Angela Merkel, Germany’s Chancellor, left, poses for a photograph with Theresa May, U.K. prime minister, following a news conference at the Chancellery in Berlin, Germany, on Wednesday, July 20, 2016. (Photographer: Jasper Juinen/Bloomberg)

Germany and U.K. Drop Key Brexit Ask, Easing Path to Deal

(Bloomberg) -- Follow @Brexit on Twitter, join our Facebook group and sign up to our Brexit Bulletin.

The British and German governments have abandoned key Brexit demands, potentially easing the path for the U.K. to strike a deal with the European Union, people familiar with the matter said. The pound rose.

Germany is ready to accept a less detailed agreement on the U.K.’s future economic and trade ties with the EU in a bid to get a divorce deal done, according to people speaking on condition of anonymity because the discussions are private. The U.K. side is also willing to settle for a vaguer statement of intent on the future relationship, postponing some decisions until after Brexit day, according to an official who declined to be named.

The shift away from the demand for extensive detail before exit day means that widespread opposition to U.K. Prime Minister Theresa May’s proposals for the future -- known as her Chequers plan -- isn’t necessarily a barrier to getting a deal. That’s because Brexit is being done in two parts: first the separation agreement to make sure the exit is orderly, and then the future trade accord, which won’t be negotiated until after the U.K. leaves.

The issue of how to avoid a new border on the island of Ireland remains a hurdle to an agreement, although there are also signs of potential progress there. Still, whatever deal May gets is likely to face opposition in the U.K. Parliament when she brings it back for approval.

The pound rose on the news, trading as much as 1 percent higher before paring gains after Reuters cited a German government spokesman saying their position hadn’t changed.

Initially, both sides wanted a detailed map of the future relationship as part of the first stage. Negotiators in the U.K. and EU were once planning a document of up to 100 pages; now it could be just a 10th of that, officials say. That would leave the more detailed -- and controversial -- decisions to be made later on.

Speaking in Parliament on Wednesday, U.K. Brexit Secretary Dominic Raab confirmed that more negotiations will be needed on the details of the future trade agreement after the U.K. leaves the bloc.

Raab said the part of the deal focusing on the future “ought to look more like an instruction to the parties to get on and implement the model and effectively flesh out the detail” after the U.K. has left. But he added that the declaration on the long-term partnership shouldn’t just set out a “nebulous and unclear destination point.”

Germany and U.K. Drop Key Brexit Ask, Easing Path to Deal

A fudged deal will still need to show a clear direction of travel and the EU remains insistent that the U.K. won’t be able to pick and choose bits of the bloc’s single market, officials in Brussels said.
The EU rejects much of May’s blueprint for future ties, in particular its idea of remaining only partly in the single market and establishing a unique model for customs that would enable it to strike its own global trade deals. But the German view is that difficult decisions, if they can’t be reached now, can wait until the U.K. is in its post-Brexit transition phase, during which it will continue to abide by EU rules so that the status quo is maintained until the new regime is clear.

The question of how much detail to agree before Brexit has divided EU governments for a year, with Germany and France pushing for a detailed plan and the U.K.’s closest allies, such as the Netherlands, wanting to leave options open.

May’s administration is still aiming to agree the overall shape of the future trade ties with the EU, one person familiar with the matter said. This will still be a challenge and without enough clarity about the future U.K.-EU relationship, there’s a risk the British and European parliaments will not agree to ratify the accord, the person said.

“Parliament needs to be able to make an informed decision on the future relationship,” May’s spokesman James Slack told reporters in London on Wednesday. He declined to say how many pages in length the text on the future relationship would need to be.

A less-detailed agreement on the future will enable negotiators to focus on the so-called backstop for the Irish border -- an insurance policy that’s triggered if the future U.K.-EU agreement doesn’t prevent the need for customs checks between Northern Ireland and the Republic of Ireland. On that issue, there are also signs of progress.

EU officials are looking for ways to make the bloc’s proposal for the so-called backstop more palatable, a person familiar with the situation said earlier this week. And Raab hinted on Tuesday that the U.K. might be willing to offer a concession to the EU’s position.

A fudged political declaration on the future relationship may also make it easier for May to approve the backstop, according to Mujtaba Rahman, managing director at Eurasia Group, in a note on Wednesday.

“EU negotiators are now calculating that the British prime minister will be able to sign off on the EU’s backstop in the Withdrawal Agreement because she will be able to argue --pointing explicitly to the political declaration -- that it will never need to be implemented,” Rahman wrote.

©2018 Bloomberg L.P.