February 10,2017

U.K. Prime Minister Theresa May’s vision for Brexit is antagonizing European Union governments, raising the risk that negotiations deteriorate into a bust-up even worse than first expected.

May’s initial demands –- and warnings over what she will do with taxes or security if she doesn’t get her way -– are elevating the likelihood that the U.K. leaves the bloc in 2019 without an exit deal, let alone the sweeping trade pact it seeks, according to five Brussels-based diplomats who spoke on condition of anonymity.

The decline in sentiment comes less than two months before May plans to open discussions by invoking Article 50 of the Lisbon Treaty and suggests she may need to modify her approach to ensure the breakup doesn’t end up hurting both economies.

“It’s going to be very complicated, very messy,” former Finnish Prime Minister Alexander Stubb told Bloomberg Television this week. “When you’re negotiating Article 50, you’re talking about 200,000 pages of secondary legislation — it’s not going to be easy to just get out.”

The messages from the diplomats are that EU governments are preparing to enforce their line that the U.K. can’t be better off outside the bloc than inside it and that they value safeguarding their own interests and regional stability above the need to maintain good relations with the U.K.

While the diplomats acknowledged there is likely to be a long back-and-forth and that May has merely made an opening gambit, they said officials have been surprised by how combative the U.K. has been so far.

“The EU faces an existential crisis,” said Malcolm Barr, an economist at JPMorgan Chase & Co. “It will prioritize a deal which fosters coherence among the 27 and which demonstrates to all the disadvantages of leaving, even if that comes at a short-run economic cost to itself.”

Large Sums

May outlined her strategy in a January speech and formally published it last week. She aims to leave the single market for goods and services, quit sending large sums of money to Brussels, clamp down on immigration and recapture law-making powers. As for trade, she wants a “bold and ambitious’’ commercial relationship with the EU but also the freedom to negotiate accords with other countries.

She argues the relationship she envisages would benefit the EU too by ensuring easy trade across the English Channel and warns both economies would suffer if a pact can’t be struck. “It is in everybody’s interest to find an arrangement, to find a partnership between us that actually meets the needs on both sides,’’ May told the New Statesman magazine this week. “I don’t feel I have a weak hand.’’

Still, governments couldn’t avoid noticing that May’s pitch was laced with menace, the diplomats said. She suggested failure to land a deal could prompt the U.K. to cut taxes to maintain competitiveness and also hinted it could withhold security cooperation from its neighbors. Her willingness to engage with U.S. President Donald Trump also raised eyebrows.

“She’s taken this huge strategic decision to ally herself with Donald Trump which has ruffled a lot of feathers,” former U.K. Deputy Prime Minister Nick Clegg said in an interview with Bloomberg Television on Friday. Diplomats across the EU “are mystified as to why she hasn’t tried to create more space to come to a more workable, a more moderate accommodation.”

Hardening Positions

British efforts to find allies among the other 27 EU states and undercut the European Commission in Brussels would risk hardening positions, the diplomats said.

The U.K. has already started bulking up the status of embassies in central and eastern Europe. It has also yet to guarantee the rights of EU citizens currently living in the U.K., which outnumber Britons on the continent.

How the talks will actually fare may be evident early on. An immediate flashpoint is set to be the haggling over Britain’s exit bill. Running to an estimated 60 billion euros ($64 billion), it comprises various financial commitments, such as pension obligations to EU officials and past pledges to the bloc’s budget and projects.

Strategic Priorities

U.K. Trade Secretary Liam Fox last week called the idea of such a bill “absurd” and the government has said it won’t pay for any EU projects signed after last November unless they “provide strong value for money and are in line with domestic strategic priorities.” The European Commission this week reiterated that Britain’s financial commitments “should be honored in full.’’

The structure of the talks will also prove nettlesome even as both sides agree they need to wrap up around October 2018 so as to give the British and European parliaments time to debate the draft plans.

EU negotiator Michel Barnier maintains that settling the terms of divorce must come before discussions about a future relationship. That would put paid to May’s hopes of striking a new trade deal within two years, although European Parliament point-person Guy Verhofstadt recently said parallel discussions should be possible.

While British businesses and London-based banks are also keen for there to be a transitional period after the day of Brexit to acclimatize, Barnier says that will be a matter for deep into the discussions. That could be a problem for May as an agreement could come too late to stop jobs and operations moving overseas.

Recent evidence suggests May will struggle to divide and conquer the EU. The bloc has broadly stuck to its commitment not to hold even informal talks with the British until Article 50 is activated, while all its leaders say the U.K. will be unable to “cherry pick’’ the best bits of EU membership.

‘Situation Outside’

“Britain’s situation outside must be less favorable than the situation it’s had inside,” EU Economics Commissioner Pierre Moscovici said in an interview in Belgium’s Le Soir newspaper on Friday. “Mrs. May will negotiate for British interests; we will negotiate for the interests of Europe at 27.”

Instead of fracturing, the EU’s other 27 nations have used the time to carry out intensive preparations among themselves. National officials spent the past weeks lobbying Barnier and his team in Brussels to ensure pet causes such as Ireland’s border with the U.K. and which waters French fishermen can access aren’t ignored when the talks start.

Barnier now has about 25 members of various European nationalities, drawing expertise mainly from the European Commission in differing policy areas, including specialists in financial services, the budget, trade and law.

“The British may over-estimate the strength of the cards they hold,” Charles Grant, director of the Centre for European Reform, said in a note. “That means that May and her ministers should conduct the talks in a sober, courteous and modest manner.”