Brexit talks set to begin with May under pressure to secure soft split

Britain's Prime Minister Theresa May leaves after a church service in Sonning, Britain on June 18, 2017.
Britain's Prime Minister Theresa May leaves after a church service in Sonning, Britain on June 18, 2017.

BRUSSELS (Bloomberg) - Almost a year since Britons voted to leave the European Union, Brexit talks finally open on Monday (June 19) amid confusion over just what the UK government wants from the divorce.

What UK Brexit Secretary David Davis describes as the "most complicated negotiation of all time" begins at 11am in Brussels (5pm Singapore time) with Prime Minister Theresa May's government already on the back foot.

An attempt to strengthen her hand by calling an election backfired and she's run into further domestic strife since, while the 27 other EU members started out with more leverage anyway.

The electoral debacle has put May's own position in doubt, fuelling a new battle within her Conservative Party over the kind of Brexit the UK should seek.

Some of her ministers want to refashion her strategy toward protecting trade with Britain's biggest market rather than continue to aim for her original goal of winning control of immigration and law-making.

May has yet to change tack formally and doing so would risk infuriating euro-sceptics in her Tory party who might still prove strong enough to scupper a deal or to topple her as leader if they believe she's backsliding.

"The election result increased the probability of extreme outcomes," said Phillip Souta, head of UK public policy at Clifford Chance LLP. "If there is going to be a deal, it makes it more likely to be softer than before the election, but on the other hand the probability of no deal at all has increased."

The negotiations start against the backdrop of a mounting domestic crisis in the UK. May's weakened post-election standing deteriorated further last week after she was slammed for misjudging the national mood following a deadly tower block inferno in West London.

The public mood has also been shaken by a wave of terror attacks in recent weeks. Early on Monday morning, a van hit pedestrians near a mosque in North London. Police said one person died, eight were injured and the 48-year-old driver has been arrested.

In Brussels, Davis and the EU's chief negotiator, Michel Barnier, meet with the UK keen to win back sovereignty without hurting its economy, while the EU's aim is to maintain regional stability and stop inadvertently rewarding Britain's decision to leave for fear of encouraging others to break away.

Barnier plans to hold face-to-face meetings every four weeks and he and Davis will hold a press conference after Monday's discussions.

How the negotiations progress will be monitored closely by investors and business leaders.

Banks including Goldman Sachs Group Inc say they will shift jobs from London to the EU if they fear their access to the bloc is jeopardised, while manufacturers in the UK such as car-maker Nissan Motor Co warn against trade being hurt.

The pound has fallen about 14 per cent against the dollar since the June 23 referendum, pushing up inflation even as the economy shows signs of slowing.

Davis struck a conciliatory tone in a statement released overnight, emphasising Britain and the EU's "shared European values".

"I want to reiterate at the outset of these talks that the UK will remain a committed partner and ally of our friends across the continent," Davis said. Brexit will deliver "a deal like no other in history", he added.

Up for debate in London now is whether to safeguard trade, perhaps by staying in the bloc's tariff-free customs union temporarily or trying to win concessions on commerce by giving ground on immigration or the power of the European Court of Justice.

Such conversations mark a shift from the pre-election talk of a "hard Brexit" and May's one-time warning she would walk away from the talks if disappointed.

Without a majority for her Conservatives in the UK Parliament, May now says she will work to reflect the wide range of views on Europe that exist in Britain, a signal her Brexit policies could soften.

UK Chancellor of the Exchequer Philip Hammond said on Sunday (June 18) he wanted a "jobs first" Brexit - a hint that he believes economic concerns should be prioritised over the political demand to cut immigration from the EU.

Freedom of labour movement is a tenet of EU membership and May initially interpreted the referendum result as a demand to stop that.

As the for EU side, it is expecting to have the final say on what Brexit entails no matter what the UK seeks. While denying they want to punish their neighbour, EU officials have warned Britain off trying to "cherry pick" the benefits of membership and said it will be left worse off outside the bloc than inside.

Failure to strike a deal before Britain automatically leaves the bloc on March 29, 2019, risks inflicting sweeping tariffs and uncertainty on both economies. Business leaders have already warned against such a "cliff edge" scenario and are eager to see a transitional period to give them time to adjust after the split.

Friday (June 23) will mark one year since the referendum in which 52 per cent of British voters chose to break four decades of ties to the EU. The vote followed decades of mounting scepticism toward a project initially based on free trade, and which became a lightning rod for complaints over rising immigration and bureaucracy.

The UK may already have made one concession. EU officials said last week that Britain now agreed with them the early part of the talks should focus on the rights of citizens living in each other's economy, the financial settlement the bloc argues the UK owes and maintaining a soft border between the Republic of Ireland and Northern Ireland.

Only when "sufficient progress" is made on these matters is Barnier willing to turn to the "bold and ambitious" trade deal that May wants, a pivot most doubt is unlikely to happen much before October.

The UK is reportedly planning to make a generous offer to the 3 million EU nationals living in Britain so long as it's reciprocated for the 1 million Britons residing on the continent.

The so-called Brexit bill is likely to be the biggest hurdle in the early negotiations. EU officials have indicated it could run as high as 100 billion euros (S$154.79 billion) in gross terms as they push Britain to cover past budget commitments. The UK has ruled out paying such a sum, suggesting it could seek a chunk of the EU's assets as part of a "fair settlement", although it might have to pay something to ease a trade accord.

Once the divorce is agreed, the talks will focus on that future trade deal that May wants and which she says should feature financial services. Talks must be wrapped up by the end of 2018 to allow the European and British Parliaments to rubber-stamp them, making it questionable May can secure what she wants in the timeframe allowed.

While French President Emmanuel Macron and German Finance Minister Wolfgang Schaeuble last week said the UK would be welcomed back if it decided to reverse Brexit, polls suggest little momentum behind a rethink.

A Survation survey released on Monday for Good Morning Britain showed 51 per cent of respondents would choose to stay in the EU now, but YouGov reported last week that 77 per cent of Britons wanted the referendum result acted upon.