German threat to Brexit trade deal

Merkel’s strong opposition to bespoke agreement may torpedo British blueprint

BRITAIN’S plan for a bespoke Brexit trade deal is at risk of being derailed by Germany, even before negotiations on the future EU-UK relationship begin later this year, The Daily Telegraph can reveal.

Angela Merkel, the German chancellor, is against a British plan for so-called “managed divergence” from the EU, with senior EU officials and experts warning that she considers the idea another ruse for Britain to “have its cake and eat it”.

The staunch German opposition to the UK’S position comes as Philip Hammond, the Chancellor, and David Davis, the Brexit Secretary, arrive in Germany today for a joint charm offensive.

The pair will travel to Berlin and Munich, respectively, to appeal for more pragmatism from Europe as a reward for the UK’S decision to agree to a €45 billion Brexit bill last December.

Mr Hammond and Mr Davis will argue that the UK is not trying to cherry-pick, but that “it makes no sense” to erect unnecessary barriers to trade in goods and services “that would only damage businesses and economic growth on both sides of the Channel”.

The British overtures came as sources said that Berlin remains implacably opposed to what UK officials have nicknamed the “three baskets” approach to Brexit, in which the UK would identify where it wants to stay close to Europe, where it will diverge and a regulated middle ground. A senior German diplomat working on preparations for the next round of negotiations said: “The ‘three baskets’ sounds like the latest episode in the ‘cake and eat it’ sitcom series,” adding that Germany saw a “serious risk to the integrity of the EU and its single market”.

Regional analysts warned that the British plan to diverge from the EU over time risked being stillborn if ministers could not convince Europe to take a more flexible approach.

“Hammond and Davis are going to have their work cut out to convince the EU that the UK’S ‘three baskets’ approach isn’t another attempt to cherry-pick and sow division within the EU,” said Mujtaba Rahman, head of Europe practice at the Eurasia Group consultancy.

“Germany is going to play hardball. Senior officials in Berlin are clear that Angela Merkel is determined not to award the Brits a deal that gives Eurosceptics and future trade partners a precedent to point to.”

UK ministers have been encouraged that some EU states – notably the Nordics, Netherlands, Italy and Luxembourg – have questioned the hardline approach by Berlin and Paris, and are now beginning a month of intensive lobbying with member states.

Both sides will now engage in a crucial month-long war of ideas, with British ministers urging a pragmatic approach, while the 27 member states try to reach agreement on how to tackle the trade talks. A formal EU “mandate” is promised in March.

BRITISH demands for a bespoke trade deal after Brexit will require creative thinking on both sides of the Channel, British officials argue, despite preliminary German opposition to the idea of “managed divergence”.

The concept of the “three baskets” was first raised by Theresa May in her Brexit speech in Florence last September, when she rejected both the basic Canada-style trade deal or a highly aligned Norwegian-style model as inadequate to UK needs. She spoke of the three “areas” where the UK would either want to be fully outside Europe, fully converged or in an interim level of alignment where “we share the same goals but want to achieve them through different means”.

The Florence idea was fleshed out in a 30-page paper presented to the inner Brexit Cabinet on Dec 18 by Oliver Robbins, the UK’S top Brexit official, largely at the expense of the “Canada plus, plus, plus” deal espoused by Mr Davis.

At the heart of the UK position is the idea that a future trade negotiation with the EU should recognise the complete EU-UK alignment at the outset, and then work backwards, “managing divergence” from there as the future UKEU relationship develops.

“We are not asking Germany to deliver something we think is impossible,” added a Whitehall official, “but when Michel Barnier says the EU want their most ambitious approach to a free-trade agreement yet, that should hold.” Both sides will now engage in a l month-long war of ideas, with UK ministers urging a pragmatic approach while the EU 27 try to reach agreement on tackling the trade talks.

Mr Barnier, the EU chief negotiator, repeated the EU’S fixed positions yesterday, saying that the “only model available” – given Mrs May’s red lines over freedom of movement and leaving the single market – “is that of a freetrade agreement”.

The EU has issued contingency memos to private industries to prepare them for a no-deal Brexit, which prompted Mr Davis to accuse Brussels of damaging British interests.

The contents of the Robbins paper remain secret, with the Cabinet still working to formalise its final position on the future EU-UK relationship and key cabinet meetings expected this month. The EU is demanding the UK set out its position ahead of talks.

However, in the absence of any detail from the UK, senior EU Brexit negotiators have locked on to a paper from the non-partisan Institute for Government, which outlines how UK’S idea for a “three-tier” approach to regulatory alignment might work.

“When the UK formally proposes its plans for Brexit, the German bureaucracy now expects the UK to propose an approach on this model,” said Charles Grant, director of the Centre for European

‘The Germans worry that the Institute for Government model would allow the UK to thrive outside the EU’

Reform, raising renewed fears of “cherry-picking”.

Under the model, a joint dispute resolution body would enable the EU to punish the UK for diverging in baskets one and two, but also potentially allow different areas to move between baskets as the EU-UK relationship evolved.

“This could undermine the level playing field that the Germans want. The Germans worry that the model would allow the UK to thrive outside the EU and thus encourage other countries, like the Netherlands, to look for the exit,” he said.

The EU side will hold a series of seminars in Brussels covering all aspects of the future relationship. The most crucial meeting, however, is scheduled for Jan 25, when they will discuss how to maintain the “level playing field” – EU jargon for the rules that will stop the UK from obtaining competitive advantage on tax, state aid and other regulations.

EU sources told The Daily Telegraph that at a November seminar on the future trade relationship, the Netherlands, Sweden, Cyprus and Luxembourg all demanded a more flexible approach. They were met with firm pushback by the EC, which is expected to side with France and Germany in urging other member states to take a hard line and limit any prospect of the UK taking advantage of Brexit.