(Bloomberg) -- The U.K. and European Union are starting a key week of Brexit talks, with the bloc stiffening its demands over how any trade deal will be enforced after losing trust in Boris Johnson because of his attempt to rewrite last year’s divorce agreement.
The final round of scheduled discussions between the EU’s chief Brexit negotiator, Michel Barnier, and his British counterpart, David Frost, begins in Brussels on Tuesday with officials on both sides expressing cautious optimism a deal can be reached.
If the two sides make enough progress by Friday, they could embark on a two-week period of intense discussions -- the so-called Brussels “tunnel” -- to hammer out an accord in time for a summit of EU leaders on Oct. 15, Johnson’s self-imposed deadline for striking a deal.
If they don’t, Britain would be almost certain to crash out of the EU’s single market at the end of the year without a trade accord, potentially poisoning relations with the bloc for a generation. Businesses and consumers would be left grappling with additional costs and disruption as quotas and tariffs return for the first time in a generation.
The two main obstacles to an agreement remain deciding which of the EU’s state aid rules the U.K. will have to follow after leaving, and what access fishing boats from the bloc will have to British waters. But doubts about Johnson’s willingness to abide by pledges he has previously made have only added another layer of difficulty to striking a deal, two EU officials close to the talks said.
The prime minister’s Internal Market Bill would break some of the agreements the U.K. made when it left the EU to prevent customs controls between Northern Ireland and the Irish Republic, a move that the government in London concedes breaks international law.
EU officials say the disagreement can be ironed out -- or made moot if the two sides reach a zero-tariff, zero-quota trade agreement. But the bloc has threatened Johnson with legal action unless the government amends or withdraws the legislation by the middle of this week. The row has cast a shadow over the negotiations over the U.K. and EU’s future trade and security relationship, the officials said.
The two sides will attempt to smooth things over on Monday afternoon when Cabinet Office Minister Michael Gove and European Commission Vice President Maros Sefcovic hold separate talks on the implementation of the Irish border agreement.
Technically, the U.K. and EU are trying to keep that issue at arms length from Barnier and Frost’s negotiations over their future relationship -- but officials privately acknowledge a row at Gove and Sefcovic’s joint committee on Northern Ireland could set the rest of the week’s discussions back further.
The controversy over the Internal Market Bill has convinced the EU, as well as many European countries, that there needs to be a stronger “governance” mechanism in the deal, the two officials said. The EU doesn’t want to take the U.K’s commitments on trust; it wants to make them legally binding and accompany them with clear sanctions to stop Johnson from unilaterally breaking them in future.
That still leaves the two major sources of disagreement to resolve -- the so-called level playing field, or rules to ensure fair competition between British companies and their EU rivals, as well as fisheries.
The former is still proving hard to resolve principally because of the British government’s reluctance to set out what its future policy on state aid will be. On the latter, the U.K. is seeking a completely different way of calculating fishing quotas that would allow British boats to catch far more than they do at present. The EU is still strongly opposed to this, with countries like France warning that it could destroy their own fishing industries.
In a statement on Friday, the U.K. government noted that the “differences on fisheries and the level playing field remain significant” and that a lot of work still needs to be done. “If the gaps in these areas are to be bridged, the EU’s more constructive attitude will need to be translated into more realistic policy positions in the days to come.”
More than three out of four businesses surveyed by the Confederation of British Industry, the U.K.’s biggest business lobby group, want a deal to be signed, with almost half saying the coronavirus pandemic has hindered their preparations for Brexit.
It’s possible the negotiations will drag on beyond Johnson’s Oct. 15 deadline, but not by far. The EU views the end of October as the very last moment to sign a deal. It will need to translate a treaty of hundreds of pages into all its official languages to give to each of its 27 governments and then be ratified by the European Parliament -- all by Dec. 31.
(Adds CBI survey in penultimate paragraph.)
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