Michel Barnier, chief EU Brexit negotiator (right), has been pushing David Davis, UK Brexit secretary, for a formal response on a 'financial settlement' © AP

Britain and the EU will hold the next round of formal talks on Brexit next week. Some EU diplomats believe the encounter on July 17 could be a stormy one. Michel Barnier, the EU’s chief Brexit negotiator, is pressing the British to respond to the demand that it must pay a “financial settlement” to Brussels on leaving the bloc. But, as of Friday, David Davis, the Brexit minister, had still not presented a formal paper on the issue to Mr Barnier.

The budget is one of three “divorce” issues on which the EU wants to see “sufficient progress” before the negotiations can move to phase two: discussion of the future framework for the UK-EU relationship.

The first “divorce” question regards the acquired rights of EU citizens living in Britain. The UK has set out its views on this in a lengthy paper. The document has been heavily criticised by MEPs but many diplomats in Brussels nevertheless think it paves the way to an accord on citizens’ rights later this year. “There are a lot of issues still to be resolved,” says an EU ambassador, “but the UK paper was seen by many of us as a big step in the right direction.”

The second question regards the EU’s new frontier with Northern Ireland. Here, too, there is common political will to reach a solution. As the former MEP Andrew Duff argues in an analysis of the Brexit talks:

“Because the whole Irish question has been almost intractable for centuries, the solution here will be a political one, at a very high level, that will result in the turning of a blind eye to an EU porous border in Ulster.”

But the question of British payments into the EU budget is (as Mr Duff puts it) “where trouble lurks”. The lack of an official response from the UK is causing irritation in Brussels. Mr Barnier underscored his concern last week when he said there needs to be “rapid and sufficient progress” on all three aspects of the divorce settlement, adding: “And I mean on these three topics together.”

There are numerous reasons why settling the Brexit financial bill is so tricky. Brexit will blow a €10bn hole in the EU’s annual revenue so the issue is critical for the 27 remaining member states. At the same time, any payment to Brussels will prove toxic for the British public, who were told by the Leave side in the referendum, untruthfully, that Brexit would secure a £350m a week windfall for the NHS.

What makes this issue particularly difficult is that the UK government has done nothing to prepare the domestic political ground for a compromise with the EU. “There has been no real discussion across Whitehall on the question of money, as the cabinet and MPs in parliament are too busy fighting over the macro terms of Brexit and what the government’s ultimate direction of travel should be,” says Mujtaba Rahman of Eurasia Group, a consultancy. “There has also been a total lack of preparation with the public over the question.”

Next week’s meeting will be the first big test of how serious the financial argument could be. Mr Duff sets out the risks very clearly. He says that without a bankable promise from the UK on the budget, the European Council will never judge that sufficient progress has been made on the divorce talks to allow it to trigger the discussion on the wider UK-EU relationship.

If that second phase fails to start, “there will be no political discussions on defining the framework for the future relationship between the UK and the EU.” And without a clearly defined and mapped out agreement on Britain’s final status, “it will be impossible to proceed towards a negotiation of the transitional arrangements”.

In short, resolving the budget issue is an immense challenge. If the UK government gets it wrong, the risk of a bad deal, or — even worse — no deal, increases dramatically.

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Further reading

Nuclear fallout
Britain’s nuclear regulator is facing a post-Brexit skills crisis as it prepares to take on responsibilities currently shared with European partners, such as Euratom, at the same time as many of its ageing inspectors near retirement. The Office for Nuclear Regulation said “the loss of experienced regulatory staff” would lead to a “thinning of our overall regulatory capability” in the years ahead, even though demands on the agency are set to increase sharply. (FT)

Criminal exports
Camino Mortera-Martinez says the European Arrest Warrant has made it easier for the UK to extradite criminals but Britain will find it almost impossible to negotiate as good an arrangement after Brexit. (Centre for European Reform)

Irish borderlines
The prospects for “frictionless” and “invisible” solutions for the Irish border after Brexit are limited, according to Katy Hayward. (LSE Brexit blog)

Coming home to roost
“All the pre-referendum claims made for our future trading position within Europe are now exposed as so much hot air.” Nick Cohen on how the benefits of Brexit cited by the Leave campaign are proving illusory. (Guardian)

Easy listening

Brexit unspun
The nuclear conundrum
. When Britons voted to leave the EU, considerations of nuclear policy were probably far from their minds. But this is turning out to be one of the most complex and difficult parts of the separation process. Alex Barker and Andrew Ward tell Siona Jenkins why. (FT)

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