Brexit is stalling over one key issue and the solution could be costly for UK leader Theresa May

  • The idea behind the proposal for the extension is to have enough time to negotiate a trade deal with the rest of the EU that will avoid having to use the so-called Irish backstop.
  • This backstop is a future proposal that both the EU and the U.K. need to agree on to avoid a hard border between Northern Ireland and the Republic of Ireland.

European leaders gathered in Brussels seemingly have a new idea to try to break the current stalemate in Brexit negotiations, but it could prove costly for Prime Minister Theresa May and the U.K.

May is reportedly willing to extend the transition process. This is the portion of time after the U.K. has officially left the EU but when it is allowed to negotiate its future relationship, including a new trade deal with the rest of the EU. It will also give companies and people on both sides time to prepare for the new arrangements. This is currently set to last 21 months, between the exit day on March 29 next year and the end of 2020.

The idea behind the proposal for the extension is to have enough time to negotiate a trade deal with the rest of the EU that will avoid having to use the so-called Irish backstop. This backstop is a future proposal that both the EU and the U.K. need to agree on to avoid a hard border between Northern Ireland and the Republic of Ireland. It will only be triggered if both sides do no reach a future trade deal. The EU and the U.K. want to have a backup solution in case that ends up being the case.

This is the issue that is currently blocking progress in Brexit talks.

Danielle Haralambous, U.K. analyst at the Economist Intelligence Unit, told CNBC via email: "With the current phase of negotiations in deadlock over the Irish border issue, an extension of the transition period could in theory provide more time to negotiate a trade arrangement that permanently solves it. But this will be a hard-sell to the Brexiteers (those U.K. politicians that have campaigned to leave the EU)."

"They will reject the prospect of another year of financial contributions to the EU and adherence to EU rules," she added.

BRUSSELS, BELGIUM - OCTOBER 18:  British Prime Minister Theresa May prepares to speak to the media as she arrives for the October summit of European Union leaders on October 18, 2018 in Brussels, Belgium. 
Sean Gallup | Getty Images News | Getty Images
BRUSSELS, BELGIUM - OCTOBER 18: British Prime Minister Theresa May prepares to speak to the media as she arrives for the October summit of European Union leaders on October 18, 2018 in Brussels, Belgium. 

Extending the transition period would mean that the U.K. would prolong the period where it has no say in EU policymaking but would still have to pay into the European Union budget. It would however mean that businesses and citizens would have more time to prepare for the complete departure from the EU.

Kallum Pickering, a U.K. economist at Berenberg, said that "a longer transitional period would be a positive outcome for the U.K. economy as it would allow the U.K. to enjoy the benefits of participating in the EU single market and customs union for an extra year."

European leaders seem keen on the idea if it will end the current deadlock. Dalia Grybauskaite, the president of Lithuania, told CNBC Wednesday that extending the transition period was "not a problem for us."

Xavier Bettel, the prime minister of Luxembourg, also told CNBC's Willem Marx Wednesday that he is "in favor of all these possibilities where we can unlock an agreement, but it has to be with conditions."

"We can't just give up (on the Irish border and the single market) because time is running (out)," he said.

The other 27 European leaders — aside for the U.K. — said Wednesday night that despite the "intensive" negotiations there has not been enough progress to call for an emergency summit next month to sign off on the Withdrawal Agreement. This agreement is the terms on how the U.K. will leave the bloc, not what its future relationship will be.

However, they also said that if talks in the coming weeks show enough progress, they would "stand ready" to convene on that extra summit and potentially send the Withdrawal Agreement for parliamentary approval.

"The positive news this morning is that a November council has also not been called to prepare for a no-deal," Carsten Nickel, deputy director of research at Teneo Intelligence, told CNBC's "Street Signs" on Thursday morning.

Nonetheless, the European institutions said Monday that their preparations for a no-deal scenario were being intensified. A no-deal would be were the U.K. abruptly leaves the EU without any agreements and would have to rely on WTO trade rules which could raise export tariffs and roil financial markets.