This undated photo shows the European Union's chief Brexit negotiator Michel Barnier. (JASPER JUINEN / BLOOMBERG)

Michel Barnier, the European Union’s chief Brexit negotiator, warned of “serious divergences” with the UK after the two sides ended their first week of negotiations over their future relationship.

The EU & the UK are trying to strike a trade deal by the year-end. If they fail, the UK would default to trading with the bloc on terms set by the World Trade Organization -- meaning the return of quotas and tariffs

And he rebuffed a request from the British government to wrap up an early deal on access to the single market for London’s banks.

Speaking to reporters in Brussels on Thursday, Barnier said the two sides are at loggerheads on four key issues:

- competition policy, where the EU wants the UK to commit to a so-called level playing field to prevent its economy being undercut;

- criminal justice and law enforcement, where the UK says it wants to withdraw from the European Court of Justice and the European Convention on Human Rights, something the EU opposes;

- fishing, where the EU wants continued access to British waters;

- the way any deal would be structured. Britain favors a series of mini-agreements in case some issues become impossible to resolve, while the EU insists there must be one all-encompassing deal.

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“There are many serious divergences,” Barnier said. But “an agreement is possible -- even if difficult,” he added.

Speaking later, a British official agreed that these four areas were the biggest hurdles to overcome, adding that there were many disagreements between the two sides.

After three years of bad-tempered talks over the terms of the UK’s exit from the EU, the two sides are trying to strike a trade deal by the year-end. If they fail, the UK would default to trading with the bloc on terms set by the World Trade Organization -- meaning the return of quotas and tariffs.

As the talks began earlier this week, officials were privately downbeat on the chances of an agreement, while British Prime Minister Boris Johnson has threatened to walk away if no deal is in sight by June. But on Thursday, both sides described the first round of talks as “constructive.”

'Initial skirmishing'

“The mood music was better than expected,” EU Trade Commissioner Phil Hogan told reporters in Dublin on Thursday. “Once the initial skirmishing is out of the way, hopefully we can make a lot of progress between now and the end of June.”

Brussels has made any trade deal conditional on the two sides reaching an accord on fish. The UK argues the current system is unfair because it allows EU boats to catch more in British waters than domestic vessels. After the talks concluded, a British official reiterated that the UK cannot accept the status quo on fishing rights.

Even if an agreement on fish may not be reached before July as planned, Barnier signaled there was room for a possible compromise.

“We are ready to seek out a balanced solution,” he said. Making access subject to annual negotiations would be “impracticable” because it fails to “give the people involved in fisheries the predictability which they need,” Barnier said.

On Wednesday, UK Environment Secretary George Eustice told lawmakers in London the government could be prepared to sign fishing agreements spanning several years.

On finance, Barnier warned London’s banks will have to wait longer to find out if they will get easy access to European markets, saying that the decision is for the EU alone to make. That won’t happen until the second half of the year, despite a previous plan to try to wrap up the issue by June. Without an agreement, UK-based bankers will be unable to offer their services across the EU from next year.

'No negotiations'

“There will be dialog, of course, but no negotiations,” Barnier said about the so-called equivalence determinations, which are key to banks’ access to the single market.

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The EU Brexit chief said that his British counterpart, David Frost, had assured him the UK will stick to the terms of its Withdrawal Agreement -- in particular, the measures to prevent a hard border on the island of Ireland. EU officials had been rattled by signs that Johnson’s government was backsliding on the commitments it made.

"It was a constructive first round and we now understand each other well. These will be tough talks but we will work hard to try to reach agreement," David Frost, the UK's chief negotiator said on Twitter, reports Xinhua.

Amid growing disruption from the coronavirus, both sides played down the chances that negotiations could be delayed. Johnson’s spokesman said the UK is confident that the talks will continue on schedule.

“We will be taking all necessary precautions,” Barnier said. “There is no ban on meetings.”

The next round of talks will start on March 18 in London.