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EU hints at Ukraine-style deal for Brexiting UK

Now that the U.K. has filed for divorce, the EU is keen to ensure that its former partner continues to pay its share of the bills. But European parliamentarians have also left the door open to a looser-binding future agreement along the lines of a deal with Ukraine, which could allow a high degree of continued access to the single market.

A draft motion for a European Parliament resolution, leaked the day that the U.K. initiated a two-year negotiating period by formally notifying the EU of its intention to withdraw, makes it clear that the U.K. will no longer enjoy similar rights to EU members, and insists that negotiations on a future trade deal cannot begin until the British agree to payments for existing financial commitments.

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European Council President Donald Tusk, right, receives Britain's formal notification of withdrawal from the EU from Tim Barrow, the country's permanent representative to the bloc.

Source: European Council

Although negotiations will be led by the European Commission, the parliament has to approve any final deal, and EC officials have also said the U.K. must promise to pay up to €60 billion to cover bills including future pension payments for EU officials. Such a stance will immediately put Brussels on a collision course with London, with Prime Minister Theresa May outlining in her notification letter that talks on terms of withdrawal should run in parallel with those on trade.

The EC is set to release draft guidelines for negotiations March 31, but if the EU refused to budge on its insistence that the U.K. sort out exit terms before talks on anything else, then it would be almost impossible for a deal on future trade to be agreed on by the time Britain leaves in 2019, said Thomas Sampson, an assistant professor of economics at the London School of Economics who specializes in trade.

"My expectation is that there won't be a long-term trade deal before Brexit occurs," he said. "So it is likely that Britain will have to commit to exit terms and payments."

Although May says the U.K. would rather walk away from talks with no EU deal than with a bad one, a "hard Brexit" leading to commercial disruption between the world's largest trading bloc and the fifth-largest economy would cause pain to both sides.

The parliament's draft resolution, leaked to The Guardian, rules out piecemeal deals allowing special access for particular industries, something many in the U.K. would like to see for London's financial center. But it also holds out the prospect of an association agreement, like that negotiated with Ukraine, as a possible framework for a future relationship.

Such a deal would allow the U.K. a much higher degree of access to the single market than what Canada got in its recent free-trade deal with the EU, and could also cover services, including financial services, according to Andrew Duff, a former member of the European Parliament for the U.K.'s pro-EU Liberal Democrat Party and now a visiting fellow at the European Policy Center in Brussels. Such an agreement would also require the U.K. to accept many EU rules, but the country, unlike Ukraine, is already compliant. And May's letter, despite rhetoric by pro-Brexit politicians, indicated that she might be prepared to accept some Brussels oversight.

"We know that we will lose influence over the rules that affect the European economy. We also know that U.K. companies will, as they trade within the EU, have to align with rules agreed by institutions of which we are no longer a part — just as U.K. companies do in other overseas markets," May wrote.

An association agreement could be "a long-term aim of the negotiations," said Fabian Zuleeg, chief executive and chief economist at the European Policy Center.

"It is a useful model to consider but would require successful divorce and trade negotiations and, eventually, ratification by the EU27 and the EP," he said, referring to the EU's remaining member states and parliament.

Meanwhile, May showed herself intent on playing another card, repeating several times in her letter that she wanted the negotiations to address not only British trade with the EU but also its continued cooperation on security matters. The U.K. is not only the EU's leading military power, but its intelligence apparatus is key to security around the region, particularly at a time of growing terrorist threat and war in the Middle East.

"Linking economic and security issues is dangerous and not credible," Zuleeg said. "Using it as a negotiation tactic risks alienating the other partners around the table."