May breaks impasse in Brexit talks

Britain and the European Union are set to resume Brexit negotiations next week after United Kingdom Prime Minister Theresa May broke the stalemate in the hope that the real arguments can now begin.

In a major speech last Friday that drew guarded praise from Brussels, May signaled for the first time that she’ll be ready to discuss the amount of money the UK will owe to the EU when it departs the bloc in 2019. German Chancellor Angela Merkel’s party offered a skeptical response.

At the end of the day, the UK’s credit rating was cut by Moody’s Investors Service.

May’s goal is the opportunity to push talks nearer to the future trading relationship between the UK and the EU, and her offer is a two-year transition phase. The coming round of negotiations will test May’s ability to keep both the EU and her own euro-skeptic Conservatives on side.

“Theresa May’s offer on the divorce bill was probably more generous than anticipated, by hinting at an inclusion of historic liabilities, as well as current budget commitment,” said Mats Persson, head of international trade at EY and a former adviser to Prime Minister David Cameron. “We’re now in the landing zone of the ‘significant progress,’” he added.

That’s what EU’s chief negotiator Michel Barnier is looking for: progress on the issue of money, citizens’ rights and the Irish border. May gave her most detailed road map yet for the divorce in a speech in Florence. In it, she said Britain would pay to smooth its departure from the bloc until the end of the current EU budget in December 2020.

That buys her some time.

Just hours after May spoke, Moody’s trimmed the UK’s credit rating by one notch to Aa2, blaming doubts it had over the government’s ability to land a trade pact and a likely weakening in the public finances. The UK rating had been Aa1 since February 2013. The government called the company’s analysis “outdated.”

S&P Global Ratings and Fitch Ratings downgraded the UK by one notch the week after the June 2016 Brexit referendum.

Praise, caution

May’s words were immediately welcomed by key leaders she was trying to reach. French President Emmanuel Macron said May had made “advances,” and Barnier praised her “constructive spirit.” He also warned the prime minister to craft a “a precise negotiating position” for when talks resume in Brussels on Monday.

“The UK will honor commitments we have made during the period of our membership,” May said in a much-anticipated speech in the Italian city. The government official later clarified that meant she was open to discussing financial commitments beyond the scope of the EU budget, and that the UK would honor its dues more broadly.

Striking a negative tone, Michael Stuebgen, the lead lawmaker on European affairs for Merkel’s Christian Democrats, said May’s speech “still hasn’t explicitly committed Britain to all of its financial obligations in the EU budget.” May also failed to break new ground on EU citizens’ rights and the issue of Ireland’s border with the UK, he said in a statement.

“Unfortunately, this speech won’t lead to the new dynamic in the talks that’s so badly needed,” making progress on Brexit unlikely in the run-up to an EU summit in October, Stuebgen said.

Transition period

She made the promise while also proposing to pay money and accept the EU’s rules for two years after Brexit takes effect in March 2019, in return for a transitional period that mirrors the status quo of tariff-free, regulation-light commerce—and freedom of movement.

Britain’s access to the EU single market and vice versa would remain unchanged during the transition, according to May’s plan.

A word analysis of May’s last two speeches and what the change means what remains unclear is what May’s ultimate goal is. She’s eschewed language about a “bespoke” deal, but also rejected the so-called Norway or Canada models that have been offered as inspiration.

The cost of such an implementation phase could run to about €20 billion ($24 billion), but the so-called Brexit bill could stretch to five times that in gross terms. EU governments say, while they don’t need to see a final sum yet, Britain must help find a way to calculate it before they sign off on trade talks.

The Times, citing two people in Brussels it didn’t identify, said May agreed to pay £40 billion: about £20 billion from March 2019 through year-end 2020 and “other liabilities” of £20 billion “negotiated separately and paid over many years.”

However, May will know that Conservative hardliners won’t tolerate repeatedly delaying Brexit or signing up for vast financial liabilities.

Some ardent “Leave” campaigners are already unhappy about her plan for a two-year transition, during which free movement migration rules, budget payments and the rule of the European Court of Justice will continue to apply largely unchanged.

“The British people are patient, but more than two years for a transition period would test that patience,” Tory lawmaker Andrew Bridgen said in an interview. “We don’t want to do that in the next general election in 2022.”

Fellow Tory Jacob Rees Mogg told the BBC that effectively delaying Brexit is “disappointing” and that May hadn’t made clear if the European Court of Justice will have jurisdiction in the UK during the transition. “To my mind that is a red line,” he said.

Companies rejoice

Many businesses welcomed May’s talk of a transition that would keep trading conditions unchanged, having previously warned of a rupture in 2019. May said companies should only have to make one change—taking on board an idea first floated by Chancellor of the Exchequer Philip Hammond.

She also won the endorsement of Foreign Secretary Boris Johnson, seven days after he warned her against going soft on the EU and appeared to be on the brink of resigning. He tweeted: “PM speech was positive, optimistic & dynamic.”