Brexit talks start Monday. The U.K. still lacks a plan


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What the UK election means for the economy

Britain has three days to figure out its Brexit plan.

The U.K. confirmed Thursday that official divorce talks with the European Union will start on June 19. But it’s far from clear what its negotiating position will be when they get underway.

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Last week’s general election wiped out Prime Minister Theresa May’s parliamentary majority and raised big doubts about her hardline EU exit strategy.

May is still trying to secure the support of a fringe party whose votes she needs to form a government, and it won’t be clear until next Wednesday whether she commands a majority in parliament.

Meanwhile, there is open debate about how Britain should approach talks with the EU, despite a year having passed since voters chose to pull the U.K. out of its most important export market.

“The subjects we need to deal with are extraordinarily complex from a technical, judicial and financial point of view,” Michel Barnier, the EU’s chief negotiator, warned earlier this week.

May had promised to take Britain completely out of the bloc’s common trading area and slash the number of people coming from the EU. She even threatened to walk away from Europe without paying a hefty divorce bill or striking a new trade deal.

Related: Europe’s new finance rules put 83,000 jobs at risk

But the stunning election result has cut May off at the knees. The business community and many lawmakers want to retain closer ties with Europe, and they are heaping pressure on the prime minister to change her approach.

Airbus (EADSF), for example, has threatened to move new production out of the country if it faces new trade barriers or restrictions on the ability to recruit EU workers for jobs in the U.K.

Keeping close economic integration after Brexit is likely to mean the U.K. has to compromise on immigration.

“The EU can only negotiate once the U.K. has come to a consensus on how to proceed — which will only happen once British politicians openly debate Brexit’s dilemmas,” said Simon Tilford, deputy director of the Centre for European Reform.

How an extraordinary UK election unfolded

Media reports suggest that Treasury chief Philip Hammond planned to use a high-profile speech on Thursday to argue for a “softer” Brexit, putting the interests of the economy before controls on migrants.

Hammond, who reportedly faced the prospect of being fired if May had won big in the election, favors a transitional period to help British companies adapt to life outside the EU.

Yet Hammond called off the speech Thursday afternoon, citing a fire at an apartment building in London in which at least 17 people died.

The Treasury said Hammond would return to the issues he was planning to discuss in the near future.

philip hammond
Chancellor of the Exchequer Philip Hammond.

Related: Record number of Brits take German citizenship after Brexit

Economic data is beginning to lend extra weight to the argument for a different approach to Brexit.

Consumers, hammered by rising prices and stagnant wages, have snapped their wallets shut in recent months. Political turmoil has caused business leaders to put investments on hold.

The storm clouds began to gather in the immediate aftermath of the referendum, when investors quickly sent the pound to its lowest level in decades over fears that Britain would lose preferential access to Europe’s vast markets.

The latest warning sign came Thursday: Retail sales fell by 1.2% in May, compared with April.

While much remains unclear, here’s what could happen next:

Tilford said that if May sticks to her uncompromising approach, the EU will have “no option but to respond in kind.”

The EU could demand that Britain pay a large upfront exit bill. It could also refuse to start negotiations on a future trading relationship before exit terms are agreed.

If, however, she adopts a more conciliatory stance, the EU should outline four scenarios for the U.K.:

1) Change its mind and be allowed to remain in the EU.
2) Leave the EU but join the European Economic Area (alongside Iceland, Liechtenstein and Norway). That would mean accepting EU workers.
3) Leave the EU but negotiate a new free trade agreement, and a transition period for the U.K. economy to adjust.
4) Crash out of the EU and face new trade barriers.

“British euroskeptics would portray such an EU approach as bullying, but it would help bring clarity to the U.K. debate, by making it impossible for British politicians to persist with their strategy of ignoring the choices facing the country,” Tilford said.

CNNMoney (London) First published June 15, 2017: 11:59 AM ET


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