U.K. Has Secret Plan to Halt Brexit Cash If EU Refuses Trade

(Bloomberg) -- Prime Minister Theresa May's team has drawn up a secret contingency plan to withhold billions of pounds in Brexit payments in order to force the European Union to give the U.K. the trade deal it wants.

Senior British officials have privately discussed the idea as a fall-back option that could be used if the EU reneges on its commitment for a new free-trade deal to come into force after Brexit, three people familiar with the matter said.

The plan is far from the U.K.'s preferred outcome, but senior members of the government believe it could be necessary. May says she wants a draft accord by October to cover future trading terms, which can then be signed soon after the U.K. leaves the bloc. Despite this, the EU says October's agreement will contain little detail and will be only a political declaration.

“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 May's Conservative Party. “Everything is agreed, or nothing is agreed.”

The disclosure of the potentially explosive proposal comes at a sensitive time in the Brexit talks as the clock runs down on the U.K.'s departure in March 2019. As one of the biggest EU contributors, the U.K. side can use money as leverage -- though it's a gamble that could provoke the EU.

Read more: The Brexit bill and whether Theresa May needs to pay up

Speaking on condition of anonymity, three senior officials said the U.K. would have the option to halt payments of the 40-billion-pound ($56 billion) 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.

These officials fear the U.K. loses power 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 a financial settlement of up to 40 billion pounds as part of the withdrawal agreement -- a pledge that will be binding.

The idea that the U.K. 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, the argument might be made that the bill is for liabilities accrued and not up for debate.

Racing for a Summit

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.

Euroskeptics in May's Conservative Party reacted with anger to the idea that the U.K. should pay the EU anything. Lawmakers have since raised concerns that the so-called “framework” agreement on the future relationship that's due to be reached in October won't be legally enforceable, leaving Britain vulnerable if the EU backslides on its promises.

One of the officials said the two sides had decided that the U.K.'s financial obligation would be to pay for staff pensions and other liabilities as they came due, potentially involving annual payments lasting many years. The British government could then halt these payments in the future if necessary, though such an outcome would be unlikely and undesirable.

“The EU is desperate to get the money in the short to medium term, otherwise they will have to fork-out for it,” Duncan Smith said. “If there's no trade agreement, guess who is going to suffer the most -- it will be the EU because we're going to open our markets to the rest of the world.”

A fourth senior official was more cautious, warning that such an approach would risk backfiring, creating the bad faith and atmosphere of mistrust that would make a breakdown more likely.

To contact the reporter on this story: Tim Ross in London at tross54@bloomberg.net.

To contact the editors responsible for this story: Flavia Krause-Jackson at fjackson@bloomberg.net, Stuart Biggs

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