Barnier fires shot across May's bows ahead of Florence speech

Ahead of the UK Prime Minister's major Brexit speech on Friday, chief European Union Brexit negotiator Michel Barnier has warned Theresa May against trying to have her cake and eat it and stressing that if a transition period is requested it will first require a withdrawal agreement.

The fourth round of Brexit talks was pushed back by a week in order for May to deliver her address in Florence, where she is expected to make several key offers or requests to get stalled Brexit talks back on track, including offering €20bn to help plug the post-Brexit hole in the bloc's finances and pushing for a 'status quo transition' of up to two years, where the UK remains in the single market and the customs union for the duration of the transition phase.

May this week made pains to point out to journalists that while the EU Council has mandated the European Commission and its appointed negotiator Barnier to negotiate the UK's exit terms, "the decision will be taken by leaders”, suggesting the speech will be directed over the Frenchman's head to the leaders of the 27 other EU member states.

Barnier, speaking at Italy's parliament on Thursday, said he was looking forward to hearing May's comments on citizens' rights, the financial settlement known as the 'divorce bill' and about the Irish border.

"Once we have clarity on these points, we should also define the precise conditions for a possible transition period, if the British government requests one," he said, noting that this would begin on 30 March 2019, when the UK has exited the EU.

"An important point: this short transition period will be part of the Article 50 withdrawal agreement. Without a withdrawal agreement, there is no transition. This is a point of law."

He stressed that if there is any extension of the 'acquis' of all EU laws, then logically "this would require existing Union regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures to apply", as states Barnier's mandate from the European Council.

Yet Barnier said he was "convinced that a rapid agreement on the conditions of the UK's orderly withdrawal, and a transition period, is possible".

On the type of post-Brexit deal the Prime Minister would suggest, reports earlier suggested that May's office wanted more than the type of free trade agreement that the EU has just signed with Canada.

"For example, Norway and Iceland have chosen to be in the Single Market, to accept the rules, and to contribute financially to cohesion policy," Barnier said.

"But one thing is sure: it is not – and will not – be possible for a third country to have the same benefits as the Norwegian model but the limited obligations of the Canadian model.

"And naturally, any agreement must respect the regulatory autonomy of the EU, as well as the integrity of its legal order."

In the days leading up to May's Florentine address, the financial markets have been keeping their powder largely dry, with sterling liable to be heavily buffeted by any surprises in the speech.

City analysts stressed the impact for the pound was little compared to the wider significance.

Market analyst Kathleen Brooks at City Index said the importance of this speech "cannot be over-emphasized".

"When UK PM Theresa May takes to the stage in Florence on Friday to give her lauded Brexit speech, she had better deliver. Not only will the eyes of the world and the financial market be upon her, but this speech has held up the fourth round of Brexit negotiations by a week."

She said it will be a good indicator of whether the UK government has shifted its stance from a hard Brexit to a softer approach, "which means that the outcome of the speech could be a binary one for the pound: a softer approach is pound positive, while a hard Brexit could send the pound tumbling once again".

Economists at HSBC said that for the 'status quo transition' May was rumoured to be looking for, where the UK remains in the single market and the customs union for the duration of the transition phase, "the PM might also use her speech to say that a significant financial settlement is a moral if not legal obligation for the UK.

"Whether this would then be enough for the EC to decide at its 19 October meeting that the UK has made enough progress to move onto the next phase of talks, will depend on the success of the two final rounds [on 25 September and 9 October]."

HSBC thinks that moving onto the next phase, to discuss the UK’s future relationship with the EU, including any possible transition arrangement, would likely increase market optimism about a deal being done by March 2019.