The EU's long-term budget plan is a hostage in the Brexit negotiations.

Drafting of the financial plan is already five months behind schedule, and the bloc's budget-makers are virtually paralyzed by uncertainty over how big a hole will be left by Britain's departure, and when the shortfall — estimated at €9 billion or more per year — will start to hit.

Even tougher for Brussels is that the long-term budget problem won't be solved by the so-called single financial settlement that Britain might pay on exit from the EU, which U.K. Prime Minister Theresa May is expected to address in her speech in Florence on Friday.

The EU27 are due to begin a fiendishly complex and politically combustible set of negotiations about the bloc's roughly €1 trillion, seven-year fiscal blueprint, formally called the multiannual financial framework (MFF). But those discussions are difficult, if not impossible, without clarity about what relationship the U.K. might have with the EU after its formal departure.

"Nothing substantial will be negotiated before the Brits are out," a senior EU official familiar with budget talks said. "How can you actually discuss such sensitive topics if you do not know what can happen to programs and spending we already committed ourselves to do?"

The financial offer that May is expected to propose in Florence would barely keep the current plan on track.

As the clock speeds toward the March 29, 2019 deadline for reaching a withdrawal agreement, Britain is often described as the side under greater time pressure, with its citizens and businesses said to be at risk of going over a "cliff's edge" by withdrawing without a legal safety net.

But the EU's inability to draw up the budget plan explains why the EU27 leaders have grown increasingly angry and agitated over the slow pace of the Brexit negotiations. And it suggests that the U.K. may have stronger cards than it even realizes in trying to shift the sequence of the talks.

In the short-term, EU officials have been panicked over whether the U.K. will live up to the commitments in the current MFF, which runs to 2020. The financial offer that May is expected to propose in Florence would barely keep the current plan on track.

But that still leaves the EU in a long-term bind, facing the prospect of drastic spending cuts or sharp increases in contributions by member countries.

"How does the EU cope with losing a substantial net contributor?" said John Springford, the director of research of the Centre for European Reform, a London-based think tank. "You have to try to find money either from net contributors who aren't necessarily going to be too keen on that, or from net recipients who are going to receive less money. Obviously, this is going to be nightmarish."

It is a grim choice no one in Brussels is yet prepared to make, even though the EU's new deadline for a draft MFF is May 2018. It also explains why EU leaders were so hopeful the U.K. would opt to remain in the EU's market — and make contributions to the EU budget — following a model like Norway or Switzerland. The U.K. so far has rejected those paths, but that hasn't stopped some in Brussels from wishful thinking.

"Britain's strongest card in the negotiations has always been its sizeable contribution to the EU budget," Springford wrote in a paper published this week.

Financial pain

Despite that leverage, though, Springford concluded that the EU was still in a stronger negotiating position because the U.K. stands to suffer greater financial pain through an economic hit in the event that the two sides fail to reach a withdrawal agreement.

In an interview, he also said the time needed for the U.K. to make arrangements for its post-Brexit future, including new customs and immigration protocols, meant that a transition period could well impact the EU's next financial plan.

"Is this all going to spill over into the next MFF? Quite possibly," he said.

Fiscal experts note that the hole that will be left in the EU's budget by Britain's departure is relatively small in macroeconomic terms — roughly 0.1 percent of GDP per member country. But the need for cuts or to demand more contributions would be politically painful.

One EU diplomat said that EU negotiators would closely watch May's speech on Friday for how specific she is on the money and would be waiting to see whatever she proposes formally laid down on the negotiating table in the next round of Brexit talks, which start Monday.

"Those commitments have to be confirmed concretely in negotiating positions," the diplomat said, adding that the EU side was more interested in reaching agreement on a formula for calculating the U.K.'s obligations than agreeing to a fixed amount, which might end up underestimating the U.K.'s obligations. "Discussing figures before a methodology does not make a lot of sense," the diplomat said.

Few good choices

European Commission officials acknowledge that they have few good choices at the moment, and tough decisions lie ahead.

"Can Europe deliver on its existing policies and new priorities with a shrinking budget?" a Commission official said. "If not, where should cuts be made and ambitions scaled back? Or should the gap be bridged, either via increasing contributions from the 27 member states, alternative sources of revenue or a combination of the two?"

"The next MFF will be on EU's future, and the Brits will be already out. Let's not scare ourselves" — Isabelle Thomas, French MEP

Transition payments by the U.K. for continued access to the EU's single market beyond 2020 would forestall the looming cash crunch, but it's not clear London is willing to make them. Some hard-line Brexiteers, including the U.K. foreign secretary, Boris Johnson, are adamant that contributions to the EU budget must end.

"We would not expect to pay for access to their markets any more than they would expect to pay for access to ours," Johnson wrote this week in an op-ed in the Telegraph.

However, aides close to Johnson made clear over the weekend that he accepts the idea of continuing payments to the EU during a transition period.

The full Monti

Senior Commission officials express confidence that the draft of the MFF will be ready by next May, and note that they have already published a reflection paper laying out options for the bloc's future finances.

Separately, a commission chaired by former Italian Prime Minister Mario Monti issued a detailed report earlier this year calling for a broad overhaul of the EU's budget and finances, including the development of new streams of revenue.

The need for clarity on what if anything the U.K. might be willing to pay beyond 2020 could quickly turn the tables in the Brexit talks, making EU officials newly anxious to discuss the post-Brexit relationship with London that until now they have said should be off-limits until divorce terms are settled.

Getting that clarity could prove excruciatingly difficult, but not everyone agrees that the EU has to wait. Some member countries want to press ahead now with making cuts and reforming the whole budget system.

For the moment, Günther Oettinger, the budget commissioner, is playing for time, having pushed back the deadline for the draft MFF by five months.

At the same time, Commission President Jean-Claude Juncker has seemed to be fighting gravity, insisting as he did in his recent State of the Union speech that he wants to see new spending in the EU budget — despite Britain's withdrawal.

Two officials familiar with budget issues told POLITICO the Commission so far is targeting its efforts on boosting the EU's so-called own resources revenue — funds that come from customs fees, a portion of value-added tax, and regulatory fees and penalties — rather than on demanding heftier contributions from national capitals.

Isabelle Thomas, a center-left French MEP who is one of the Parliament's lead negotiators in budget talks, said the bloc's financial planners should push ahead without worrying too much about the U.K.

"The next MFF will be on EU's future, and the Brits will be already out," Thomas said. "Let's not scare ourselves."