Britain suffered a Brexit rebuff from the European Union on Wednesday as Brussels warned London could only hope to negotiate a free trade agreement (FTA) that would have “negative consequences” for the region-wide economy.
While the EU President Donald Tusk claimed the bloc does not want to "build a wall" with Britain, Mr Tusk said Theresa May’s hopes for a deal on financial services and continued access to certain industrial sectors were not realistic.
"Because of Brexit we will be drifting apart. In fact, this will be the first FTA in history that loosens economic ties, instead of strengthening them," he said. “I fully understand, and of course, I respect Theresa May’s political objectives to demonstrate at any price that Brexit could be a success and was the right choice. But sorry, it is not our objective.”
The two sides hope to negotiate details of a transition period between Britain leaving the EU and the starting point of a new trade regime by the end of this month. The broad outlines of the future trade agreement should then be clear by the summer.
The EU’s terms for the talks, published on Wednesday, said there were limits to the depth of the future partnership.
"This will unfortunately have negative economic consequences," the draft, which is due to be adopted by the other 27 countries on March 22, said.
A Downing St spokesman said Britain hoped the final guidelines "will provide the flexibility to allow the EU to think creatively and imaginatively about our future economic partnership."
The finance minister Philip Hammond issued a plea to Europe not to risk a system-banking crisis or financial crash by shutting out the City of London, the world’s largest financial centre. The only beneficiary of a punitive EU approach would be New York and the Asian markets, he added.
“The EU itself has noted that because of the proximity of the UK and the European Union, because of complexity and scale of existing trade flows, in many respects a simple free trade agreement would leave many questions unresolved that would have to be resolved,” he said. “It's hard to see how any deal that did not include financial services can look like a fair and balanced deal."
Observers of the negotiations said the EU had maintained a unified position with some flexibility for London to build on in the talks.
“European Council guidelines on FTA coherent and generally sensible, given UK red lines,” wrote Charles Grant of the Centre for European Reform.
In fact the most ardent Brexit campaigners expressed satisfaction with the EU’s offer of tariff-free trade in all goods and no quota limits. This fullfils their argument there is no European economic interest in putting up tariffs against British industrial output. The EU has a large goods trade surplus with Britain and any tariffs would erode this advantage.
For that reason Brussels is happy to offer a liberal goods regime. “It’s the standard offer in any EU trade agreement,” said Sam Lowe, a research fellow on trade issues at the Center for European Reform. “They love zero tariffs in goods, because they sell a lot of cars.”
The Irish prime minister Leo Varadkar cautioned that the tough realities of Brexit were only now playing out in London, Brussels and elsewhere.
“That is something that perhaps the UK is starting to understand, that negotiating with a block that is ten times bigger than you is not a strong position to be in,” he said.