The Union flag, also known as the Union Jack, left, stands next to a European Union (EU) flag ahead of the start of Brexit negotiations in Brussels, Belgium. (Photographer: Jasper Juinen/Bloomberg)

Barnier Holds Brexit Line as May's Ministers Inch Toward Unity

(Bloomberg) -- European Union Chief Negotiator Michel Barnier dug in and stressed a hardline trade position just as U.K. Prime Minister Theresa May’s key ministers were starting to unite behind a Brexit policy that may soothe rifts in her Cabinet.

Barnier used an interview with the Guardian newspaper published late Monday to rule out a special carve-out for the U.K. financial services industry and warn that Britain will have to abide by any new rules drawn up by the EU during a transition period after leaving the bloc.

His comments, which underline the EU’s determination not to let the U.K. enjoy the benefits of membership after leaving, came hours after May’s core Brexit team met to discuss what kind of trade deal the U.K. will seek with the bloc when talks start early next year.

The so-called “end state” of the divorce is an issue that divides her ministers, and it’s taken until now for them to start discussing it. The full cabinet will meet Tuesday as May seeks to bring together the differing factions in her top team.

At the meeting on Monday there was support for the idea that the U.K. should make the most of the fact it starts off with all the same rules as the EU, and then selectively move away from some of those regulations, according to a person who was present.

No Special Deal

Barnier explicitly ruled out a special deal for Britain’s financial services sector and said the decision to leave the EU single market rules out passporting arrangements which allow British financial services companies to trade in the EU. This will be a blow for banks that are already eyeing alternative cities like Frankfurt to move some of their staff.

“There is not a single trade agreement that is open to financial services. It doesn’t exist,” Barnier told the Guardian. It is a result of “the red lines that the British have chosen themselves,” he said. “In leaving the single market, they lose the financial services passport.”

U.K. officials, who asked not to be identified, indicated that Barnier’s comments should be seen as a negotiating position ahead of him being given guidelines for trade talks by EU leaders in March. Britain will emphasize the danger to economic cooperation and free trade if the EU pursues such a hard approach, one of the officials said.

Eighteen months after the referendum, May is still seeking a path to Brexit that doesn’t increase divisions in her fractious Conservative Party. Until now she has avoided formal discussions about the end state even in private.

Those who backed Brexit have tended to advocate a clean split and liberation from EU rules, even though that would put up barriers to trade with the bloc. Those who favored remaining in the EU have sought to maintain ties to the country’s biggest trading partner, and are willing to make concessions in return.

It’s not clear what the EU side might think of the proposal to gradually move away from full alignment as and when it suits the U.K. There’s a risk Brussels would consider it the kind of “cherry-picking” approach that it has long rejected. Barnier said at the weekend there’s “no way” negotiators would “mix up the various scenarios to create a specific one and accommodate their wishes.” 

If the EU says no, Cabinet tensions could re-emerge. May has made clear that controlling immigration and getting rid of European Court of Justice influence in the U.K. are red lines for her -- as they are for the most committed Brexit-backers. But the EU has said that access to the single market would require concessions on those points.

©2017 Bloomberg L.P.