In what has become a depressingly persistent undercurrent to the ongoing Brexit negotiation trainwreck, it appears that UK Prime Minister Theresa May and her European counterparts, led by chief negotiator Michel Barnier, have once again set themselves up for failure. As both sides scramble to produce the framework for a "backstop" transition agreement, a process that has been fraught with seemingly intractable conflict despite the fact that it would be explicitly nonbinding, it's looking increasingly likely that the UK and EU will miss another self-imposed deadline on Monday, as Bloomberg reports.
Investors had hoped that the backstop agreement, or at least a rough outline of a backstop agreement, would be finalized by Monday, allowing both sides more time to figure out what the economic relationship between the EU and UK will actually look like after the transition has begun.
The sticking point for May is the fact that the absence of a clear Parliamentary majority for the conservatives has put her in the uncomfortable position of trying to cater to a plurality of groups with different, sometimes opposing, demands, both in her own government and among the EU. In a piece published on its 'Brexit Blog' late last week, ING explained that the two most controversial aspects of any potential transition agreement involve what has been called the Irish border issue, and exactly how vague the wording on future trade should be.
We start with the Irish border issue:
Firstly, there's the so-called Irish backstop, where discussions are beginning to get very technical. We dived into this in more detail last week, but ITV's Robert Peston reports that the EU could be prepared to accept British demands for an all-UK customs union to be built into the Irish backstop solution. In exchange, the UK would need to accept that regulatory checks could arise between Northern Ireland and the British mainland if they leave the single market in future.
Some reports indicate this could be settled in time for the EU Council meeting next week, but as ever the challenge is 'wording' it in such a way that will convince MPs to vote in favour of the agreement. That's where the second part of the agreement comes in - the political declaration on future trade - and this is where there seems to be more disagreement on the way forward.
Then there is the 'wording' on future trade that would include a "temporary customs arrangement."
The idea is that this declaration will set out a vision for what the future trading relationship might look like.
Bear in mind; this is simply a political statement of intent – the nitty gritty details will be negotiated during the transition period after March 2019. And being a political statement, none of it will be legally binding. In other words, it’s going to be vague - but deciding exactly how vague seems to be proving a bit of a dilemma.
Plan A - at least from the EU's perspective - is to make this as vague as possible, with reports suggesting a draft version originally due for release this week could contain as few as four pages and will be little more than a series of "annotated headlines". The recent optimistic tone struck by the EU - including in the run-up to the recent Salzburg summit gives us a flavour of the sort of language the document is likely to contain. It's likely to be heavy on words like 'ambitious' and 'unprecedented', but short on details on exactly what this means in practice.
Reports also indicate the EU is open to an 'evolution clause' that would leave Brussels open to an improved offer if the UK changes its mind on what it wants. The hope is that all of this will be enough to convince MPs from across the Brexit divide that whatever the declaration ends up saying is not set in stone, and that their own aspirations for the future agreement are still alive.
However, the UK government appears concerned that this vague approach will not be enough to win over lawmakers from the Northern Irish Democratic Unionist Party (DUP). DUP leaders are concerned about reports that the government now accepts the backstop would lead to regulatory barriers between Northern Ireland and the British mainland, and the party is reportedly considering voting against the forthcoming budget if the Prime Minister doesn't change course.
With that in mind, a government spokesman said on Monday that the UK is looking for more "precise" wording on future trade in the declaration, presumably in a bid to reassure DUP MPs that the Irish backstop will never be needed.
Still, EU leaders bluntly informed May during last months' Salzburg summit that her Chequers plan wouldn't work. Yet, the EU's push for a more vague 'political statement' might be accepted by hardline Brexit MPs, who also objected to Chequers...the whole situation is effectively one giant gordian knot of a problem.
What's worse for May, early Sunday in London, the Brexiteer hardliners published an open letter signed by 63 Conservative MPs, including David Davis, the former Brexit secretary, Jacob Rees-Mogg, the chairman of the European Research Group of Eurosceptic backbenchers and former Brexit minister Steve Baker, the former Brexit minister. At the same time, Anne-Marie Trevelyan, a pro-leave MP, published an editorial in the Sunday Telegraph demanding that any possibility that the UK could remain in a "temporary customs arrangement" after the Brexit transition period ends in December 2020 be stricken from the final agreement - because leaving open the possibility would be tantamount to ignoring the political will of the 17.4 million Britons who voted for Brexit.
Meanwhile, Davis demanded in an editorial in the Sunday Times that Cabinet ministers should "exert their collective authority" and rebel against Theresa May's proposed Brexit deal. All of this is happening amid even more conflicting reports, citing sources from the EU and sources from No. 10 Downing Street, affirming and denying that a deal had been reached.
Underscoring the hostility to a deal, the leader of Northern Ireland's Democratic Unionist Party said Sunday that she would prefer a "no deal" Brexit to a "backstop" transition agreement that would require any borders between Northern Ireland and the UK, arguing that this would amount to the "annexation" of Northern Ireland by the EU, per CNBC.
While much work clearly remains ahead - and the eventuality that Parliament could at the last minute sink whatever backstop deal is "finalized" between May and the EU remains a very real possibility - analysts from ING still believe the backstop agreement will be reached. While that likely won't happen this week, ING said, an agreement could be reached by an upcoming summit in November, with a Parliamentary vote taking place in December.
As a reminder, here's a timeline of important Brexit-related events, and an outline of four possible post-Brexit Day scenarios.
Still, after pricing in the backstop deal's success in recent weeks, traders might not feel comfortable with the two sides blowing a deadline set for this coming week, as it could cause some to question whether Barnier was being unrealistically optimistic in September when he predicted that a deal would be reached by the end of this month because so far, negotiators have failed to prove to the market that they can square the circle and create an agreement that is palatable both to the EU and to the many opposing factions in the UK's Parliament.