism is needed for addressing differences of opinion between the two parties down the line. This will be particularly important on the issue of citizens’ rights, but it also relates to other aspects of the withdrawal agreement, such as the financial settlement, and any continuation of EU laws post-Brexit.

Prime Minister Theresa May has made clear that Brexit will mean the end of the jurisdiction of the Court of Justice of the European Union (CJEU) in the UK. The EU, however, has argued that the CJEU should oversee the withdrawal agreement. Given past legal disagreements between the Commission and the UK over the interpretation of EU law respecting free movement, the EU is presumably sceptical of any agreement that falls short of this level of rigour – seeing anything else as a ‘gentlemen’s agreement’ with little guarantee of being upheld. The EU is only willing to countenance an alternative mechanism dispute resolution if it guarantees the equivalent level of independence and impartiality that the CJEU offers – and even then the Commission says this would only be possible for provisions of the agreement that do not relate to EU law. A blow-up on governance therefore seems inevitable.

  1. And finally, what on earth do we do about Northern Ireland?

The other big question prioritised by the EU27 for the withdrawal negotiation is the Northern Irish border. Here both sides have a clear mutual interest: neither wish to undermine peace or inflame tensions in Northern Ireland. Moreover, given that the Republic of Ireland is the most exposed by Brexit of the remaining 27 EU member states, the Commission is clearly aware of the importance of managing the border issue carefully.

Even so, there are tensions within the UK’s own position on the Northern Ireland border. On the one hand, the white paper on Brexit commits to ensuring “as seamless and frictionless a border as possible between Northern Ireland and Ireland, so that we can continue to see the trade and everyday movements we have seen up to now”. On the other hand, the government is clear that it wants to no longer be bound by the EU’s Common Commercial Policy and Common External Tariff, which would necessitate some form of customs border. In order to square this circle, the UK might try to negotiate with the EU a customs deal that precludes customs checks but allows the UK to set its own trade policy; but this would most likely be dismissed by the Commission as impossible. Without creative solutions, this issue too could reach an impasse.

Scope for compromise?

Of course, none of these problems are insurmountable. With enough negotiating guile, imaginative thinking, and considered analysis, solutions can be found. In order to navigate this challenging territory, the government should be realistic about the trade-offs and compromises required. Striking a deal will not be easy, but there may be scope for a middle ground on some of the issues discussed.

On citizens’ rights, if the UK stays in the single market and continues free movement for all EU citizens then this question will become immaterial. But assuming this is not on the cards, a compromise could still be found. The government could accept the ‘package’ of free movement rights proposed by the EU, but challenge the EU’s proposals to protect all former residents as well as current residents. On the one hand, those EU citizens who settled in the UK but then recently left temporarily, under the impression that their free movement rights would continue to be protected and they could easily return, should be protected. But at the same time, it seems excessive to extend full free movement protections to those who briefly worked in the UK many years ago. The UK government could, for instance, therefore propose a compromise whereby all EU nationals who lived or worked in the UK for more than three months (and who have sufficient evidence to verify this) in the three years before the withdrawal date will be granted permanent free movement rights, but that these rights will not extend to former residents or workers who have spent shorter periods in the UK or who have not lived here recently.

On the financial settlement, the UK could agree to pay its fair share of the ‘resteà liquider’ and pension contributions, but seek to strike a deal on the more contentious issue of planned spending that will be translated into budget commitments post-Brexit. It could reject any demand to pay a share of the ‘Other Planned Commitments’ that the Commission is not legally bound to and that will not become commitments until 2019-20. On the ‘Significant Legal Commitments’ that are legally pledged, Alex Barker’s suggestion of an arbitration panel to adjudicate may be the best solution – the UK and the EU could promise to follow whatever the arbitration panel decides. The UK could also urge that their ‘fair share’ of liabilities take into account its rebate – this would result in a share of 12% rather than 15% of liabilities.

On the dispute resolution mechanism for the withdrawal agreement, the UK could propose to create an alternative UK-EU court, made up of delegations from UK and EU officials, or, less ambitiously, to use the EFTA court, which bases its jurisprudence on the case law of the CJEU. This would technically avoid the jurisdiction of the CJEU – and so live up to the government’s commitment on sovereignty – while reassuring the Commission that the agreement is governed by an independent and impartial mechanism.

As for Northern Ireland, this largely depends on the UK’s decisions on the single market and the customs union. If the UK government does commit to pulling out of the single market and does not entering into a new customs union with the EU, then some kind of border arrangement will be necessary. But there is still scope for a compromise to avoid a hard border. It is likely that any future migration agreement will be largely managed through the labour market, rather than border control, so ending free movement may not necessitate passport controls on the Northern Ireland border. A customs arrangement will be trickier, as without a customs union there will certainly need to be some form of checks on goods moving across the border. But a system modelled on other ‘soft border’ arrangements – for instance, the Sweden-Norway border – and using the latest technological developments in customs checks could help to minimise disruption.

Some will argue that any compromise of this sort will be a capitulation to the Commission. But this is the wrong way of looking at the negotiations. The overarching purpose should be to seek the best deal to continue a close and sustainable relationship with our EU partners – and to succeed in this, the UK government will need to prioritise diplomacy, flexibility and patience. The alternative is simply a total breakdown in talks at the outset – and potentially the realisation of the ‘no deal’ scenario that both sides want to avoid. With the countdown to Brexit underway, the government days away from embarking on the toughest negotiations in a generation, and the UK political class reeling from the shock election result and the uncertainty it has produced, now is the time for a considered, consensual approach to the forthcoming talks.