Britain is paying for threatening to walk away from the EU without a deal.

The U.K.’s obvious turnabout on the desirability of a no-deal exit from the European Union shows how completely the tables have turned in the Brexit negotiations. With less than a year to seal a trade deal, the EU is nudging the U.K. toward an understanding that the only benign outcome is agreeing to a long transition period. That could allow a different U.K. team to emerge with a humbler approach.

David Davis, the U.K. Brexit minister, has written Prime Minister Theresa May a letter complaining that the EU is preparing for the eventuality of trade talks ending without a deal. The EU’s Brexit guidance for companies — such as the European Medicines Agency recommendations for pharmaceutical firms — makes no mention of any transition period before the U.K. becomes a “third country,” an outsider. Instead, they say companies may need to relocate outposts and change procedures in preparation for the U.K.’s withdrawal.

Davis’s letter shows that he considered suing the EU over these recommendations but received legal advice not to do it. Instead, he wants to push the European Commission to withdraw the recommendations and encourage U.K.-based companies to lobby against them. But there’s no reason for the EU to pull back. As European Commission spokesman Margaritis Schinas said on Tuesday, the EU is “surprised that the United Kingdom is surprised that we are preparing for a scenario announced by the U.K. government itself.”

Obviously, the U.K. wants to convince businesses that such a withdrawal was unlikely — otherwise companies will start moving out soon. But the E.U. doesn’t stand to gain anything by effectively promising firms that something will be worked out. That would be unsafe, especially after Davis said in December that a preliminary agreement between May and EU leaders, which opened the way to trade negotiations, was not legally binding. The trust-destroying statement made it necessary for EU agencies to give companies fair warning. They simply must begin renegotiating their own contracts rather than depend on an uncertain wholesale deal on the government level.

The British aerospace industry is already getting a taste of the no-deal scenario. Davis’s complaint in the letter about “a growing number of instances where the U.K. is treated differently by EU institutions before we leave the EU” is likely to be a reference to the apparent exclusion of U.K. firms from bidding for contracts for the European satellite navigation system, Galileo. The EU can hardly be expected to welcome U.K. bidders, though, until some sort of agreement is reached on the U.K.’s further participation in the EU space program.

Yet neither that nor the harsh guidance for companies is a sign that the EU really expects a no-deal exit. It’s more like a demonstration of how the EU flipped Britain’s no-deal threat into a nightmare.

The size of Britain’s negotiating failure is enormous — the EU hasn’t shifted its position at all. After Nigel Farage, one of the top Brexit ideologists, met with chief EU negotiator Michel Barnier this week, he came away with the impression was that Barnier still didn’t understand why Brexit was happening. “All the rules and all the laws have to be the same for everybody,” Farage insisted. That’s an easy position to hold, but the U.K.’s options are still the same as a year ago: a Norway-style deal that includes maintaining the free movement of workers with the EU or a Canada-style free trade deal that doesn’t cover financial services, the U.K.’s top export. Neither works politically for the U.K.

May has already overruled Davis in order to negotiate the preliminary agreement, essentially accepting every EU demand. With Davis still in the driver’s seat in the forthcoming discussion of trade, she may have to do it again. Given how comfortable the EU feels in its position, it’s likely that preparations are being made for a favorite European game — kicking the can down the road, and that May is a silent accomplice in this.

That’s a reasonable approach. It allows the U.K. government to put more historical distance between the Brexit referendum and the event itself. Continuing negotiation failures and a mild form of economic fallout could quietly erode pro-Brexit sentiment and prepare the U.K. to reverse course or settle for a Norway-style arrangement plus a customs union. There’s a reason why dead-end talks and procrastination have carried the EU so far: They tend to cool the hottest of heads.

Source: www.bloomberg.com – 10 January 2018