The European Commission on Wednesday recommended draft negotiating directives to the General Affairs Council (Article 50) for the next phase of Brexit negotiations, calling on a transitional period requested by Britain to conclude before the end of December 2020.

Supplementing the negotiating directives from May 2017, the draft negotiating directives set out additional details on possible transitional arrangements.

No cherry picking

The directive says no "cherry picking" would be allowed. During the transition, Britain would continue to participate in the Customs Union and the Single Market with all four freedoms -- free movement of goods, services and capital and labor.

The Union acquis should continue to apply in full to and in Britain as if it were a European Union (EU) member state. Any changes made to the acquis during this time should automatically apply to Britain, said the directive.

Meanwhile, during the transition period, all existing Union regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures will apply, including the competence of the European Courts of Justice (ECJ).

Britain will be a third country as of March 30, 2019. As a result, it will no longer be represented in EU's institutions, agencies, bodies and offices, the directive added.

The recommendation also recalled the need to translate into legal terms the results of the first phase of the negotiations, as outlined in the Commission's Communication and Joint Report, according to a press release of the EU.

It underlined that work needs to be completed on all withdrawal issues, including those not yet addressed in the first phase, such as the overall governance of the withdrawal agreement and substantive issues such as goods placed on the market before Britain's withdrawal from the EU.

The General Affairs Council (Art 50) is scheduled to adopt these additional negotiating directives on transitional arrangements in January 2018, said the release.

Transition obligations

Commenting on the directives, Michel Barnier, chief negotiator of EU's Brexit talks, told reporters during a press conference Wednesday that "Britain will keep all the benefits and obligations of the single market, the Customs Union and common policies during this transition period."

However, "if there is no orderly withdrawal and a treaty on section 50, there is no transition," he warned.

"And so these two elements go together: all the conditions and the elements of the ordered separation, especially on the basis of the joint report approved eight days ago and which will be essentially the main stream of the withdrawal agreement and transition, which will be decided under the same legal basis," he added.

As to EU's future relationship with Britain, Barnier said it will not be a treaty in October 2018. "We will need more time. However, we can and we will in this political declaration define the framework of the future relationship and this political declaration will accompany the treaty Article 50 on the withdrawal ordered and the transition."

In their last gathering here for the winter EU summit, leaders of the 27 EU members approved the second phase of Brexit talks, with belief that sufficient progress had been made during the first session of Brexit talks.

Future relationship

As for the details of the future relationship between EU and Britain, local media is currently focusing on two types of future relations: one modeled after the Comprehensive Economic and Trade Agreement (CETA) and another after the European Economic Area (EEA).

A CETA-type trade deal would fall short of what Britain is looking for, mainly because it offers relatively limited access in services, with no passport rights for financial services -- an important sector for Britain.

On the other hand, an EEA-type agreement would give Britain much of what it is looking for in trade, including passporting rights for financial services. However, the EU insists that access to its single market, which EEA countries enjoy, must mean not only free movement of goods, services and capital, but also of labor -- a demand that Britain is not willing to accept.

In other words, Britain is looking for a "CETA-plus" (i.e. plus services, including financial services) or an "EEA-minus" (i.e. minus free movement of labor).

Room for compromise?

For its part, the EU is sticking to its CETA or EEA offer, without plus or minus. Whether there is room for a compromise between the two positions and at what price, in terms of British contributions to the EU budget and with respect of ECJ decisions, is what the negotiations of phase two will really be about, said Maria Demertzis, deputy director of the Bruegel think tank based in Brussels.

"Given the tight schedule of phase two, which requires a deal to be reached by October, November 2018, CETA-plus looks much more feasible than EEA-minus," she said in an analysis co-authored with Bruegel's senior research fellow Andre Sapir.

"For the EU, CETA plus would avoid getting into the discussion on the indivisibility of the single market's four freedoms, which it considers sacrosanct at this stage and which EEA-minus would imply," Demertzis said.

For Britain, CETA-plus would probably require less contribution to the EU budget and less respect of ECJ decisions than EEA-minus, and therefore be easier to accept politically," she added.

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