After round of negotiations in Brussels, chief Brexit negotiator for EU says there are ‘substantial’ disagreements over terms of two-year transition period.

The European Union’s (EU) chief Brexit negotiator raised the prospect of the UK crashing out of the bloc next year into a legal limbo and no agreement on a grace period wanted by business. The pound fell.

After a round of negotiations in Brussels, Michel Barnier said there were “substantial” disagreements over the terms of the two-year transition period that would come into effect on March 2019 to give business time to prepare for the new regime.

If disagreements persist, a transition deal cannot be taken for granted, he told reporters on Friday.

“Transition today is not a given,” he said.

Still, he hopes the disagreements will be solved in the next negotiating round.

“Time is short, very short – we don’t have a minute to lose if we want to succeed.”

A senior UK official countered that it was not a given that Barnier could keep all EU member states on board, given that EU businesses also want a transition deal.

The official also pointed out that the £39-billion (€41 billion) financial settlement would be off the table without an agreement, predicting that the EU was talking tough now and would eventually give ground.

Transition is crucial for business as the future trade deal between the two sides almost certainly will not have been completed on the day Britain leaves the bloc, so businesses on both sides would plunge into a legal and regulatory limbo in March next year.

That would mean tariffs would be slapped on goods, and in the worst case, data transfers, air travel and food supplies could also be disrupted.

Hardline pressure

Businesses have set a deadline of late March this year to get a deal pinned down before they activate their contingency plans – moving jobs and business out of the UK.

While many banks have already taken steps to protect their business and are not relying on a transition deal, they are still hoping to have the time to rewrite contracts and prepare for the future setup.

Prime minister Theresa May, under pressure from hardline Brexit backers in her party, has toughened her stance on the transition in recent weeks.

Initially, the UK was expected to accept the EU’s conditions wholesale, but, amid accusations that the arrangement will leave Britain a “vassal state” of Brussels, she has raised a series of objections.

Transition will preserve access to the single market, and Britain will have to keep abiding by all the rules, while having no say in making them and no voting power in the bloc.

The UK does not want to have to accept new rules that are made during the transition amid fears the EU could adopt rules that would hurt British interests.

Toughening up

The EU has also toughened its stance and threatened to unilaterally suspend the UK from the benefits of the single market if it breaks rules during the two-year period.

Barnier said the EU was defending the integrity of the single market.

Both sides have also raised the prospect of the timetable slipping for the withdrawal agreement from an initial target of October, which was intended to allow the deal to go to UK and EU parliaments for approval in time for exit day in March 2019.

UK Brexit secretary David Davis has said year-end may be a more realistic deadline, while Barnier mentioned November on Friday.

The UK did not provide the EU with an update on the future relationship on Friday as planned.

That was because of scheduling issues, Barnier said.

May’s Cabinet is yet to decide on what kind of future trade deal it will seek.

The longer transition takes to pin down, the less time available to discuss the future relationship.

That makes it more likely that the UK will leave the bloc without a clear idea about the future ties it will be able to maintain with its largest trading partner.