U.K. Prime Minister Theresa May struck a conciliatory tonetoward the European Union as she coupled her demand for divorcewith a request for a sweeping free-trade deal encompassingfinancial services.

In a six-page letter submitted Wednesday to EU President DonaldTusk, May formally triggered two years of talks that will end withBritain leaving its largest trading partner after four decades ofmembership.

May sought to smooth over tensions by calling on bothsides to negotiate “constructively and respectfully,” sayingthat she wants the bloc to “succeed and prosper.” The charmoffensive may be aimed at trying to win what she called a “bold andambitious” free-trade deal to cover “crucial” industries likebanking and technology.

But an immediate clash was evident over the sequence of thetalks, as May called for their future partnership to be decidedalongside the terms of exit, while Tusk insisted the first phase ofnegotiations must focus only on “key arrangements for an orderlywithdrawal.”

“Our first priority will be to minimize the uncertainty causedby the decision of the United Kingdom for our citizens, businessesand members states,” Tusk said, speaking on behalf of the 27 otherEU governments.

Battle lines are becoming evident nine months after Britonsunexpectedly voted to quit the EU, setting the U.K. on a path ofuncertainty. The immediate point of contention is just how tohandle the talks: May wants to conduct parallel discussions topreserve bargaining power, while her counterparts prefer to settlethe split first.

The die was cast at about 1.20 p.m. in Brussels, when Britain'sEU envoy handed Tusk the letter invoking Article 50 of the LisbonTreaty, the legal mechanism to exit the group. The pound was down0.3% at $1.2410, having earlier touched a one-week low of$1.2377.

The remaining 27 EU countries are prepared, know what they wantand have provided the commission with a strong mandate, GermanForeign Minister Sigmar Gabriel said in Berlin. The EU and the U.K.need each other and should maintain friendly relations, though it's“hard to understand” why Britons should think they're better offalone, he said, “especially in these turbulent times.”

Exit Bill

Another early flashpoint will be money as the EU pushes for theU.K. to pay around 60 billion euros ($65 billion) to settle itsaccounts. In her letter, May signaled she realized the U.K. wouldneed to cover some past financial commitments, but hinted thatBritain would make its own claims as it leaves the bloc.

“We will need to discuss how we determine a fair settlement ofthe U.K.'s rights and obligations as a departing member state, inaccordance with the law and in the spirit of the United Kingdom'scontinuing partnership with the EU,” she said.

Another issue May wants to settle “early” is the rights of EUcitizens and Britons to live in each others' countries. She isaiming by March 29, 2019, to have won back control of labor flows,which raises questions about the legal status of 3 million EUnations living in the U.K.

In a cooling of rhetoric, May's letter carried no repeat of herpast warnings that she would be willing to walk away from thenegotiations, that “no deal is better than a bad deal” or that shecould always turn her economy into a low-tax haven.

The letter's tone suggested May “now recognizes the importanceof European goodwill if the U.K. is to avoid a disorderly and hardBrexit,” said Mujtaba Rahman, a managing director of the EurasiaGroup, a consultancy.

Her missive did contain a hint of menace. She said acollapse in talks and the imposition of tariffs on U.K. exports toEurope would carry security implications as the joint fight againstcrime and terrorism would be weakened.

May wants “to avoid any cliff edge” for business as Britainleaves, she told Tusk, asking him to work with her to minimizedisruption and help provide certainty to companies andinvestors.

Carmaker Ford Motor Wednesday urged May to secure thecontinuation of tariff-free trade and warned failure to strike adeal would be the “worst case.” Ryanair Holdings said the U.K.risked losing air links to the continent.

The talks will test the negotiating mettle of a premier in powerfor just eight months and her ability to play to a domesticaudience, especially the anti-EU wing of her Conservative Partythat remembers she voted to stay in the bloc. Britain is dividedover a “hard Brexit,” where May could walk away with no deal, and“soft Brexit” with continued tariff-free trade.

For Europe, it's a question of cohesion. Any deal struck betweenthe U.K. and the EU potentially could decide whether Britain provesto be a trailblazer for other countries to leave, or remain theskeptical outlier it has always been. To guard against encouragingothers to eye the exit door, EU officials say Britain will not beallowed to enjoy better terms outside the bloc than inside it.

European officials will bide their time to make a consideredresponse, knowing the British have ceded control of the clock tothem. Tusk will publish draft guidelines for Barnier by the end ofthe week, but leaders won't sign off on them until an April 29summit.

The EU's chief negotiator Michel Barnier tweeted that “this isDay 1 of a very long and difficult road.”

Bloomberg News

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