British Prime Minister Theresa May has said the UK will seek a post-Brexit transitional period and pay into the EU budget until 2020 – but is leaving the Single Market.
In her much-heralded speech in Florence, Mrs May also pledged to protect the status of EU citizens living in the UK.
She said UK courts would “take into account” judgments by the European Court of Justice (ECJ) over their rights.
The EU's chief negotiator, Michel Barnier, welcomed the "constructive spirit" of Mrs May's speech and her "willingness to move forward", but said more detail was needed on her proposals.
Sterling took an early hit in live markets as the prime minister confirmed Britain would be leaving both the Single Market and the European customs union.
But her commitment to what she called an ‘implementation period’ after Brexit in 2019, and to keep paying into EU coffers – though without putting a figure on how much – saw the pound recover most of its early losses.
Sterling closed at around the €1.13 mark, and also maintained its recent strong run against the dollar, closing at $1.35 – down about half a cent on the day.
Bespoke new agreement
In her speech, Mrs May called for a bespoke new trading agreement with the EU.
She ruled out remaining in the European Economic Area – the so-called Norway option – which requires membership of the Single Market, and accepting EU regulation over which the UK would have no control.
The prime minister also dismissed a Canadian-style free-trade deal with the EU. She said as a member of the EU, the UK had the unique advantage that all its trading regulations were already harmonised with Europe.
“We can do so much better than this,” she said.
“The UK is the EU’s largest trading partner, one of the largest economies in the world, and a market of considerable importance for many businesses and jobs across the Continent.
“And the EU is our largest trading partner, so it is in all our interests to find a creative solution.
“There is no need to impose tariffs where we have none now, and I don’t think anyone sensible is contemplating this.”
In what could be seen as an olive branch to Brussels, Mrs May said EU citizens would continue to be able to enter the UK to live and work during the implementation period. They would, however, be subject to a registration scheme.
The prime minister said a period of transition would give “businesses and people alike the certainty that they will be able to prepare for the change”, but said there must also be “a guarantee that this implementation period will be time-limited, giving everyone the certainty that this will not go on for ever”.
She said many practical issues would need to be resolved, not least a new immigration system to control UK borders.
She added: “As of today, these considerations point to an implementation period of around two years”.
Mrs May pledged to honour financial commitments made during the UK’s membership of the EU, and promised no other member state would be affected by Brexit “over the remainder of the current budget plan” – which ends in 2020, a year after Brexit.
She also said the UK would continue to take part in, and contribute to, the EU’s science, education and culture programmes, and called for “a bold new strategic agreement” on future security, law enforcement and criminal justice co-operation.
Michel Barnier, responding shortly after Mrs May's speech, said the prime minister had "expressed a constructive spirit which is also the spirit of the European Union during this unique negotiation".
"The speech shows a willingness to move forward, as time is of the essence."
But he added: "Our priority is to protect the rights of citizens. EU27 citizens in the United Kingdom must have the same rights as British citizens today in the European Union. These rights must be implemented effectively and safeguarded in the same way in the United Kingdom as in the European Union.
"Prime Minister May’s statements are a step forward but they must now be translated into a precise negotiating position of the UK government."
On the subject of the UK's divorce bill, M. Barnier appeared to seize on Mrs May's pledge that the UK would honour its commitments.
"The United Kingdom recognises that no member state will have to pay more or receive less because of Brexit," he said. "We stand ready to discuss the concrete implications of this pledge.
"We shall assess, on the basis of the commitments taken by the 28 member states, whether this assurance covers all commitments made by the United Kingdom."
On the prime minister's call for a transitional period, he said this was covered within Article 50 and the EU would consider the proposal. But he warned that "existing Union regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures" would apply during any such period.
Short on detail
Despite the prime minister’s rhetoric, observers say her speech was short on detail, and that when it came to the nitty gritty, the UK's offer was unlikely to satisfy EU demands.
“With her still saying we will come out of the Single Market, it’s still looking like a hard Brexit – it brings a no-deal scenario back into the picture,” said Chris Saint, senior currency analyst at stockbrocker Hargreaves Lansdown.
He said the commitment to pay into the budget until 2020 would roughly equate to the figure of €20bn (£18bn) being touted in briefings before the speech.
“I’m not sure Barnier is going to think there is too much in there to impress him. I’m sure the EU side will say the final bill should be a lot higher.”
Mr Saint said sterling was likely to continue to get a bumpy ride. “It’s going to be a long drawn-out process for these talks and anyone expecting too, much too early, is going to be disappointed,” he added.
“Theresa May has set out what she wants to achieve but not put too much more flash on the bones – it’s all a bit vague. It’s now a question as to whether the EU think they can give up more on their side. It still looks like it’s going to be a sticky process.”
Earlier this month, former Greek finance minister Yanis Varoufakis warned that the EU would punish Britain to prevent other member states following suit.
Writing in the Sunday Times, the UK-based economics professor, who was personally opposed to Brexit, said there were parallels with the way the EU handled the Greek economic crisis.
“Brussels’ worst nightmare is a mutually advantageous economic agreement that other Europeans may interpret as a sign that a mutiny against Europe’s establishment may be worthwhile,” he said.
“That Michel Barnier and his team have a mandate to wreck any mutually advantageous deal there is little doubt.”
He said the key was in the EU’s insistence that Brexit talks were ‘sequenced’ –that discussions over the divorce bill must be completed before trade talks begin.
“The message to London is clear: you give us everything we are asking for, unconditionally. Then and only then will we hear what you want,” wrote Mr Varoufakis.
“This is what one demands if one seeks to ruin a negotiation in advance.”