EU Raises Specter of No Deal This Year as Brexit Talks Drag

European Union chief negotiator Michel Barnier raised the prospect of Brexit talks failing to reach a breakthrough by year-end, saying the U.K. has two weeks to come up with a better offer on the financial settlement.

Barnier called for “real and sincere progress” on the three divorce issues, which include the separation bill, the rights of EU citizens and the Irish border, which has erupted back onto the agenda this week.

“I have to present a sincere and real picture on those three subjects to the European Council and the European Parliament. If that is not the case, then we will continue, and that will put back the opening of discussions on the future,” Barnier said at a news conference in Brussels on Friday with Brexit Secretary David Davis.

Little progress had been expected in this sixth session of talks, but the mood of the news conference was more somber than in recent rounds. Earlier on Friday, Poland’s European Affairs minister, who met Davis in Warsaw this week, also raised the possibility that talks wouldn’t move on to trade until March.

That would narrow the available time to hash out a trade deal, and render almost useless the transition deal that U.K. companies are crying out for. Britain is due to leave the EU in March 2019, with or without a deal, and the ratification of any agreement needs a few months.

“December is absolutely the most important crunch point,” said Mij Rahman of Eurasia group. If there’s no agreement by the December summit, he argues that the two sides will be forced to reassess the whole process, and could consider trying to hash out a minimalist exit deal instead — a “no-deal deal”. “There may be a rethink as to where we are headed.”

Back in October, as another summit that had been hailed as a crunch meeting was shaping up to be a flop, European Council President Donald Tusk made a similar assessment of what might lie ahead at year-end.

“If it turns out that talks continue at a slow pace, and that sufficient progress hasn’t been reached, then, together with our U.K. friends, we will have to think about where we are heading,” he said.

EU diplomats have begun work on two versions of draft summit conclusions for the December gathering — one for the possibility of a breakthrough and another one for continuing stalemate.

Sunnier Tone

The pound rose as much as 0.5 percent against the euro, as investors were relieved that talks at least hadn’t ended acrimoniously.

Davis struck sunnier tone than Barnier, saying “significant progress” had been made on all three divorce issues. He continues to reject the demand that the bill is sorted before talks can move on to trade. But the two sides had made some progress going through the EU demands, which include payments for pension liabilities and projects the U.K. agreed to finance while a member.

“We are making clear progress in building a common technical understanding on every item,” he said. “This is now about moving into the political discussions that will enable both of us to move forward together.”

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The issue of the Irish border, which had taken a back seat in recent months as the U.K. argued it would be easier to sort further down the line, came back on the agenda, as a memo that emerged late on Thursday made clear that the EU has adopted almost wholesale Ireland’s position.

Davis said they have had “frank” discussions on the border — which bisects the island of Ireland and will become the U.K.’s only land frontier with the EU. The EU paper — which reflects Ireland’s position — called for Northern Ireland to maintain the rules of the customs union and single market after Brexit to avoid a hard border between Northern Ireland and the Republic.

Those demands are all but impossible for Britain, unless the whole U.K. stays in the customs union, which Prime Minister Theresa May has ruled out. Allowing Northern Ireland to stay in the customs union could mean putting a border between it and mainland Britain.

That’s unthinkable for the U.K., and more so at a time when the Conservative government is propped up by the pro-U.K. Democratic Unionist Party from Northern Ireland. The DUP would quit before accepting a border.

Davis made clear on Friday that the U.K. would reject any such solution. Irish Prime Minister Leo Varadkar later clarified that he’s not asking for Northern Ireland to stay in the customs union, but to apply the same rules.

Ireland has a dilemma: while its business want a swift trade deal with the U.K., it’s aware that the issue of the border has essentially given it a veto in the first phase of talks, which it will lose once it agrees that talks can move on to trade. The Irish government risks political criticism at home if it agrees to anything that could be construed as allowing the island of Ireland to be divided. But the longer trade talks are delayed, the greater the chance of a messy no-deal Brexit, which would damage Ireland’s economy.

The U.K. has about two weeks to improve its offer on the bill so that trade talks can get the green light at the summit in December. With the EU asking for about 60 billion euros ($70 billion) and the U.K. so far offering about a third of that, the U.K. side will need to make concessions. That will be hard to sell at home as voters were promised more money would be made available from Brexit — rather than being left on the hook for bills. Several high-profile figures in May’s Conservative Party are unwilling to offer the EU a settlement.

May made some efforts late yesterday to win over euroskeptic lawmakers: she wants to enshrine in law the date that the U.K. will leave the EU. The move may also aim to discourage the growing wave of speculation about how Brexit could be reversed or delayed.

May, whose position at the top of a divided cabinet is vulnerable, also used firm words in a Telegraph editorial to warn pro-EU lawmakers not to try to thwart the divorce by amending her flagship Brexit legislation. She won’t tolerate any attempts to “try to block the democratic wishes of the British people by attempting to slow down or stop our departure from the European Union.”
Source: Bloomberg