BRUSSELS (Reuters) - A view among investors that a Brexit deal is more likely has pushed the pound higher this month, perplexing European Union officials and diplomats involved in the talks who say key stumbling blocks remain.
A stream of headlines on efforts to clinch an agreement at a series of summits between now and mid-November has helped sterling reverse losses suffered last month, when talk of a failure of negotiations spooked the markets.
It is up about 3.5 percent against the dollar from lows hit in August.
But one senior EU diplomat, briefed on the state of play as seen by the bloc’s negotiator Michel Barnier, said: “Nothing has changed. I don’t know where this optimism is coming from.”
A senior EU official closely involved in negotiations said his assessment of the risk of breakdown had not changed, mainly because Prime Minister Theresa May faces major difficulties persuading her own party to back proposals that are still not satisfactory to the EU.
“You can always end up in hard Brexit by accident,” he said, referring to a failure to agree on an orderly withdrawal before Britain leaves at the end of its two-year notice period on March 29.
“The biggest threat is political gridlock in the UK.”
The issue of the land border on the island of Ireland remains critical and intractable.
The EU insists the withdrawal treaty contain a legal “backstop” protocol that would keep Northern Ireland in an economic space with the bloc whatever happens to British-EU trading relations after an adaptation period ends in 2020.
May, dependent on Northern Irish allies who see the EU plan as weakening their ties to the British mainland, wants to do things differently, proposing a new set of customs arrangements.
Officials say work on the withdrawal treaty tying up legal loose ends for businesses, budgets and expatriates is nearly done. But the Irish problem is tangled up with broader talks on the future trading relationship. These will only produce an outline declaration to accompany the exit deal but the two sides remain deeply divided on how it might look.
May’s allies have been talking up progress. Her Brexit minister Dominic Raab, after a call with Barnier on Friday, spoke of “closing in on workable solutions”.
Barnier said he and Raab discussed the latest progress.
“But substantive differences remain,” he said of the Irish fix, governance of the deal and geographical indication labels for specialised local products. “We are also continuing our discussions to find common ground on the future relationship.”
One British official said London detected warmer “mood music” coming from Barnier and the EU’s executive European Commission. The official highlighted how Commission President Jean-Claude Juncker gave a specific name-check to May’s recent “Chequers” proposals and promised goodwill to Britain as a close partner in a free trade area after Brexit.
EU officials, however, stress that warm words are always put with the caveat that Britain will not be allowed to undermine the bloc’s single market - and that London’s current proposals would do just that. Barnier insists they are unworkable.
May will meet fellow leaders in Salzburg, Austria on Wednesday and Thursday. The other 27 will get a briefing from Barnier on a “road map” to a deal in November, EU officials said.
The summit will be a “warm up” given May cannot compromise until after her Conservative party conference on Sept. 30-Oct. 3, one official said. That gives two weeks negotiating time until a regular summit on Oct. 18. Leaders in Salzburg are also likely to pencil in a special Brexit meeting in Brussels, hoping for a deal in mid-November.
The EU sees as unacceptable May’s Chequers proposal for a free-trade agreement complemented by a “single rulebook” for trade in goods. But overall, her plan was received in Brussels as a good starting point, partly because it envisages close ties in security after Brexit that the bloc also wants.
“We have to get to it without humiliating May”, one diplomat put it.
The EU plans to offer May a more detailed declaration on their future ties to help her convince her cabinet and parliament to accept the deal.
The bloc is also rewording the text on Ireland in ways that Dublin can accept but which, as Barnier puts it, “de-dramatises” the fears of May’s allies in Northern Ireland about, for example, EU customs checks on the sea routes to mainland Britain.
For many in Brussels, a deal now rests on a view that May has little choice but to accept EU terms or take a much heavier economic hit from Brexit.
Another diplomat said: “If she can’t do it now – then in November. She’ll announce the new Irish text as her success.”
Additional reporting by Tommy Wilkes and Jan Strupczewski; Editing by Toby Chopra