May's Red Lines Begin to Blur Even as She Clings to Brexit Dream

(Bloomberg) -- Theresa May has started to compromise on the ambitious vision for Brexit that has prevented her fractious government from splitting apart, with a blunt warning that “hard facts” can't be ignored any longer.

For the first time, the British prime minister admitted there are contradictions in her negotiating aims and raised the prospect of diluting her own red lines. 

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“We need to resolve the tensions between some of our key objectives,” May said in the speech, which was moved from the Brexit-leaning North East of England. The U.K. and the EU “both need to face the fact that this is a negotiation and neither of us can have exactly what we want.”

But she clung to a blueprint for an unprecedented trade deal with Europe that her Cabinet has rallied behind even though European officials think it's unrealistic. She wants to leave the EU single market and customs union but have no new tariffs, keep an open border with Ireland, and pick and choose regulations for different business sectors.

The speech came at a critical moment in the Brexit process. With just over a year to go before Britain leaves the bloc, negotiations on the future trade partnership are about to begin. The EU has been demanding clarity from the U.K. on what kind of trade terms it wants.

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Foreign Secretary Boris Johnson, a figurehead of the Brexit campaign, tweeted his support. Jacob Rees-Mogg, leader of the hardline Brexit backers in Parliament, said it was a good speech and now was not the time to nitpick over the concerns that it raised. Nicky Morgan, a pro-EU Conservative who has rebelled against the government to keep ties as close to Europe as possible, was also satisfied.

In Europe, the reaction was more muted. While Michel Barnier, the EU's chief Brexit negotiator, welcomed the “clarity” that May provided, other EU officials said there were still many questions that urgently need answering.

The pound was little changed. 

May has been trying to keep both pro and anti-Brexit wings of her own Conservative Party together. Her solution has been to ask for everything and avoid the inevitable hard choices.

May's most senior advisers admit the real domestic troubles will start when the EU refuses and forces the U.K. to decide between the freedom to strike trade deals around the world or retain open commerce with the EU.

“The reality is that we all need to face up to some hard facts,” May said. “We are leaving the single market. Life is going to be different. In certain ways, our access to each other's markets will be less than it is now.”

In one key area, May specifically opened the door to a serious compromise on one of her red lines: the role of the European Court of Justice. May has previously ruled out a role for the ECJ -- which is loathed by euroskeptics -- in making rulings that affect the U.K.

As Bloomberg reported on Feb. 24, May is blurring this key red line. “Even after we have left the jurisdiction of the ECJ, EU law and the decisions of the ECJ will continue to affect us,” she said.

May proposed the U.K. taking on “associate membership” status at some key EU industry regulators, which are overseen by the ECJ. This would affect chemicals, aviation and medicines, which are overseen at an EU level.

“We would, of course, accept that this would mean abiding by the rules of those agencies and making an appropriate financial contribution,” May said.

An official in May's office told reporters the speech showed the prime minister is being pragmatic rather than theological. She doesn't believe walking out of talks would help get a deal.

“We will not be buffeted by demands to talk tough or threats to walk out," May said in the speech.

To contact the reporter on this story: Tim Ross in London at tross54@bloomberg.net.

To contact the editors responsible for this story: Flavia Krause-Jackson at fjackson@bloomberg.net, James Hertling, Emma Ross-Thomas

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