Brexit Talks Begin in Brussels as May Urged to Soften Stance (2)

Jun 19, 2017 8:40 am ET

(Bloomberg) -- Almost a year since Britons voted to leave the European Union, Brexit talks finally began on Monday amid confusion over what exactly the U.K. government wants from the divorce.

What U.K. Brexit Secretary David Davis describes as the “most complicated negotiation of all time” kicked off in Brussels with Prime Minister Theresa May’s government already on the backfoot. An attempt to strengthen her hand by calling an election backfired and she’s run into further domestic strife since, while the 27 other EU members started out with more leverage anyway.

“We are starting this negotiation in a positive and constructive tone,” Davis said in comments to reporters from the European Commission’s Berlaymont building headquarters. “There is more that unites us than divides us.”

The EU’s chief negotiator, Michel Barnier, told reporters that the talks “must first tackle the uncertainties posed by Brexit,” as he outlined expectations for the opening round. “I hope that today we can identify priorities and the timetable that would allow me to report to the European Council later this week that we had a constructive opening of negotiations,” he said.

The U.K. electoral debacle has put May’s own position in doubt, fueling a new battle within her Conservative Party over the kind of Brexit the government should seek. Some of her ministers want to refashion her strategy toward protecting trade with Britain’s biggest market rather than continue to aim for her original goal of winning control of immigration and law-making.

Strong Enough

May has yet to change tack formally and doing so would risk infuriating euroskeptics in her Tory party who might still prove strong enough to scupper a deal or to topple her as leader if they believe she’s backsliding.

“The election result increased the probability of extreme outcomes,” said Phillip Souta, head of U.K. public policy at Clifford Chance LLP. “If there is going to be a deal, it makes it more likely to be softer than before the election, but on the other hand the probability of no deal at all has increased.”

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The negotiations start against the backdrop of a mounting domestic crisis in the U.K. May’s weakened post-election standing deteriorated further last week after she was slammed for misjudging the national mood following a deadly tower block inferno in West London. The public mood has also been shaken by a wave of terror attacks in recent weeks, the latest of which involved a van that rammed pedestrians near a mosque in North London early on Monday morning, killing one and injuring ten.

In Brussels, Davis and Barnier meet with the U.K. keen to win back sovereignty without hurting its economy, while the EU’s aim is to maintain regional stability and stop inadvertently rewarding Britain’s decision to leave for fear of encouraging others to break away. Barnier plans to hold face-to-face meetings every four weeks and he and Davis will hold a press conference after Monday’s discussions.

‘New Partnership’

“The most important thing now is for us to look to the horizon, raise our eyes to the horizon, think about the future, think about the new partnership, the deep and special partnership that we want to build with our friends,” Foreign Secretary Boris Johnson told reporters in Luxembourg on Monday before a meeting of his EU counterparts. “In the long run, this would be good for the U.K. and good for the rest of Europe.”

How the negotiations progress will be monitored closely by investors and business leaders. Banks including Goldman Sachs Group Inc. say they will shift jobs from London to the EU if they fear their access to the bloc is jeopardized, while manufacturers in the U.K. such as carmaker Nissan Motor Co. warn against trade being hurt. The pound has fallen about 14 percent against the dollar since the June 23 referendum, pushing up inflation even as the economy shows signs of slowing.

Up for debate in London now is whether to safeguard trade, perhaps by staying in the bloc’s tariff-free customs union temporarily or trying to win concessions on commerce by giving ground on immigration or the power of the European Court of Justice. Such conversations mark a shift from the pre-election talk of a “hard Brexit” and May’s onetime warning she would walk away from the talks if disappointed.

Read more: The Brexit checklist - where the U.K. and EU now stand

Without a majority for her Conservatives in the U.K. Parliament, May now says she will work to reflect the wide range of views on Europe that exist in Britain, a signal her Brexit policies could soften.

U.K. Chancellor of the Exchequer Philip Hammond said on Sunday he wanted a “jobs first” Brexit -- a hint that he believes economic concerns should be prioritized over the political demand to cut immigration from the EU. Freedom of labor movement is a tenet of EU membership and May initially interpreted the referendum result as a demand to stop that.

As the for EU side, it is expecting to have the final say on what Brexit entails no matter what the U.K. seeks. While denying they want to punish their neighbor, EU officials have warned Britain off trying to “cherry pick” the benefits of membership and said it will be left worse off outside the bloc than inside.

German Chancellor Angela Merkel said her priority was that the EU27 maintain their unity, while listening “very carefully” to the U.K.’s wishes and proposals.

“I think it’s premature to speculate about the outcome on the first day of talks,” she told reporters in Berlin. “I would like us to strike a good deal that is in both sides’ interests, but we 27 will frame our interests very clearly and jointly.”

Failure to strike a deal before Britain automatically leaves the bloc on March 29, 2019, risks inflicting sweeping tariffs and uncertainty on both economies. Business leaders have already warned against such a “cliff edge” scenario and are eager to see a transitional period to give them time to adjust after the split.

(Updates with comment from Chancellor Merkel in 16th paragraph.)

--With assistance from Richard Bravo Nikos Chrysoloras John Fraher and Birgit Jennen

©2017 Bloomberg L.P.