Theresa May, U.K. prime minister. (Photographer: Caitlin Ochs/Bloomberg)

Brexit Talks in Peril as May Says She'll Never Agree to EU Draft

(Bloomberg) -- U.K. Prime Minister Theresa May vowed she will never accept a draft Brexit agreement published by the European Union on Wednesday, raising the prospect that the negotiations are heading for a breakdown. The pound fell.

The EU commission set out in minute detail how it wanted to arrange Britain’s withdrawal, but key passages on avoiding new customs checks at the U.K.’s land border with Ireland made the 118-page draft impossible for May to support. It proposes keeping Northern Ireland in the bloc’s customs union, under the jurisdiction of the European Court of Justice -- both of which May wants the whole of the U.K. to leave.

With time running out to reach a solution before the U.K. leaves in March 2019, May gave her verdict: the plan would undermine the integrity of the British economy and constitution.

“No U.K. prime minister could ever agree to it,” May told Parliament in London. “We will never do so.”

While May fights Brussels, her room to negotiate is being squeezed by her wafer slim parliamentary majority at home. She faces rebels on each end of the Brexit spectrum.

Those who want her to keep closer EU ties are gaining in strength, and are backing legislation to keep the U.K. in the customs union that has enough support to defeat her.

Tory Rebellion

These pro-EU Conservative lawmakers might be encouraged by the words of chief EU negotiator Michel Barnier, who said keeping the whole U.K. in a customs union with the bloc would go a long way to solving the problem of the Irish border.

Why Ireland’s Border Is Brexit’s Vexing Puzzle: QuickTake Q&A

May is due to spell out her own vision for the future trading partnership with the EU in a speech on Friday. The stakes are high. She needs to finalize the terms of the Brexit transition phase that business is desperate for at the March 22 EU leaders’ summit, and then move on to start negotiations on trade, with the aim of concluding these by October.

So far, the EU has dismissed May’s approach to a free-trade agreement outside the EU’s single market and customs union as “cherry picking.” There’s still no deal on what the transitional phase will look like, and even parts of the divorce settlement that were agreed in December now look like they’re falling apart.

While privately officials say much of the dispute is down to both sides taking up tactical negotiating positions, a seemingly intractable problem lies at the heart of the argument. That is how to police the U.K.’s future land border with the Republic of Ireland, an EU member, after Brexit.

Common Rules

According to the EU’s draft treaty, Northern Ireland will form a “common regulatory area” with the Republic of Ireland and will have to follow the EU’s rules and rates on customs, sales tax, state aid, excise duties and even sanitary and phytosanitary rules. U.K. officials working at the Northern Irish customs will have to follow EU rules.

This is the fall-back position that will come into force if the U.K. and the EU do not agree to a sweeping free-trade accord that solves the problem, and if other solutions can’t be found.

For May, the problem with the EU’s plan is threefold: first, it goes much further toward tying Northern Ireland into the EU’s market rules than was agreed in the initial phase of Brexit talks in December.

Johnson: Irish Border ‘Being Used’ to Keep U.K. in Customs Union

She’s also promised the hard-line Brexit supporters in her own party who are keeping her in office that the entire U.K. -- including Northern Ireland -- will leave the EU’s customs union.

Heresy

Finally, the EU proposal will create a new frontier between the island of Ireland and the British mainland. This is heresy for the Democratic Unionist Party, the Northern Irish lawmakers who prop up May’s minority government.

The EU text is “constitutionally unacceptable and would be economically catastrophic for Northern Ireland,” DUP leader Arlene Foster said on Wednesday.

British officials privately regard the EU’s draft as hostile. One said the European Commission appeared to be trying to annex Northern Ireland and turn it into a supplicant state.

The EU rejects such a notion. Irish Foreign Minister Simon Coveney said in an interview with Irish broadcaster RTE on Wednesday that Northern Ireland will “of course” remain part of the U.K. after Brexit. Moreover, the backstop option applies primarily to goods, meaning even if it came to pass, much of U.K. law would still apply across the province.

The U.K. official also said it was provocative for the EU to cut a key passage of text that was included in the deal signed by May and European Commission President Jean-Claude Juncker in December, which was intended to guarantee no new trade barriers between Northern Ireland and mainland Britain.

“We are committed to ensuring that we see no hard border between Northern Ireland and Ireland,” May told Parliament on Wednesday. “But the December text also made clear that there should continue to be trade between Northern Ireland and the rest of the United Kingdom as there is today.”

©2018 Bloomberg L.P.

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