By David Milliken and William James
LONDON (Reuters) - British finance minister Philip Hammond said on Wednesday the value of a transitional Brexit deal would decline rapidly if talks to agree it drag into next year, but said it was too soon to spend money on contingency plans.
Negotiations on the terms of Britain's exit from the European Union have made slow progress before a March 2019 deadline. Talks on a transition period have not even begun.
And while Hammond thinks it's too early to begin enacting contingency plans for a failure to reach an agreement, EU diplomats and officials are putting renewed focus on preparing for a legal limbo after March 2019.
Their efforts have intensified as Brexit negotiations stall on issues like the bill Britain must pay to leave and the future of Northern Ireland's land border with the EU. If progress does not pick up, Hammond said, a transition agreement will rapidly diminish in value.
"It is self-evident to me ... that a transitional arrangement is a wasting asset. It has a value today. It will still have a very high value at Christmas, early in the new year," Hammond said.
"But as we move through 2018 its value to everybody will diminish significantly. And I think our European partners need to think very carefully about the need for speed in order to protect the potential value to all of us of having an interim period."
British Prime Minister Theresa May has set out plans to seek a transition period after March 2019 with a set time limit. During that period, Britain wants to operate under the same rules as it currently does to provide certainty for businesses while allowing new arrangements to be put in place.
Business leaders have repeatedly called for clarity on the trading conditions they will face during the transition period and beyond. Some - including banks in London's financial sector - are making arrangements to move overseas to ensure continued access to the EU market.
Hammond said lack of direction to talks was hurting business investment and consumer confidence, and one of his top advisors said international banks would make decisions to move in the first three months of 2018.
Britain had hoped EU leaders would agree to start talking about the future at a summit next week. But European Council President Donald Tusk poured cold water on that idea on Tuesday, saying he hoped it could happen in December.
Hammond called on the EU to change their approach, warning of the possibility of a bad-tempered breakdown in talks which would see EU countries acting against their own interest.
"We have made the running in this and we really need our European Union partners to engage ... We are not asking them to sign up. We are not asking them to write blank cheques. We are simply asking them to start talking to us," he said.
The limited progress in Brussels has drawn calls from some British lawmakers to walk away from the talks and start preparing for a clean break with the bloc.
Hammond is considered one of the most pro-EU members of Prime Minister Theresa May's cabinet, and pro-Brexit lawmakers and campaigners have accused him of trying to water down or even halt Britain's exit.
He said the government was planning for all possibilities, including Britain's leaving with no agreement on the terms of its departure or how the two would build a new relationship. He said 250 million pounds ($330 million) was being spent on planning for all scenarios.
But he rejected the idea that Britain should begin putting "no deal" contingency arrangements in place, including a suggestion from a member of his own party that the government should start spending money to beef up border and customs capabilities.
"Some are urging me to spend money simply to send a message to the EU that we mean business. I think the EU knows that we mean business," Hammond said. "I don't believe we should be in the business of making potentially nugatory expenditure until the very last moment when we need to do so."
However, he warned that he would have to start spending in 2018 if there was no clear prospect of a transitional deal.
"There will be some areas where we need to start spending money in the new year if we can't tell ourselves that we are moving steadily and pretty assuredly towards a transition agreement," he said.
($1 = 0.7573 pounds)
(Additional reporting by William Schomberg, editing by Larry King)