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European Parliament Confirms it is a Major Impediment to a Brexit Deal

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Any official Brexit agreements will require the rubber stamp of the European parliament and, after flexing its muscles Tuesday, it may soon frustrate Theresa May’s effort to secure an early agreement on a transitional deal between the UK and the EU.

The European parliament has heaped pressure on to Prime Minister Theresa May ahead of a key speech Wednesday and underlined the threat it poses to a final deal on post-Brexit relations.

Any agreements between London and Brussels, whether transitional or final post-Brexit trade agreements, will need the rubber stamp of the EU parliament. But Tuesday saw Brussels officials flex their muscles and fire a proverbial warning shot across the bow of London.

Lawmakers held a nonbinding vote in Brussels which ruled against negotiations between the UK and EU proceeding on to the subject of the future trading relationship due to “insufficient progress” with efforts by negotiators to extract a “divorce bill” from London.

The ruling does not bind negotiator Michel Barnier but it makes the sentiments of the parliament clear and could be enough to ensure PM May uses an eagerly anticipated speech at the Conservative Party conference Wednesday to offer further concessions to Brussels.

Brussels officials have turned the screws on May at a time when speculation is rife over how long she can continue to avoid a challenge to her leadership, given vocal opposition to further concessions coming from within her own cabinet.

“We think May will be able to converge towards the EU27 on financial liabilities and citizens rights without triggering a destabilizing leadership challenge,” says Oliver Harvey, a macro strategist at Deutsche Bank. “This would in turn overcome the 'sufficient progress' hurdle presented by Barnier and likely trigger a positive from markets.”

Deutsche Bank predicts that if a leadership challenge takes place it is likely to be won by a Brexiteer, such as Johnson, but implies this is a low probability outcome due to the risk of it leading to a snap election - which the Conservatives might lose.

At the heart of Brussels’ concern is a fear the EU will not be able to finance its budget commitments between when Britain is scheduled to leave and the end of the EU budget period in 2020.

In another speech, this one in Florence, May set out plans to ensure the EU avoids a budgetary cliff during the fiscal period to 2020 but made her offer of continued budget contributions conditional on securing an early agreement on a post-Brexit transitional period.

This was swiftly described by European Council president Donald Tusk as insufficient to move talks along, in a move seen as a subtle demand by Brussels for more money.

The rights of EU citizens living in the UK and UK citizens living in the EU are still uncertain despite efforts to reach a deal. Direct or indirect ECJ oversight of British courts when it comes to citizens rights is a key demand of Brussels.

But Brexiteers within the Conservative Party have opposed the idea of the ECJ having any jurisdiction in the UK during and after a transitional period.

“We believe the question of May's political future hinges on whether Brexit Secretary Davis will support convergence. If yes, the government is likely to be able to weather the resignation of Johnson. If no, then it is more likely a leadership contest takes place,” says Harvey.

While it is possible fears of a challenge to May’s leadership are overbaked, the European parliament remains an imposing figure in the current environment, as it could also frustrate May’s more recent effort to secure early agreement on a transitional deal between the UK and the EU.

“Given the political capital required from the EU27 to agree on EEA transition, member states may resist the prospect of a possible 'transition to nowhere,” says Harvey. “But the greater the emphasis the EU27 place on the outline of a future free trade deal to move talks onto transition, the more difficult this will make life for May, given ongoing divisions within the Conservative Party.”

The Pound extended recent losses against both the Dollar and the Euro Tuesday, with the Pound-to-Euro rate falling 0.38% to 1.1269 while the Pound-to-Dollar rate dropped 0.12% to 1.3256.

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