Significant Obstacles Remain in Brexit Negotiations

The two sides are racing to complete and win ratification for an agreement that would set bilateral economic and security ties by Dec. 31. Failure to reach a deal would mean from the start of next year tariffs would be applied for the first time in almost a half-century on some trade between the U.K. and the EU, to which it sends 43{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} of its exports.

After the discussion, a senior U.K. government official said “very large gaps remain between the two sides and it is still unclear whether these can be bridged.” The two leaders “agreed that by Sunday a firm decision should be taken about the future of the talks.”

Mrs. von der Leyen also said in a statement that the two sides were “far apart.” She said that negotiating teams would immediately resume talks “to try to resolve these essential issues.”

The U.K. formally left the bloc on Jan. 31 but is in a transition period until Dec. 31, during which it gets full access to the EU single market but must follow all EU rules.

The trade discussions are stuck on several issues that have bedeviled the talks from the start: Britain’s freedom to set its own state aid rules and diverge from other EU standards, EU access to U.K. fishing waters and how the commitments in the accord will be enforced.

On Wednesday, senior EU officials said the bloc’s leaders, who will come to Brussels for a summit Thursday and Friday, will likely receive an update on the talks but will make no decisions even if the negotiating teams reach a deal.

Tensions focused Wednesday on EU suggestions that it could retaliate if Britain doesn’t stay broadly in line with future EU tightening of environmental, social or labor standards. The two sides had been discussing pledges not to allow regulations in these areas to drop below current levels.

Speaking in parliament, German Chancellor

Angela Merkel

said Wednesday she believed a deal was possible but warned the EU must guard against giving British companies unfair advantages when competing with European businesses.

“We must have a level playing field, and not just for today but also for tomorrow. Otherwise it will come to unfair advantages and we don’t want to expose our companies to that,” Ms. Merkel said.

In Britain’s parliament, Mr. Johnson said the EU demands that the bloc can punish the U.K. if future standards diverge and what he called the bloc’s failure to recognize Britain’s right to set its own rules on fishing access were unacceptable.

“I don’t believe…that those are terms that any prime minister of this country should accept,” he told lawmakers.

EU officials have warned the failure to reach a deal will set back the bloc’s recovery from a deep coronavirus recession, and have said they think Britain will be worse hit by the failure to reach a deal.

Bank of England Gov.

Andrew Bailey

has warned that failure to secure a deal would leave more lasting scars on the British economy than coronavirus, though Mr. Johnson has said the British economy would flourish even without an EU deal.

Failure to reach a deal would end many types of cooperation between the U.K. and the EU over crime, security and travel, and corrode relations between close American allies in Europe as a new administration comes to power in Washington.

—Bojan Pancevski in Berlin and Jason Douglas in London contributed to this article.

Write to Laurence Norman at [email protected]