As London softens on pace of Brexit, Brussels appears to harden

By Alastair Macdonald and Jan Strupczewski

BRUSSELS (Reuters) - Just as London appears to be coming round to the idea that it will need a temporary transitional agreement with Brussels to smooth its exit from the European Union, it may find the position of European leaders has hardened.

For months the working assumption in Brussels has been that it would be impossible to manage Britain's exit from the EU by a 2019 deadline without a temporary transitional deal to govern trade terms until a final arrangement can be hammered out.

The idea is favored by businesses on both sides of the channel who want to minimize uncertainty, and by the technocrats tasked with hammering out a deal, who say a final pact cannot be reached in time. The only people who didn't seem to like it were hardliners in London who said they preferred a clean break.

But with Prime Minister Theresa May lately softening her "Brexit means Brexit" rhetoric to emphasize the need to avoid forcing businesses off a "cliff edge", the positions of European leaders only seem to have hardened.

Senior European officials who spoke to Reuters on condition of anonymity no longer sound convinced that a transitional deal is as inevitable as it once seemed.

"The technicians of course say it's obvious. But frankly, politically it's not at all," a senior EU official told Reuters. "Do the Brits really want it? On the kind of terms we can offer?

"There's a real danger they will just fall off the cliff."

LONDON SHIFT

May intends to set a two-year clock running on Britain's exit negotiations by late March. She is due to give a speech on Tuesday, and any hint she gives that she will accept a transitional arrangement could make headlines.

While she has so far given few details of her negotiating position, Britain unmistakably softened its stance on a transitional arrangement last month. David Davis, the cabinet minister tasked with overseeing exit from the European Union, said in early December he was "not really interested" in a temporary deal. But a week later British newspapers carried reports that he had privately said he was not opposed to one.

EU Brexit negotiator Michel Barnier, in his only detailed public comments so far, stressed last month that a transitional deal was no certainty and would depend first on broad agreement on the long-term way ahead.

But generally EU negotiators have spoken in private as if a transitional deal were inevitable. They have long described Brexit as a three-stage process of negotiation, transition and divorce, which cannot realistically be rushed.

That inevitability no longer seems to be the assumption in Brussels, even though the economic logic favors it. A second EU official closely involved in Brexit planning noted that Britain depends more on EU trade than vice versa, which means London needs a transition more than Brussels does.

"Economically, the EU has much less incentive than Britain to arrange a transitional deal," the official said.

"Politically the logic of the talks will be to keep the Brits as close as possible even after the divorce," the official added. The terms of a transition would depend on the long-term goal: if a free trade deal is the ultimate aim, it makes no sense to impose tariffs on British goods that are only going to be removed again, so a duty-free transition would be logical.

TIME IS SHORT

Time is tight even for a basic deal to settle issues on money, citizenship, law and so on next year, so any interim pact may need to be simple: "The divorce terms will be so difficult to negotiate that I think that it will be impossible to have a negotiation on the transitional arrangement," the lead Brexit negotiator from one of the 27 other member states told Reuters.

"The timeframe is going to be really short."

While all sides are still only hinting at their positions before formal negotiations start, continentals have been reminding British officials of the leverage given to them by the deadline specified in the EU treaty's untried Article 50, which covers the withdrawal process. With or without negotiated terms, Britain will be out of the Union once two years are up.

One senior German official told Reuters that Britain should ask to stay in the European Economic Area (EEA) for some years, which would require it to accept free movement from EU countries and pay into the EU budget in return for continuing free trade.

May should start by asking for a transition deal to avoid running out of road in the negotiations: "The risk is that the two years run out with no agreement," the German official said.

The other 27 national leaders have shown a determination to stick together, whatever the complaints of their own business leaders, to insist Britain pay the price of a hard Brexit rather than allow a soft option that could tempt other countries to follow Britain out the door.

Last week, the Maltese prime minister whose ministers will chair EU councils until June, called for a transition deal, notably because London remains Europe's main financial center.

But Joseph Muscat also said that this would mean Britain accepting that EU courts would go on "dishing out judgments", Muscat said - a scenario May might find a hard sell to impatient Brexiteers as she seeks re-election by 2020.

The second EU official said Brussels believed May could, however, try to sell a partial exit before the election that might even include continued payments into the EU budget.

"Maybe it is not as different from membership as some would want," the official said. "But it is a step, and the direction for the next is clear too ... May will remain hostage to the Brexit hardliners, but she will also have to deliver something."

(Additional reporting by Paul Carrel and John O'Donnell in Berlin; writing by Alastair Macdonald; editing by Peter Graff)

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