A leaked European Union paper outlining the bloc's initial negotiating position in Brexit talks hints at a clever zero-sum strategy. The EU's main goal is to deter other potential exiters and offload all the anxiety about the truly important issues in the divorce on the U.K. alone.

The paper (actually called a "non-paper" in EU parlance because it's still a draft) makes it clear that the EU wants to negotiate Britain's departure in stages. Just two contentious issues are to be addressed in Stage One: the treatment of EU citizens now living in the U.K. and the bill to be settled by the departing country. Essentially, the U.K. will be told that if it wants any kind of closure on a trade deal, it first needs to take care of the EU migrants and agree to pay a large sum of money (in euros, please) to honor previous commitments and move London-based EU agencies elsewhere. 

At the same time, the initial EU position makes agreement on both issues as difficult as possible. For the 3.5 million EU citizens living in Britain, including more than 900,000 Poles and more than half a million other eastern Europeans, the bloc wants a lifelong right to live and work in the U.K. on the same basis as locals; these EU citizens would also retain the right to claim U.K. benefits for children living in other countries, bring over relatives and confer resident status on third party nationals through marriage. And they would also be subject to the jurisdiction of European courts.

That won't be easy for Prime Minister Theresa May to swallow, even if she gets a decisive mandate in the June election. Immigration was a major issue for voters who backed Brexit. The government may argue that "grandfathering" the immigrants already in the U.K. is the lesser evil, but to the anti-foreigner voters this means the current situation -- the one that angered them in the first place -- will be frozen for decades.

In the letter May sent EU leaders when activating the Brexit procedure she, too, stressed the need for an early deal on EU citizens in the U.K., and U.K. citizens in the EU -- about 1.2 million people, many of them retirees in Spain and France. But the divergent nature of the two groups of migrants makes the EU's demands far weightier than the U.K.'s. EU workers in the U.K. are young, often needy and far more numerous, especially taking into account possible family reunification. There is no easy compromise to be reached, and that suits the EU fine. As the bigger trading partner that stands to lose less if there is no resulting trade deal, time is on its side.

Concerning the exit payment, the EU paper also lays out an extreme position: The bloc is going for a one-time pay-out big enough to anchor the expectations of other countries that may try to leave the union; and there's no mention of handing over its share of EU assets. No future campaign based on promises to invest in health care instead of contributing to the EU budget will fly if negotiators attain this goal. 

There is also no reason for EU negotiators to compromise here. Though Brexit leaves a hole in the union's budget, no political constituency important to the negotiators will be seriously hurt. A strong deterrent to more renegades is more important.

There's nothing expressly malicious in the bloc's initial negotiating position. The union is confidently laying its cards on the table; its position will likely be highly public throughout the process (there's hardly a choice given the many potential sources of leaks), while the U.K., under more pressure to make compromises, isn't likely to be as forthcoming.

The longer that game goes on, the better for the EU's cause of maintaining unity and discouraging further secession. With 27 member states, there's always a big election somewhere: In France right now, in Germany later this year, in Italy sometime soon. For pro-EU forces running in these elections, the more uncomfortable Brexit looks, the better.

A temporary extension of the U.K.'s membership, explicitly mentioned in draft negotiation guidelines the European Commission has written up for the bloc's Council of Ministers, would be a godsend to these centrist political forces: It would show that leaving is a cumbersome process that's far easier to initiate than to pursue, and that the two-year time frame that exists for it is unrealistic. A transition arrangement that drags on and becomes semi-permanent doesn't cost the EU anything, but it will likely hurt May's government badly.

If the EU knows how to do anything, it's to draw out inconclusive negotiations. That can be a useful skill.

David Fuller's view

If Leonid Bershidsky is right (he has certainly added some relevant details to support my own views since the Brexit vote) then it shows just how short-sighted and desperate EU negotiators and politicians have become. 

Absurdly, they view the EU as a club which any reasonably democratic and predominantly Christian European nation can join - although there is a catch – they can never leave.  EU bureaucrats themselves pay lip service to democracy but often regard it as inconvenient and expendable, as subscribers may have noticed.

If the EU tries to carry out the policy detailed above, effectively attempting to punish the UK as an example to deter any other nations from trying to leave, this will only increase European-wide disillusion.  

Sterling strengthened on short covering following Theresa May’s announcement of a General Election on Monday, which was confirmed by a comfortable majority vote on Tuesday. Apparently, traders felt that an increased majority for the PM would make a so-called hard Brexit less likely.

That depends on the EU.  Yes, Theresa May has been very clear that she favours a mutually beneficial Brexit but there has been little evidence, so far, that this view is reciprocated.  Mrs May has also said that “no deal” was better than a bad one.  The bigger Parliamentary majority which we expect her to have following the 8^th June election will strengthen her hand.  

Nevertheless, the EU has everything to gain by delaying the Brexit process, to deter other countries from leaving and also to gain more revenue from the UK.  Consequently, our PM may have to walk away quickly, with no agreement, rather than allow herself to be strung along by the EU, as I have often mentioned.  Yes, that would be a hard Brexit, at least initially, generating widespread uncertainty within the UK.  However, I also maintain that European corporations would lobby effectively for a sensible renegotiation, which would be in everyone’s interests.

Lastly, the best result for the UK in this Sunday’s French Election would be successes by Le Pen and Mélenchon, taking them both through to the final round. I don’t expect this but it would create chaos within the EU and make Brexit a lot easier.  Pundits are predicting that fresh-faced, untainted young Macron will win on Sunday, with Le Pen taking second place.  That would provide a short-term lift for European stocks because Macron would be heavily favoured to win the second round.    

(See also: U.K. Conservatives Prepare for Election, and Social-Media War, from Bloomberg)