The presentation by Theresa May in Florence last week was said to be a significant announcement and worthy of delaying the start of the fourth round of Brexit negotiations by a few days. The take-away message of the Florence speech was that the UK wants a transition period after it leaves the EU in March 2019; this was hardly a revelation. The concession that the UK will pay about €20 billion for the privilege was hardly news either since it is only marginally higher than the standard UK EU contributions and would, in effect, be an extension of the UK’s EU membership. The acknowledgement that the UK would respect the Four Freedoms and abide by EU law during this period could not have been otherwise.
Whilst the speech was generally welcomed in European capitals and by those involved in the negotiations as a positive development and a sign that the UK government is realising that it can’t “have its cake and eat it”, it has not been seen as the breakthrough needed to move talks into a second phase where a post-Brexit EU-UK trading relationship can be discussed. In the cabinet, rifts are already emerging with the Foreign Secretary calling for a short transitional period and suggesting that freedom of movement will be curtailed after exit which is at odds with what May is promising. Eurosceptics in government and parliament will be opposed to paying anything after the UK formally leaves the bloc and this before the “divorce settlement” figure has been revealed, let alone agreed.
Against this background, the ratings agency Moody’s decided to cut the UK’s sovereign credit rating on Friday night, just hours after the Florence speech. It dropped the rating one level to Aa2, meaning that it is now two levels below AAA status. Moody’s cited concerns about public finances, Brexit headwinds and a weaker growth outlook as justifications for their decision.