Goldman Sachs: The EU will not give Theresa May a 'Soft Brexit'

LONDON - Theresa May will probably fail to keep Britain in the EU Single Market and lose the UK's financial passport after Article 50 talks conclude in March 2019, according to Goldman Sachs analyst Andrew Benito.

That is the bad news, the kind that might impose a "permanent cost" on the UK of 1.2% of GDP.

The good news is that once Britain gets past what Benito calls its "phoney war" with the EU, Prime Minister May will probably be able to get a transitional agreement which will last until a new free trade agreement is made. That could hold most of the UK's existing EU relationship in place, and take 10 years or more, the Goldman analyst believes.

May has two "red lines" that she will not cross in negotiations, Goldman says:

• She wants Britain to be outside the jurisdiction of the European Court of Justice.
• She wants to end the automatic right of European immigrants to live in the UK.

However, May has not talked much about a third potential red line: ending payments and contributions to the EU budget.

That suggests May could be willing to continue those budget contributions in exchange for some access to the Single Market and compromises on the "equivalence" of British financial services in Europe, according to Benito.

That won't be the same as a "soft Brexit" in which Britain keeps access to the Single Market and retains the financial passport on which City banks depend. "A free trade deal is far from a perfect substitute for participation in the Single Market," Benito says:

"Assuming PM May insists on the exclusion from free movement and from the ECJ ruling, then losing participation in the Single Market from Spring 2019 seems to us to be the more likely base case."

"Since we understand 'soft Brexit' to mean participation in the Single Market (e.g., via membership of the European Economic Area), this set of outcomes is some way away from a 'soft Brexit'. Yet, by achieving a free trade deal, it is more constructive than a 'hard Brexit' that involves falling back on WTO rules, absent a free trade agreement."