Brexit brinkmanship: UK demands deal change, EU says 'non'

By Guy Faulconbridge and Gabriela Baczynska

LONDON/BRUSSELS (Reuters) - British Prime Minister Theresa May was on a collision course with the European Union on Wednesday after lawmakers demanded she renegotiate a Brexit divorce deal that the other members of the bloc said they would not reopen.

Less than two months before the United Kingdom is due by law to leave the EU on March 29, investors and allies are trying to gauge where the crisis will end up, with options including a disorderly Brexit, a delay to Brexit, or no Brexit at all.

Two weeks after voting down May's Brexit deal by the biggest margin of defeat for a government in modern British history, parliament demanded she return to Brussels to replace the so-called Irish backstop, an insurance policy that aims to prevent a hard border between Ireland and Northern Ireland.

May said she would seek "legally binding changes" to the divorce deal which she clinched in November with the EU after two years of tortuous negotiations.

"There is limited appetite for such a change in the EU and negotiating it will not be easy," May told lawmakers who voted 317 votes to 301 to support the plan, which had the backing of influential Conservative lawmaker Graham Brady.

In essence, May will try to use the implicit threat of a no-deal Brexit to clinch a deal from the other 27 members of the EU whose economy is, combined, about six times the size of the United Kingdom's.

The response from European capitals was blunt.

France, the EU's second most powerful member, said there could be no renegotiation and demanded a "credible" British proposal. Germany has so far not given a public comment.

European Council President Donald Tusk said the divorce deal was not up for renegotiation. Tusk and May will have a phone call at 1745 GMT.

Sterling was trading at $1.3104 on Wednesday, down from $1.3190 reached before lawmakers voted on Tuesday.

LAST MINUTE BREXIT?

May, an initial opponent of Brexit who won the top job in the chaos following the 2016 referendum, is now locked into a game of brinkmanship with the EU and her own split party.

While the EU has repeatedly refused to reopen the divorce deal, EU sources said additional clarifications, statements or assurances on the backstop might be possible.

May has said she would need more than an exchange of letters, but a legally binding change. She would aim to bring back a revised deal by Feb. 13. If not, parliament would vote on next steps on Feb. 14.

That deadline ratchets up the pressure on dedicated Brexiteers in the Conservative Party who fear opponents will try to delay and ultimately thwart Britain's exit.

Some diplomats and officials now think Britain's exit will not be decided until the very last moment, though some senior officials also warn that the risk of a disorderly no-deal Brexit is rising, as is the probability of a delay to Brexit.

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Both May's Conservatives and the main opposition Labour Party are formally committed to carrying out Brexit but internally divided over how or even whether to do so.

Brexiteers accept there is likely to be some short-term economic pain but say Britain will thrive in the long term if cut loose from European rules. Pro-Europeans say Britain’s exit will make it poorer, reduce its global clout, undermine London’s position as a global financial capital and weaken the West.

Britain voted 52 percent to 48 percent to leave the EU in a 2016 referendum. Brexit supporters say it would betray democracy to fail to act on that mandate. Opponents say voters may have changed their minds now that the details are becoming clearer.

NO-DEAL BREXIT

Opposition Labour leader Jeremy Corbyn, who had refused to hold talks on Brexit with May, said after Tuesday's vote that he was now prepared to meet her. That meeting is due to take place on Wednesday. A Labour source said Corbyn would tell May a no-deal exit must be taken off the table and she should pursue his party's plan, which includes a customs union.

If May cannot get a deal agreed, the default option would be to exit the EU abruptly with no deal at all, which businesses say would cause chaos and disrupt supply chains for basic goods.

British lawmakers on Tuesday approved a proposal calling on the government to prevent a no-deal exit, sending a signal that a majority opposes it. However, they rejected two amendments that set out a clear path for parliament to prevent it.

Many company chiefs are aghast at London's handling of Brexit and say it has already damaged Britain’s reputation as Europe’s pre-eminent destination for foreign investment.

"Parliament at large signaled that it opposes a 'no deal' Brexit, but it is not ready to delay Brexit to rule out 'no deal' entirely," Goldman Sachs (NYSE:GS) said.

"The Eurosceptic wing of the Conservative Party, by contrast, signaled that it opposes the prime minister’s Brexit deal, and it is ready to risk 'no deal' to re-negotiate the terms on offer."