EU eyes quick Brexit transition deal, trade pact to take time

By Alastair Macdonald

BRUSSELS (Reuters) - Businesses fretting about Brexit should get reassurance early in the new year that little will change for a couple of years after Britain leaves the European Union in less then 16 months, EU officials said on Friday.

The full-blown free trade agreement that London wants will take considerably longer, however. Negotiations will start only later in 2018 and lead at best to a "political declaration" of intent before Brexit. Full negotiation on an actual trade treaty would only begin after March 2019, though Brussels hopes one can be in place by early 2021, when a transition period would end.

Following an interim accord on divorce terms struck by Prime Minister Theresa May in Brussels, EU leaders should next Friday agree to start negotiating a transition period of around two years, if they stick to a draft proposal seen by Reuters.

"We could easily engage on those issues very early in the new year," a senior EU official said, noting that the two sides had already voiced quite similar views on the transition.

The draft negotiating guidelines echo an agreement among the 27 other EU national leaders in April that Britain would remain bound by essentially all EU rules in the transition but without a say in making them. That will give businesses more time to adjust, but still leave it unclear what will happen in 2021.

"Removing uncertainty around transition arrangements would serve as a tremendous relief to businesses on both sides of the continent given supply chains are highly integrated," said Karen Ward, JP Morgan Asset Management's chief market strategist.

However, some in the EU are wary of giving Britain too easy an assurance before it has fully met their demands for a treaty governing its withdrawal. "We will only accept a transitional period after Brexit if we are satisfied with the outcome of the second phase of negotiations," said Manfred Weber, the German leader of the European Parliament's big, center-right bloc.

Looking further ahead, EU Brexit negotiator Michel Barnier repeated his view on Friday that the future relationship would resemble last year's EU free trade agreement with Canada.

This was, he said, largely because May has ruled out staying in the EU's single market or a customs union and wants to end free immigration from the continent and the oversight of EU courts. "What are you left with?" Barnier asked. "Just one thing: a free trade agreement on the Canadian model."

The senior EU official said that some countries with which the Union already has free trade agreements had already voiced concern that Britain might get better terms than they have. Some treaties have clauses obliging the EU to improve the terms if need be if another subsequently gets more favorable treatment.

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The draft guidelines make clear that Barnier will only be able to start seriously negotiating on trade and other aspects of the future UK-EU relationship such as defense and security after leaders agree a more detailed set of instructions.

"We need more clarity on how the UK sees our future relations," summit chair Donald Tusk told reporters, calling on Barnier to start "exploratory talks" with London.

More guidelines could be endorsed at EU summits in February or March but could take longer if London delays, the EU official said. Talks take weeks to start after guidelines are agreed.

Moreover, there might be relatively little detail fixed by the time Britain leaves the EU. The withdrawal treaty must take account of the "framework for the future relationship".

But this framework would be contained only in a "political declaration" that will accompany the withdrawal treaty to be ratified by the British and EU parliaments. It is "simply not realistic" to get a full deal by then, the official said.

The EU will launch negotiations on a legally binding trade treaty only once Britain becomes a non-member or "third country". If the two sides fail to reach a deal before the end of the transition period, there would be a "cliff edge".

Legally, it would be possible to extend the transition period, but EU governments are reluctant to do so very far.

Britain cannot put new bilateral trade treaties with other countries into effect during the transition period as the EU insists Britain go on collecting EU customs duties as if it were still a member, the official said.

Tusk, who will have to maintain unity among the 27 as they embark on the much more divisive phase of negotiating a trade deal that balances the countries' very different interests, warned "the most difficult challenge is still ahead".