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The U.K. and the European Union are on course to miss a key milestone on the road to a Brexit deal after talks hit a roadblock on Sunday. Negotiations are now paused, putting pressure on leaders to step into the breach later this week.
A weekend of intense negotiations -- including a surprise dash by Brexit Secretary Dominic Raab to meet his EU counterpart Michel Barnier in Brussels -- failed to break the deadlock.
@DominicRaab and UK negotiating team. Despite intense efforts, some key issues are still open, including the backstop for IE/NI to avoid a hard border. I will debrief the EU27 and @Europarl_EN on the #Brexit negotiations.
There will be no further attempt to resolve the impasse before the EU summit in the Belgian capital on Wednesday, according to people familiar with the matter, and officials on both sides are concerned time is running out to get an agreement before the U.K.'s exit in March. Even so, Britain's Foreign Secretary Jeremy Hunt said he's optimistic a deal can ultimately be done.
The pound was little changed against the dollar as of 11:10 a.m. in London, having fallen as much as 0.5 percent earlier.
Hopes Dashed
“Hopes of a decisive breakthrough in the Brexit negotiations at this week's European Council have been thwarted by Theresa May's limited room for maneuver at home,” Eurasia analyst Mujtaba Rahman said in a note to clients. “The decisive factor was enormous pressure from her own Cabinet, which compounded the problems she already had with Eurosceptic Tory MPs and Northern Ireland's Democratic Unionist Party.”
The weekend was meant to be a chance to crack the thorniest issue in talks -- what to do with the Irish border -- so that leaders could declare progress at this week's summit and signal that a final deal could be signed in mid-November.
That timetable -- which markets had started to price in -- has been thrown off and there's likely to be more talk of how to prepare for a chaotic and acrimonious no-deal split. A key meeting of EU governments scheduled for Monday was canceled and negotiations will likely to be paused for some time, according to EU diplomats.
‘Sticking Point'
“I think everyone in the U.K. should have confidence that this Prime Minister, Theresa May, will never sign a deal that is not compatible with the letter and spirit of the referendum result,” Hunt told reporters in Luxembourg ahead of a scheduled meeting with his EU counterparts Monday. “There are one or two very difficult outstanding issues, but I think we can get there.”
German Foreign Minister Heiko Maas said on Twitter an agreement was still possible, warning that a no-deal Brexit carried economic risks. “I hope that in the end, reason takes the upper hand.”
The major sticking point remains how to avoid the need for a hard customs border at the land frontier between Northern Ireland and the Republic of Ireland after Brexit. One proposal is to keep the U.K. inside the EU's customs union on a temporary basis, which would mean no new checks on goods passing from Northern Ireland to Ireland would be needed.
Read our explainer about why the Irish border is the intractable Brexit riddle
But pro-Brexit ministers in May's Tory party -- including Raab -- are determined to make sure any such arrangement has a strict end date, to avoid Britain being trapped inside EU rules and tariffs indefinitely. They want the U.K. to be free to strike trade deals around the world, something that is impossible for countries in the EU customs union.
Despite the pessimism, some observers believe a showdown moment may simply be a necessary piece of theatrics that will act as a precursor to a deal.
Standing Firm
The September EU summit in Salzburg ended in a diplomatic disaster for May, yet she used the occasion to her advantage. A breakdown in relations in October could potentially help the premier at home by showing she had stood her ground.
“In Europe, an agreement never comes before the end of the time, we don't have to dramatize, we still have time, we still have a month,” Josep Borrell, Spain's minister of foreign affairs, told reporters in Luxembourg. “This week, it will not be possible” to reach a breakthrough, he said. “But this week is not the end, we will continue negotiating.”
Some EU diplomats speculate that she needs to have a fight in order to get the deal she does eventually deliver through a divided British Parliament. May is probably going to have to count on opposition votes, and will need to present it as the only viable alternative to chaos.
Sabine Weyand, Barnier's deputy, told ambassadors it was clear from Sunday's talks that for domestic reasons the U.K. needed more time before it could make concessions, according to a diplomat in the meeting.
Read more about the tricky arithmetic May has to contend with to get Brexit
With just five months until the U.K. is due to leave the bloc, with or without a deal, businesses are increasingly anxious to see the terms of the divorce and to secure the 21-month transition period that they need to avoid the legal limbo of no-deal. Yet the two sides remain far apart on key points.
Unresolved
“There remain a number of unresolved issues relating to the backstop,” a British government spokesman said on Sunday. “The U.K. is still committed to making progress at the October European Council.”
The Irish backstop proposal has enraged at least two groups that May needs in order to get her deal through a Parliament where she has no majority. That's reduced her room for maneuver.
At least one member of May's Cabinet is considering resigning over her Brexit stance and former Brexit Secretary David Davis is rallying Brexit hardliners to rebel. Arlene Foster, the head of the Northern Irish DUP that props up May's government, was quoted as saying she expects a no-deal exit because the premier's proposals on the Irish border are unacceptable.
Sammy Wilson, the DUP's Brexit spokesman, told the Belfast News Letter a no-deal exit is “probably inevitable” because of the “intransigence of the EU” and the “corner they've put Theresa May into.”
A Cabinet meeting on Tuesday is shaping up to be a showdown between May and those ministers most in favor of a clean break with the EU. “We need more time, but there isn't much time left,” one British official said.
--With assistance from Viktoria Dendrinou and Lyubov Pronina.
To contact the reporters on this story: Ian Wishart in Brussels at iwishart@bloomberg.net;Nikos Chrysoloras in Brussels at nchrysoloras@bloomberg.net;Tim Ross in London at tross54@bloomberg.net
To contact the editors responsible for this story: Emma Ross-Thomas at erossthomas@bloomberg.net, Stuart Biggs, Jones Hayden
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