Brexit Bulletin: How the Deal Could Unravel

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Britain will find out in the next 10 months what it will get in exchange for the £40 billion exit bill it agreed to pay the European Union. As the quid pro quo comes more clearly into focus, there's a risk it derails the whole process.

The U.K. has always said it wants a full trade deal wrapped up and ready to sign the moment it leaves the bloc in March 2019. That makes sense as it will have more leverage as a member negotiating its exit – with financial obligations in the balance – than as an estranged partner negotiating a new trade deal. But time constraints, and the EU's stance, mean that all the U.K. will likely get by October is an outline agreement on the future relationship with its biggest trading partner. October has emerged as the deadline so that European and U.K. parliaments have time to approve the deal before exit day in March 2019.

Without a whole lot of detail or a legally binding agreement on future ties, the outline deal could stir opposition at home on both ends of the Brexit spectrum. There are already those in the Tory party questioning why the government has agreed to pay an exit bill. That indignation could spread as lawmakers and voters weigh up what the U.K. is getting in return. 

“If there's no legal basis that's a real problem for the U.K. They will push for something legal but the EU is leaning towards something like a EU council document,” said Mujtaba Rahman of Eurasia Group. Lawmakers could refuse to approve the deal if they don't think the U.K. has secured enough in the way of guarantees.

Read more: Predictions for 2018, the Year That Makes or Breaks Brexit

EU officials say there is a way to give the political declaration on the future relationship some legal clout, but the text on future ties will be a separate document to the exit agreement. It will inevitably be vague, according to the EU side. An EU official at the end of last year said the text could be about 30 pages long. By contrast, Canada's free trade agreement with the EU runs to 1,600 pages.

Time is short: talks on the future relationship are due to start in March, after discussions on the transition deal, and there are still loose ends from the first phase of talks to tie up.

Brexit Latest

Change the Rules | The U.S. wants Britain to cut EU regulations after Brexit to boost the chances of striking a free-trade deal between the two countries. If May ditches some European rules on farming and food processing, “there is a much greater opportunity for trade between the U.K. and U.S.,” according to Ted McKinney, undersecretary for trade at the U.S. Department of Agriculture. “We find the EU a very difficult place to do business and so we hope that as part of Brexit, the reset button can at least be considered,” he said at an event in Oxford with Environment Secretary Michael Gove.

Democratic Sabotage | After former Prime Minister Tony Blair on Thursday reiterated his longstanding call for a second referendum, Andrew Adonis, a Labour peer who quit as May's infrastructure czar at the end of last year, said he, too, wants another public vote. He told LBC radio a new referendum is the only way the 2016 verdict can be reversed. “I absolutely want to sabotage Brexit,” he said. “But I do not want to do that in an undemocratic way.” Blair's campaign extended to Europe, with an op-ed in El Pais on Friday.

Car Slump | U.K. car sales suffered their biggest annual slide since the global recession, stunted by Brexit's impact on consumer confidence. Preliminary figures indicate 2017 sales fell 5.6 percent from a year earlier to 2.54 million vehicles, the steepest drop since 2009.

Stick Together | French President Emmanuel Macron urged fellow European leaders to maintain their unified stance as Brexit talks move on to the future relationship. He said the members of the EU would maintain their approach of seeking a common negotiating mandate. If they didn't, he said, they could harm their own interests by failing to cooperate – a classic prisoner's dilemma.

On the Markets | One of the first economists to correctly predict that the Bank of England would hike interest rates in November is warning that rates will increase more quickly than consensus forecasts over the next two years. Nomura's George Buckley is forecasting four rate hikes by the end of 2019 to keep inflation in check. The pound rose 0.2 percent in early trading to $1.3572 on Friday.

And Finally...

Former U.K. Independence Party Leader Nigel Farage has clinched a meeting with EU Brexit negotiator Michel Barnier and has asked the public to help him come up with questions. Farage, who has criticized the agreements reached so far and wants the U.K. to be ready to walk away from talks, will meet Barnier on Monday.

Pro-Europeans in Britain are not pleased. “Sending Nigel Farage to Brussels to sort out Brexit is like sending an arsonist to put out a house fire,” said James McGrory, Executive Director of Open Britain, which is trying to maintain ties to Europe.

— With assistance from Ian Wishart and Alex Morales

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To contact the author of this story: Emma Ross-Thomas in London at erossthomas@bloomberg.net.

To contact the editor responsible for this story: Adam Blenford at ablenford@bloomberg.net, Andy Reinhardt

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