EU leaders open “Phase Two” of Brexit talks and warn Theresa May of tougher times

Last week, the European Union and the United Kingdom made substantial progress on their Brexit agenda, opening the most crucial part of their divorce conversations. As the latest EU Summit wrapped up in Brussels on Friday, European Union leaders agreed Brexit talks have made enough progress to move negotiations to phase two. Also, the UK revealed more of how it would like to shape its trade pact with the EU, with Finance Minister Philip Hammond saying it is likely Britain will want to negotiate a bespoke deal, rather than copying existing arrangements like the Canada-EU FTA. However, despite the many news after months of cold chats, some leaders cautioned the second phase of Brexit talks will be harder than the first, and that the toughest part of Theresa May’s job could even start now.

Sufficient progress

Just before midday last Friday, when she was already travelling back to her country, UK Prime Minister Theresa May received the news from the 27 EU leaders that Brexit talks talks have made enough progress to move negotiations to phase two. “The European Council welcomes the progress achieved during the first phase of negotiations […] and decides that it is sufficient to move to the second phase related to transition and the framework for the future relationship”, said an official European Council press release published on Friday.

Positive exchange

EU Council President Donald Tusk was the first to announce the go-ahead for the second phase of negotiations, and congratulated British Prime Minister Theresa May on Twitter. “EU leaders agree to move on to the second phase of #Brexit talks. Congratulations PM @theresa_may”, he said on Friday. UK’s PM May responded with thanks, welcoming the decision as “an important step on the road to delivering a smooth and orderly Brexit and forging our deep and special future partnership”.

The relaxed and positive exchange between leaders showed how last week’s summit marked a significant change in atmosphere between the two sides after months of tough conversations. On Thursday night EU leaders gave Mrs. May a round of applause as the British prime minister ended a short speech to a leaders’ dinner. The morning after, the President of the European Commission Jean-Claude Juncker said the applause had been deserved. “Some of us thought, including me, that she did make a big effort and this has to be recognised”, he said.

The bitter part

However, despite such a warmer approach compared to the past, the next, more decisive phase is likely to be the toughest test for Theresa May. European Commission President Jean-Claude Juncker warned on Friday that, despite the big efforts made by UK’s PM, the next stage “would be much harder than the first phase”, with the first having been very hard anyway. German Chancellor Angela Merkel echoed him on Friday at the end of the Summit. “We have made good progress, the second phase of talks can start”, Chancellor Merkel said. “But this will mean even tougher work – that was clear today in the discussion – than we have experienced so far”.

Austrian Chancellor Christian Kern went even deeper, saying even a primary school student could see that the first phase deal on the Irish border would come back to haunt the talks because it was “impossible for Britain” to leave the bloc’s single market while avoiding a hard border on the island of Ireland, as described by Reuters. “Our primary school students can see that there is a riddle to be solved”, Reuters quoted the Austrian leader as saying.

Open points

Indeed many open points will need to be touched during Brexit talks’ second phase, as “phase two” is when the discussion can widen to include the transition phase and – most importantly – trade talks. Sources report that EU leaders reiterated on Friday their position that Britain cannot conclude a free-trade accord with the bloc until it has left and become a “third country”, but this is something that Theresa May wants to bring home within the next fifteen months. If Britain and the EU will not agree on a trade pact before the UK leaves the bloc in 2019, Mrs. May might have to agree a divorce settlement without knowing precisely what the future relationship would look like, which is something that the Conservative wing in her Parliament will never accept.

Also, despite having agreed agreed at the summit to support May’s call for a two-year transition out of the bloc, EU 27 Leaders are already making clear that there will be no “discounts” for the UK during the transitional phase, as Britain will be treated as a “third country”. “Such transitional arrangements, which will be part of the Withdrawal Agreement, must be in the interest of the Union, clearly defined and precisely limited in time”, said the EU Council statement released on Friday.

Replicate the status quo

British Chancellor of the Exchequer Philip Hammond on Saturday made his call to reassure businesses that there Britain’s departure from the bloc in 2019 will represent no cliff edge. Speaking in Beijing at the UK-China Economic Financial Dialogue, just a day after EU leaders paved the way to “Brexit phase two”, the UK’s Finance minister revealed that the UK would seek to replicate the status quo even after the divorce from Brussels. “We won’t technically or legally be in the customs union or in the single market,” Mr. Hammond said. “But we’re committed as a result of the agreement we’ve made this week to creating an environment which will effectively replicate the current status quo”, he also added, as reported by the Financial Times.

Bespoke arrangements

UK Chancellor Hammond went further and described the shape a future EU-UK trade deal will have, saying it was likely that the UK would want to secure specific, “bespoke arrangements”. “We have a level of trade and commercial integration with the EU 27 which is unlike the situation of any trade partner that the EU has ever done a trade deal with before,” he told reporters. “And therefore it is likely that we will want to negotiate specific arrangements, bespoke arrangements”, Hammond added, also saying that it’s unlikely that Britain will develop a Canada-style trade deal with the EU. “I expect that we will develop something that is neither the Canada model nor an EEA model, but something which draws on the strength of our existing relationship”, Mr. Hammond said from Beijing.

As soon as Chancellor Hammond finished his speech to the press, Chinese Vice Finance Minister Shi Yaobin said “We hope the UK and the EU will conduct their Brexit negotiations in a way that’s mutually beneficial for both sides and result in outcomes that are desirable for both sides”. After last Friday this looks by all means more feasible, although it’s becoming more evident this is when the toughest part begins.