The EU treaty is quite unambiguous regarding its prohibition of eurozone states bailing each other out. The no-bailout clause was critical in overcoming deep-rooted resistance in some member countries, and in moving towards the currency union in the first place. Yet, when the solvency of a eurozone state became a point of serious concern, all other eurozone members seemingly ate their words, supporting Greece through a series of financial support packages worth hundreds of billions of euros--at first bilaterally, and later through hastily assembled eurozone multilateral frameworks. They also put together financial support for Ireland, Portugal, Cyprus, and Spain, and repeatedly restructured these official loans with lower interest rates, payment holidays, and longer tenors, greatly reducing the financial burden for the troubled sovereign debtors.

This experience has led to an assumption, mostly by the U.K., that the EU will change its stance against cherry-picking in the Brexit negotiations, just as they did regarding the allegedly nonnegotiable no-bailout clause. The EU, so the thinking goes, is playing to its own gallery on what it claims are ironclad principles, but will ultimately be pragmatic, as dictated by narrower national economic interests.

The hope that "softness" against Greece is a blueprint for upcoming softness vis-à-vis the U.K. is most likely misguided--and if employed as a Brexit negotiation assumption, dangerously so. This argument overlooks the obvious: self-preservation and survival, the rationale that led the EU to leniency with Greece, will also guide it to be principled against the U.K. When Greece skidded towards economic and social disaster, capital markets shut their doors to an increasing number of fellow-eurozone sovereigns and banks. The air was thick with fear of a catastrophic systemic collapse of the eurozone economy, and panic spread that defaults could ripple throughout the eurozone, potentially bringing down the entire edifice. Not only were the debtor countries at risk, so too were some heavily exposed banks in the creditor countries. Domestic financial stability in the so-called core of the eurozone was also in jeopardy.

Under such pressure, European policymakers came together, albeit belatedly, to introduce a circuit breaker into the vicious circle of fleeing creditors and contracting economies. An alphabet soup of rescue mechanisms followed. In the minds of policymakers, not doing so would have put the survival of the eurozone in grave danger, and economic and social chaos could have engulfed the continent. The EU's pragmatism towards Greece and others was thus a rational survival strategy. Do it, however reluctantly, or perish.

The incentives facing the EU in the Brexit negotiations could not be more different. In the case of Greece, leniency was the safest option, maximizing the prospect of prosperity and institutional survival. In the case of Brexit, however, malleability could pose a significant and potentially mortal danger to the EU. If Britain negotiates a result that is either similar to EU membership, or more attractive, the EU could disintegrate, swept away like a sandcastle in the approaching tide, slowly at first, but nonetheless inexorably. EU governments are not ready to risk setting a precedent. They have a strong incentive to stick to their principles. Remaining firm will dissuade other countries from leaving in a domino effect. Their strategic survival instinct will trump tactical short-term considerations. In this context, the fact that the U.K. imports more from the rest of the EU than vice versa, or that the City of London is dominant in the field of financial services, are set to become secondary considerations. Member states delegated the day-to-day Brexit talks to the supranational European Commission rather than opting for an intergovernmental negotiation approach. This suggests that they know the temptation of sacrificing a principled strategic bargaining position in favor of more tactical short-term national interests, is always lurking in the background. By voluntarily tying themselves to the collective mast of the Commission, member governments cannot be lured away easily by Westminster's divide-and-conquer siren songs.

This principled EU stance against the U.K. has nothing to do with punishing Britain, but is instead simply a rational approach. The EU may consider the short-term economic cost that post-Brexit trade disruption will cause as the price worth paying to insure against a more calamitous event down the road: the unravelling of post-war European integration. To hope for a fundamental change in tack by the EU towards pragmatism, as observed in the context of the Grexit threat, would be misreading the deeper incentives of European policymakers.

The negative outlook on our sovereign rating on the U.K. (which we downgraded by two notches to 'AA' in the wake of the referendum), is a reflection of what we believe are risks of an adverse economic and financial outcome for Britain. The U.K. government at the time misread the electorate's mood when it invited it to vote on EU membership. It is hopefully not also misjudging central convictions held across the Channel. Otherwise, a disorderly Brexit could become increasingly likely. Such a turn of events would bring renewed downward pressure to Britain's sovereign rating.

Related Research

• Credit Conditions: Hope Overcomes Fears As The Fundamentals Propel Europe Forward, Dec. 5, 2017
• The Top Brexit Risks For Rated Corporates Explained, Dec. 14, 2017
• Ratings On The United Kingdom Affirmed At 'AA/A-1+'; Outlook Remains Negative, Oct. 27, 2017
• Credit Conditions: As The Political Fog Shifts To The U.K., Prospects Are Improving In The Rest Of EMEA, Oct. 2, 2017
• Brexit: A Negative Outlook For The U.K., Nov. 10, 2016
• Ratings On The United Kingdom Lowered To 'AA' On Brexit Vote; Outlook Remains Negative On Continued Uncertainty, June 27, 2016
• The Credit Impact Of A Grexit, July 1, 2015
• Credit FAQ: Greece In Crisis: Frequently Asked Questions, June 30, 2015
• A Greek Exit From The Eurozone Would Have Limited Direct Contagion Risks For Other Sovereign Ratings, Feb. 19, 2015