This blog was written on Fri Sept 15th.

UK  Prime Minister, Theresa May, is to fly to Florence next week to deliver a speech billed as an “important intervention” on the Brexit negotiations. Why Florence? Why not the European Parliament? Florence, a once great banking centre in Europe, its glory days long behind it. A role model for London, post-Brexit perhaps.

A spokesman for May said, “The Prime Minister wanted to give a speech on the UK’s future relationship with Europe in its historical heart. The UK has had deep cultural and economic ties spanning centuries with Florence, a city known for its historical trading power. As the UK leaves the EU we will retain those close ties. As the Prime Minister has said on many occasions, we are leaving the EU, not Europe.” He added that the speech was an opportunity to “update on Brexit negotiations so far.”

Speculation is that she is going to announce that the UK government wants a transition deal after it exits the EU that, in the words of Chancellor Philip Hammond, is as close to the “status quo” as possible. To repeat, if that is what she is going to do, why not to the European Parliament, which has a potential veto over the Brexit deal. Better to talk to people who count than to a room full of strangers.

But we shall see. Press reports this morning, Friday, September 15, speculate that not all members of the cabinet, especially Boris Johnson, have yet signed off on what May proposes to say.

A health warning. We may be blindsided. There are suggestions that, instead of proposing a transition deal, the prime minister may announce a hard-Brexit in March 2019 and invite individual EU member states to open negotiations now with the UK on trade agreements. Cut the EU Commission negotiating team led by Michael Barnier out of the loop. Talk or we walk, would be the message in this second scenario.

The transition referred to by Hammond is called a “soft-Brexit” in the UK press, as opposed to “hard-Brexit”, the UK crashing out of the EU in March 2019 without any sort of deal in place.

In reality, there is no such thing as “soft-Brexit” and “hard-Brexit”. There is only Brexit or No-Brexit. You are either a member of the European Union or you are not. The UK has served the Article 50 notice, saying it will leave the EU at the end of March 2019. Only a vote in Parliament can reverse that decision and then, only if the EU agrees. If the EU were to agree, it would impose new terms of membership on the UK. There can be no “sorry about that, now where were we” return to the EU on the part of the UK.

But late in the day, the UK has come to realise that it does not have sufficient time to put in place all the legal, infrastructural and regulatory arrangements that will be necessary to deliver Brexit. What it now really wants is more time to leave the EU. A “slow- boat” to Brexit, if you will, because the UK government has not yet laid the keel for a fast one.

Article 50 does not explicitly provide for a transition arrangement. Nevertheless, the European Council, in its guidelines for the Brexit negotiations (here) says:

To the extent necessary and legally possible, the negotiations may also seek to determine transitional arrangements which are in the interest of the Union and, as appropriate, to provide for bridges towards the foreseeable framework for the future relationship in the light of the progress made. Any such transitional arrangements must be clearly defined, limited in time, and subject to effective enforcement mechanisms. Should a time-limited prolongation of Union acquis be considered, this would require existing Union regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures to apply

So, the EU sees a transition arrangement as a bridge towards the future relationship during which all “regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures” continue to apply to the UK. Which assumes that before the transition arrangements can be put in place the framework of the “future relationship” must be known. Impossible to have a bridge to nowhere. Note also that the transition arrangements must be in the “interest of the Union”, not just the interest of the UK. It’s a two way street.

Now it would appear that during the transition the UK will want to negotiate what we might call an “EU/UK common commercial space” agreement with the EU which would look pretty much like the single market/customs union. Such an agreement would come into effect when the transition ends. Thereafter, with the “commercial space” agreement with the EU in place the UK would want to move on to limit free movement and negotiate trade agreements with other countries. The words “cake and eat it” come to mind if that is what the UK wants.

But is that how the EU sees things? Article 5 of the negotiating guidelines states:

While an agreement on a future relationship between the Union and the United Kingdom as such can only be finalised and concluded once the United Kingdom has become a third country, Article 50 TEU requires to take account of the framework for its future relationship with the Union in the arrangements for withdrawal. To this end, an overall understanding on the framework for the future relationship should be identified during a second phase of the negotiations under Article 50 TEU. We stand ready to engage in preliminary and preparatory discussions to this end in the context of negotiations under Article 50 TEU, as soon as the European Council decides that sufficient progress has been made in the first phase towards reaching a satisfactory agreement on the arrangements for an orderly withdrawal.

So, during the Article 50 negotiations all that can be done is that the framework for the future relationship between the EU and the UK can be identified and taken into account. But an agreement can only be “finalised and concluded” once the UK has left the EU and has become a third country.

So what will be the status of the UK during the transition period? Clearly, it will not be a member of the EU after the Article 50 notification takes effect on March 29th, 2019. It will lose it roles in all EU governance structures. If “transitional arrangements” have been agreed they will come into force and the UK will remain subject to “existing Union regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures” during the transition.

But will the EU regard the UK as a “third country” with which it can negotiate during this transition phase? The UK would certainly want it to, and from a business perspective it would be the rational thing to do. But would the EU take the view that while the UK was effectively benefiting from the single market and the customs unions during a transition phase, negotiating a future agreement with it would be more “cake and eat it”?

Further, even if the EU was willing to negotiate how much time would be available to do so? The EU negotiating guidelines say that a transition must be “limited in time” and it appears that members of the UK cabinet are split, with a faction wanting it to end before the next election, due in 2022, so at most 2 to 3 years. Not enough time to unwind a legal and economic relationship that has lasted over 40 years and negotiate replacement arrangements. Especially, when you realise that what the UK will effectively be doing is negotiating worse terms and conditions with the EU than it currently enjoys.

But first, there is the question of money. The EU, as part of the Article 50 negotiations, wants the UK to agree a financial settlement that will discharge the commitments the UK entered into as part of the EU. The EU believes that these incurred obligations are separate from any future payment that would result from a transition deal or from UK involvement in EU programs or projects in the future.

For its part, the UK appears to want to use the already incurred payments to “buy” a transition deal. In effect, use the same money twice. This is not an offer the EU is likely to accept. Not to mention the amount that might be in question, where the two sides could be very far apart.

So, if in Florence, Mrs. May is going to make a financial offer to the EU it will have to be very carefully crafted. A badly structured offer could make matters worse, rather than better.

But even a well-crafted financial offer will need to be accompanied with a statement of where the UK eventually wants to land so that a transition to that landing place can be discussed. The “deep and special relationship” the UK says it wants with the UK will need to be spelt out in detail. Because you can’t structure a negotiation around the words “deep” and “special”.

That’s the problem. The UK bought an empty bucket called Brexit. Now it can’t decide how to fill that bucket.