Theresa May calls for post-Brexit transition period, new security treaty

In a speech in Florence on Friday, Prime Minister Theresa May confirmed that she wanted a two-year "implementation period" post-Brexit and a new treaty with the European Union on security and justice.

May, who scheduled the speech as an attempt to kickstart Brexit negotiations that had stalled after three rounds of talks, said Brexit was a "defining moment in the history of our nation", and which she hoped would see the EU and the UK "thrive side-by-side".

In order to give the UK "access to EU markets" from March 2019 and to give the EU a major concession, the PM said the implementation period will see all EU rules and regulations continue, with the UK continuing to pay into the bloc's budget.

She said the "UK will honour commitments we have made", which was thought to be key language that the EU wanted to hear, and said that she was hoping for freedom of movement to continue.

EU citizens will be able to come to live and work in the UK during the two-year period, she said, but suggested a "registration system" could be introduced.

"In the event of any uncertainty around underlying EU law, I want the UK courts to be able to take into account the judgments of the European Court of Justice with a view to ensuring consistent interpretation. On this basis, I hope our teams can reach firm agreement quickly," she said.

May admitted that negotiations between the two unions had been "tough" but believed that "concrete progress" had been made.

May said "The UK is living the EU, we will no longer be members of its single market or customs union," but said both parties would have to be "imaginitive and creative" moving forward.

She highlighted the fact that a trade partnership like the one recently struck between the EU and Canada would be built under "false pretences" if implemented between Britain and the bloc.

The Canadian trade agreement, which she also noted took seven years to negotiate, was designed with two nations that did not have any prior trade agreements in place which was fundamentally different to that of the EU and the UK.

"Let us be creative as well as practical in designing an economic partnership" that respects the EU and UK, she says.

The UK is one of the EU's largest trading partner and "the EU is our largest trading partner", so "there is no need to impose tariffs", she adds.

The Prime Minister put a lot of emphasis on the future of security between the EU and the UK through what she called some of the "greatest challenges of our time," singling out North Korea as well as incidents of extremist violence across the UK and Europe.

She told reporters afterwards that she felt both sides are “very close” to an agreement and hoped that her assurances on legal guarantees in the speech will help get the talks moving forward again.

A day earlier, chief EU Brexit negotiator Michel Barnier warned that if May were to request a transition period, it would first require a withdrawal agreement.

On Friday, Barnier recognised the "constructive spirit" of May's address, which he said "shows a willingness to move forward, as time is of the essence" but noted that it "does not clarify" the issue of the Northern Irish border and "how the UK intends to honour its special responsibility for the consequences of its withdrawal for Ireland".

On Monday he and David Davis will meet in Brussels next to begin the fourth round of the negotiations, which he hoped would see more concrete proposals thrashed out.

POLITICAL AND MARKET REACTION

Sandro Gozi, Italy’s EU minister, said May made “steps forward” on citizens’ rights and said the transition period proposal was “good” and would help financial negotiations, he told the Financial Times.

Adam Marshall, director general of the British Chambers of Commerce, praised the “constructive” tone of Theresa May’s speech but called for the transition period to last at least three years, not the two requested by May.

After the speech the pound tumbled down 0.9% on the euro to 1.1273 and down 0.5% versus the dollar to 1.3508.

While the speech seemed "a bit of a dud" and thin on detail, said analyst Neil Wilson at ETX Capital, there was one important change.

"Officially the government is now advocating a transition period, and that the UK will keep paying its subs, but this had all largely taken as read. The key difference seems to be that Britain is no longer pushing for a bespoke transition deal, which ultimately kicks Brexit down the road by two more years, but it also is more likely to be acceptable to the EU and suggests we will see a smoother exit and this ultimately may prove positive for sterling."

Tim Graf, a macro strategist at State Street, agreed that after great anticipation, the speech offered "few specifics and even fewer surprises", feeling the main takeaway for markets was the formal expression of desire for a transitional arrangement.

"For the near-term, negotiations may likely be hampered by the lack of detail offered on the main items for discussion, namely the Irish border question, the ultimate financial settlement with the EU and the rights of EU citizens. European Commission Chief Negotiator Michel Barnier was not given much new to work with on these points."

He said the movement of the pound and UK rates was quite muted as the speech carried very little new information outside of what had been leaked in previous days.

For Chris Beauchamp, chief market analyst at IG, it was also somewhat of a let-down. "The speech was big on Boris Johnson-style rhetoric, with plenty of ‘broad sunlit uplands’ stuff that spelled out how the UK wished to be a friend to the EU. But beyond that, little else. The pound took a bit of a knock, giving the FTSE 100 room to move higher, but beyond that the market has taken little notice. The focus returns to the negotiations, which should start again next week."

Analyst Martin Arnold at ETF Securities said it was "smoke and mirrors" from May that was not fooling the FX market.

"May is trying to change the perspective and is talking about the EU transitioning to new environment and how the UK can assist with the EU’s problems, like migration and terrorism. PM May wants to continue to be cooperative with the EU, something that is good for the UK economy, but that is already priced into GBP," he said.

"A ‘softer’ Brexit is good for both sides and will continue to be a critical point for the Conservatives. However, negotiations are ongoing and constructive rhetoric is unlikely to be a catalyst for further strong gains in GBP."