Today’s speech from the Prime Minister came at the end of a tumultuous week when Brexit choices – on a customs union, the Irish border, and the trade-offs between Single Market access and UK regulatory control – began to bite. This is a big moment for Theresa May. She badly needs to agree a transitional deal with the EU later this month. But her proposal for “ambitious managed divergence”, which she fleshed out in more detail today, may struggle to win support from the EU27.

While the speech today provided more substance than previous statements, and fundamentally signalled a desire to maintain close alignment with the EU in many areas, it still put forward proposals that are likely to be unacceptable to Brussels. Time is running out to square off the differences ahead of the European Council on 22 March. Failure to make progress on transitional terms by that point will give rise to serious political and economic uncertainty.

Close alignment

Two key questions will dominate the Brexit negotiations this year: how closely aligned does the UK want to be to the Single Market rules? And will the UK join a comprehensive customs union with the EU, or does it prioritise doing its own trade deals?

If we strip away the rhetoric, what clarity did Mrs May provide against these benchmarks?

The PM’s speech went further than before in leaning towards a future in which the UK remains closely aligned to the European market. In that sense it makes hard reading for Liam Fox. The PM set out her desire for Britain to be an associate member of various EU agencies – notably in chemicals, medicines and aviation – abiding by their rules and paying fees to participate in them. More generally, the PM underlined how she wants to reach a comprehensive free trade deal in goods, with frictionless borders and without tariffs or quotas.

To that end she made a ‘strong commitment’ to maintaining regulatory standards at least as high as that of the EU. That would make trade deals with new global partners like the US hard to achieve – though the PM noted that in the area of agriculture and fisheries “it will be particularly important to secure flexibility here to ensure we can make the most of the opportunities presented by our withdrawal from the EU”. In addition to referencing goods, the PM voiced her ambition to strike a deal that would expand beyond goods to cover services, including in broadcasting and finance.

Customs union

However, while she spoke about a desire for close alignment, the PM remained uncompromising on some of the key mechanics. On customs, Mrs May reiterated that the UK will not be part of any comprehensive customs union after Brexit. Instead she promoted the idea of a customs partnership – described as ‘blue skies thinking’ when it was unveiled as an option last summer – whereby the UK collects the common external tariff on goods entering the UK for onward travel into the EU, but discounts it for those that stay in the UK market. This proposal is very unlikely to win support in Brussels, where it is regarded as ‘fantasy land’.

It also fails to really address the problem of avoiding a hard border in Ireland, and Mrs May’s proposal to effectively turn a blind eye to the small traders who make up 80% of cross-border trade in Ireland seems especially weak. The bottom line is there no obvious way to avoid a hard border in Ireland if the UK is not in a comprehensive customs union – as the European Commission’s draft Withdrawal Agreement made clear this week. The question of the customs union will therefore remain a critical issue and key flashpoint when amendments to force that position on the government are eventually confronted in the House of Commons. However, it is notable that Tory Remainers who have supported the customs union amendment have given today’s speech a cautious welcome.

Next steps to March: is a transition deal at risk?

Major decisions on Brexit will be forged, or forced, in the next few months. The immediate priority for the UK is to secure agreement at the 22 March European Council to a ‘standstill’ transitional phase, to ensure that little changes for business after the UK leaves in March 2019. The impasse on Ireland, as well as the government’s own objections to some of the transition terms (e.g. asking to review or veto new EU laws) now pose a real risk of delaying agreement on the transition to June.

Failure to agree a transition in March could cause volatility in the markets and embolden Mrs May’s Remain-inclined Tory backbench critics, making a Commons defeat on joining a customs union more likely when the legislation eventually returns to Parliament. That would cause serious political turbulence on the governing side. Even if the government avoids defeat, Mrs May will need to start making decisions on the trade-offs between control and market access, as the negotiating realities begin to bite. She will do so with very little political capital left. The period from now until the June European Council will probably define the UK’s main Brexit choices for the longer-term, with political crisis never far away.