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As Brexit negotiations are entering the next phase focusing on the EU-UK future relationship, the unity that has prevailed so far within the EU27 will come under increasing pressure. The issues at stake in phase I – especially financial obligations and citizens’ rights – were unifying factors for the EU27. The second phase, however, might present more challenges. Major splits are unlikely. But varying interests, levels of Brexit exposure, more vocal business sec-tors, and different opinions on the future architecture of the EU27 and Eurozone could create more unpredictability than seen so far. Businesses will need to broaden their monitoring, and follow key EU capitals as closely as they have done so far with London. Much will continue to depend on the approach of the British Government, which is still to identify a coherent set of objectives for Phase II around which the whole Cabinet can unite. Part of a new series, Rasmussen Global deciphers some of the factors that could affect EU27 unity within four key states: France, Germany, Poland and Spain. These states either represent major power centres, or states most exposed, economically or politically, to Brexit. For more information on these issues, or for other Brexit-related work please contact Olaf Böhnke obo@rasmussenglobal.com

France: more interested in the future of Europe debate

• Vulnerable to Brexit but also open to po-tential gains such as financial services

• Using Brexit to further Macron’s European agenda

• Deterring French and other Eurosceptics France has a natural interest in a soft Brexit, given the historic and extensive economic and security relationship with the UK. One of Emmanuel Mac-ron’s top campaign advisers, economist Jean Pi-sani-Ferry, argued for a "continental partnership" including UK access to the Single Market. France and the UK have similar defence, security and for-eign policy agendas and capabilities, so France will have an interest in maintaining a close link with the UK in these areas.

However, Mr Macron is aware that across Europe – and indeed still in France – there are strong Eu-rosceptic movements. Consequently, Paris wishes to illustrate that the UK’s departure from the EU will be damaging, with no special treatment being offered. President Macron stated that he opposed “a tailor-made approach where the British have the best of two worlds.” Second, France’s position is influenced by its views on the EU’s future. President Macron wants more, not less, Europe. Brexit offers a chance to forward his agenda, as defined in his Septem-ber Sorbonne speech. London was one of the big-gest opponents of issues such as tax harmoniza-tion, new EU tax-raising powers, or enhanced mili-tary cooperation. Today, Paris feels emboldened to push these points back onto the EU negotiating ta-ble. France’s biggest strategic priority remains forging an effective partnership with Germany on the future of the EU. Macron will view Brexit as sec-ondary.

27 shades of grey Brexit phase II: potential rifts among the EU27

December 13th, 2017

Finally, while France is vulnerable to Brexit, it also potentially stands to gain, especially by attract-ing businesses and financial institutions to Paris. The re-location of the European Banking Authority, although it carries just a few hundred jobs, holds an important symbolic value. Many of Mr Macron’s early reforms aim to make Paris more attractive to the business community and a major financial hub alongside London and Frankfurt. Paris will prioritise its interests, stress the im-portance of “defending the integrity of the EU’s in-tertwined freedoms of movement”, and oppose special treatment for the UK on trade. Contrary to British expectations – given the strong bilateral re-lationship - France’s interest in pursuing an ex-tensive relationship with the UK is likely to be overridden by its own political considerations.

Germany: Less flexible than expected

• No special favours for the UK • Merkel is pre-occupied and will not ride to

Britain’s rescue • Different visions for the Eurozone could

choke the Franco-German motor While Berlin’s formidable economic interests fa-vour the closest relationship possible with the UK, the political imperative of preventing further EU fragmentation has ultimately prevailed. According to sources in Germany, the fact that the UK is Ger-many’s third most important export partner, will lead to no special favours from Berlin. Given the political situation in post-election Ger-many, Angela Merkel is consumed with debating the framework of the next four years and trying to build up a coalition that will avoid a fresh round of elections. All future parties in government share Merkel’s approach to phase I, so Brexit has not been a topic of interest. A grand coalition with the SPD will not fundamentally change the position on phase II, but it will most likely increase the focus on EU reform and integration rather than on striking a broad deal advantageous to the UK. Had the lib-eral-conservative FDP entered the coalition, the opposite would have been true. In London, German Chancellor Angela Merkel is still considered to be the UK’s strongest ally in EU talks. This narrative has dominated British thinking

since David Cameron came into office, and espe-cially during his EU renegotiation process in 2015/16. But London continues to overestimate her role and capacity to dictate the EU response, e.g. believing that Mrs Merkel will push for a tailor-made trade agreement with the greatest possible access to the Single Market (often quoting the argument that she will be lobbied extensively by German car exporters). Mrs May and her cabinet are reluctantly beginning to realise the constraints under which Merkel is operating, particularly given the post-election uncertainties in Germany and erosion of her national standing. Berlin has no desire to punish the UK for its deci-sion; however, our Berlin interlocutors recognised from the very beginning that Germany’s position will unavoidably toughen should London remain too intransigent in the Brexit talks. Germany’s pro-EU positioning was evident in the public advice of the influential Federation of German Industries (BDI) to its members before the fifth round of Brexit negotiations on 5th October 2017: “German firms must prepare for the worst-case scenario of a very hard Brexit, anything else would be naive. (...) To make it clear: Yes, Germany industry wants to keep a very close relationship with Britain. But have no doubt: We prioritise the further develop-ment of the EU.” Berlin will ultimately put the priority on EU unity, even if this comes at a short-term cost to Germany. However, for all this, the German Government is likely to remain a balanced and responsible voice, and they will not want negotiations to break down. Poland: The potential spoiler

• Anxious at losing a key non-eurozone ally • Sees interests resting with EU27 • But tensions arising from Polish resistance

to Macron’s ideas for a multi-speed Eu-rope could spill over into Brexit negotia-tions, and weaken EU unity

Poland, one of the UK’s staunchest allies within the EU, is set to lose both politically and eco-nomically once the UK leaves the Union. War-saw would therefore prefer that post Brexit UK-EU ties stay as close as possible and that the UK re-mains integrated in a number of areas with the EU. The UK has hoped that Warsaw would be amena-ble to a bilateral deal on residents’ rights in ex-change for diluting the EU’s position on the Brexit

Bill and negotiations on the future trade relations; but Poland has not broken EU ranks. To date, the EU has protected Poland’s key in-terests well, especially regarding the Brexit bill and citizens’ rights. As talks are now set to move to the next phase it is likely that Mrs May’s political weakness will prompt the Polish government to stick to a united EU position, for the moment. Poland has also managed to keep Brexit nego-tiations compartmentalised from other areas of conflict with ‘Brussels’ regarding constitutional reforms and the migration crisis. However, the cur-rent Polish government is likely to diverge with other states over the future of the EU27. Poland will lose a strong non-Eurozone ally after Brexit, and the ruling Law and Justice (PiS) party will lose its main sister party in the European Par-liament, the British Conservatives. This could di-minish Warsaw’s influence and its ability to cham-pion PiS leader Jaroslaw Kaczynski’s aim to estab-lish a group of EU states opposed to a multi-speed Europe. To date, that project has yet to materialise, even within the Visegrad states. However, it is a factor that could lead to Poland becoming isolated if other Eurozone members wish to pursue further integration. The EU will need to be aware of Poland’s differing perspective to Macron over a multi-speed Europe, otherwise there is a risk of spillover into Brexit negotiations that could weaken EU unity.

Spain: Exposed but closing ranks with the big 2

• Highly exposed and seeking soft Brexit • Occupied by Catalonia Crisis Being among the most economically exposed countries to Brexit, Spain would normally favour the UK’s exit to be as soft as possible. The gov-ernment’s position was defined by one of our sources as “straightforwardly supportive of the

EU position for phase I but more ambiguous for the second phase”. A recent Eurobarometer survey showed that a high 82 percent of Spaniards hold a positive or neutral view of the EU. Combined with the low profile that Spain has adopted in the international arena, this means that Madrid is unlikely to deviate from the position taken by Paris and Berlin. Moreover, it supports France’s plans to strengthen Eurozone governance. However, the country has one of the biggest trade surpluses with the UK, especially relative to its GDP. Disentangling this web of relations will in-volve massive costs and of course uncertainty for the millions of UK residents living in Spain. Spain is also a net recipient of EU funds, but could tip into becoming a net contributor if Brexit leaves a gap in the EU budget. As a result, because of its com-mercial interests, Spain has all the reasons to push for a soft Brexit. Consequently, Spain will have to balance its position between its long-term interest in preserving EU unity as well as a good cooperation with Paris and Berlin, while simultane-ously preserving its short-term trade interests. Madrid is keen to redefine the status quo on Gibral-tar and will apply tools such as closing the border or requesting EU sanctions against tax avoidance if London is seen as unconstructive. On phase II and future EU-UK trade relations, Spain expects its interests will be addressed within the common EU position. One area where Madrid has a particularly high interest is the future UK reg-ulatory regime, given that a number of Spanish in-terests in the UK are in regulation-heavy areas such as banking and public infrastructure. Madrid, and the wider Spanish public are preoccu-pied with their own domestic crisis with Catalonia, making it less interested in Brexit issues. A major priority for the Rajoy Government is to maintain EU understanding over Catalonia and avoid EU inter-vention, as requested by the Catalan separatists.

Rasmussen Global is a political consultancy with a presence in Copenhagen, Brussels, Berlin, Lon-don, Washington and Spain We offer political, economic and legal advice to sovereign and private clients who are exposed to Brexit. For more information on Rasmussen Global, visit our website: www.rasmus-senglobal.com