Britain Formally Announces EU Departure, Kicks Off Negotiations

S&P Global Market Intelligence
Written By: Richard Lovie
S&P Global Market Intelligence
Written By: Richard Lovie

The U.K. is officially on its way out of the European Union, kicking off two years of difficult negotiations to forge a new trading deal between the world's largest customs union and the fifth-largest economy.

Nine months after voters opted to end the country's membership, the U.K.'s permanent representative to the EU on March 29 handed a letter signed by Prime Minister Theresa May to European Council President Donald Tusk invoking Article 50 of the Lisbon Treaty to provide formal notice of intention to withdraw.

The U.K. says it wants a future trade agreement to retain as much access to EU markets as possible, but a draft European parliament resolution obtained by The Guardian insisted that the relationship will be less positive for the U.K. than in the past and ruled out special access for economic sectors such as the City of London's financial center. Instead the resolution proposed an association agreement along the lines of that with Ukraine and said any transition deal between the end of negotiations and new conditions coming into force would be limited to a maximum of three years.

"In essence, this is about damage control," Tusk said at a press conference after the letter was handed over. "Our goal is clear: To minimize the cost for the EU citizens, businesses and member states. We will do everything in our power in order to achieve this goal."

In her letter, May said the agreement "should be of greater scope and ambition than any such agreement before it so that it covers sectors crucial to our linked economies such as financial services and network industries."

"This will require detailed technical talks, but as the U.K. is an existing member state, both sides have regulatory frameworks and standards that already match."

Tusk will provide draft guidelines for the EU's negotiating strategy March 31, to be agreed at a summit of the remaining 27 EU members April 29. One of the first roadblocks in the talks will be EU demands that the U.K. pay a bill of up to €60 billion to settle its existing financial commitments to the bloc.

While officials on both sides expect some quick initial progress on simpler matters such as guaranteeing the rights of EU citizens resident in the U.K., and of U.K. citizens on the continent, May has said "no deal is better than a bad deal," raising the prospect that Britain could resort to trading with the EU under World Trade Organization rules.

But her Conservative Party is riven by divisions on how hard a line negotiators should take. On the European side, critical elections in France and Germany will occupy much political attention through at least September.

A crucial issue will be the level of access to EU markets granted to London's financial center, by far Europe's largest. Some major banks have already indicated they could move staff to locations with the eurozone. Up to 232,000 U.K. jobs could be at stake, according to London Stock Exchange Group Plc Xavier Rolet, if many companies relocate.

Other European cities are already vying to host the London-based European Banking Authority and European Medicines Agency.

To allow for a smooth transition on the day Britain departs, the U.K. government will March 30 publish a white paper setting out plans to transpose EU legislation into U.K. law in what the government has termed the Great Repeal Bill.

Any eventual EU-U.K. exit deal will be subject to approval by the European Parliament. U.K. parliamentarians will also be given a vote, but only on whether to accept or reject it. Some 38 national and regional parliaments may also have to give any future free-trade deal the green light, according to a European Court of Justice judge in December 2016. The parliament for the Belgian region of Wallonia region nearly sunk an EU-Canada trade deal that had been in the works for seven years.