U.K. to Trigger Brexit March 29, Starting Two Years of Talks

(Bloomberg) -- Prime Minister Theresa May will file divorce papers to leave the European Union on March 29, launching two years of complex negotiations that will pit the U.K.’s desire for a trade deal against the bloc’s view that Britain must not benefit from Brexit.

More than 40 years after the U.K. joined the EU and nine months since it voted to leave, Britain’s envoy to the bloc, Tim Barrow, informed EU President Donald Tusk on Monday of May’s plan to invoke Article 50 of the Lisbon Treaty, the mechanism for quitting that has never been used.

At stake in the looming talks is whether Britain -- the world’s sixth biggest economy -- can regain powers over immigration and lawmaking without derailing trade with its largest market or threatening London’s status as the region’s leading financial center. England’s 310-year-old union with Scotland is also in jeopardy, while the border separating Northern Ireland -- a U.K. province -- from the Republic of Ireland could become a hard one.

“I want to ensure we get the best possible deal for the United Kingdom,” May said during a visit to Swansea, Wales. The premier said her goals included getting “a good free-trade deal” with the EU and an agreement to collaborate on security after Brexit. “We are going to be out there, negotiating hard, delivering on what the British people voted for,” she said.

EU Ready

The EU is “ready to begin negotiations,” European Commission spokesman Margaritis Schinas told reporters in Brussels. The pound fell, reversing earlier gains, after the announcement. It was trading at $1.2348 at 4.32 p.m. in London, down 0.4 percent on the day. It earlier touched $1.2436, the strongest level this month.

For the EU, the focus will be on ensuring there is no easy ride for the British as it tries to safeguard the stability and the commitment of its 27 remaining member states to the postwar project of deepening economic and political union. It is also tested by growing nationalism at home and meddling from beyond by Russian President Vladimir Putin and U.S. President Donald Trump.

May will soon be working against the clock. Realistically, she has until the end of 2018 to agree the terms of the breakup and try to win the trade deal she wants. If she can’t secure an agreement, Britain will crash out of the EU and over what businesses call a “cliff edge” of uncertainty and higher trade tariffs.

Election Talk

No details of the communication with Tusk’s office were disclosed. EU leaders plan an initial response within two days of May triggering Article 50, before convening a summit in late April or early May to ratify guidelines for their chief Brexit negotiator, Michel Barnier. Officials have said they may wait until June to engage fully, and then German elections in September could serve as another distraction.

There is speculation that May could also try to trigger an election in the U.K., in the hope of winning a bigger majority in Parliament and her own mandate to strengthen her hand at home and in the Brexit talks. Her spokesman, James Slack, rejected the idea of an early election on Monday, telling reporters: “There isn’t going to be one.”

The British premier is up against European leaders who are showing no desire to give her generous terms, fearing that would encourage exit campaigners elsewhere. The EU is already planning to focus the early part of talks on the exit fee -- estimated as high as 60 billion euros ($64 billion) -- and May has been told she won’t be allowed to “cherry-pick” the best bits of EU membership without bearing the costs.

‘Vicious’

Irish Prime Minister Enda Kenny has warned the talks could turn “vicious’’ and European Commission President Jean-Claude Juncker has predicted they will be “very, very, very difficult.” David Davis, the U.K. Brexit Secretary, is readying for what “may be the most complicated negotiation of all time.”

May has conceded Britain will have to quit the single market for goods and services -- accounting for about 44 percent of its exports -- to avoid being bound by European court rulings and the free movement of migrants. She says it would be “rational” for the EU to agree to her terms given the amount of goods and services its companies ship to the U.K. and the security her government provides the continent.

While May says “no deal for Britain is better than a bad deal for Britain," quitting the bloc without a pact or more time to negotiate one would leave the country exposed to World Trade Organization tariffs, putting duties of around 10 percent on car exports alone. Strengthening May’s hand to push for a so-called hard or clean Brexit is the fact the U.K. economy is defying predictions that voting to leave the EU will spark a recession.

High-Wire Act

Still, signs are emerging that consumer spending -- the engine of the British economy --is starting to slow as the pound’s 17 percent decline since the June 23 referendum drives up inflation.

May faces a high-wire act during the two years of talks. She campaigned to remain in the EU but must now navigate the exit, after succeeding David Cameron, who resigned when he lost the referendum. Having already faced pushback, first from the Supreme Court and then from parliamentarians, she leads a Conservative Party split between lawmakers who want a clean, swift break and those who worry she risks hurting the economy. Fresh calls for a second independence referendum in Scotland from First Minister Nicola Sturgeon only intensify the pressure on the prime minister.

An early flashpoint will be the bill Barnier wants to present Britain with. EU officials say they aren’t willing to discuss trade until that’s settled and that the matter could take until early 2018 to resolve in a best-case scenario. A worst case would see the talks break down prematurely. Other points to be discussed early in the talks include border issues and rights of EU citizens residing in the U.K. as well as Britons living in the bloc.

‘Incredibly Complex’

May’s team has questioned the size of the bill and how much legal obligation Britain is under to pay it. It wants to discuss the exit and the new free-trade deal together, to save time, give businesses certainty and to preserve bargaining power. The two sides may also have to line up a transitional phase to bridge leaving the bloc and new trade rules with banks threatening to shift staff from London if they don’t get time to adjust.

“This is not only the beginning of the process, it’s also the beginning of a process by which the delusions of the Brexiteers will have a very brutal collision with reality,” former U.K. Deputy Prime Minister Nick Clegg said in an interview. “Now they actually have to negotiate with 27 other governments and parliaments -- it’s going to be incredibly complex.”

Brexit Minister David Jones told a panel of lawmakers the government is making contingency plans because it is “quite possible” the Brexit talks will collapse without a deal, though he insisted he’s expecting a successful negotiation.

In a sign the U.K. is preparing to fight the EU over paying to leave the bloc, Jones said he welcomed an “extremely helpful” recent report from lawmakers that said Britain could legally quit the bloc without stumping up anything.

The U.K. will publish a paper plan “soon” setting out proposals for a ”Great Repeal Bill,” incorporating EU law into British law on the day the country leaves the bloc, he said. A “large number” of other detailed draft laws will follow, paving the way for the U.K.’s new migration rules and other areas of specific legislation that will need to replace EU laws.

--With assistance from Robert Hutton and Alex Morales

To contact the reporters on this story: Tim Ross in London at tross54@bloomberg.net, Ian Wishart in Brussels at iwishart@bloomberg.net.

To contact the editors responsible for this story: Simon Kennedy at skennedy4@bloomberg.net, Andrew Atkinson