European Council president Donald Tusk has poured cold water on Philip Hammond's hopes for a free trade agreement covering the financial sector, warning any post-Brexit deal will not offer the same access for services as for goods.
Mr Tusk also dismissed UK suggestions that the vexed issue of the Irish border could be put off until a broader settlement on trade relations is reached, insisting that the sequence of negotiations must be "Ireland first".
After Theresa May angrily rejected EU proposals for Northern Ireland effectively to remain in the customs union, Mr Tusk warned that progress in Brexit talks could be put at risk if there was any "backsliding" by the UK on the deal reached between the Prime Minister and Jean-Claude Juncker in December.
Britain has so far failed to bring forward "specific and realistic" alternative proposals to keep the Irish border open without activating the EU's "backstop" option, he said.
The European Council president was speaking in Dublin after talks with Irish Taoiseach Leo Varadkar, who held out hopes for an "evolution" in the UK's position as negotiations on the future relationship get under way.
At a joint appearance in the Irish capital, Mr Varadkar welcomed the EU's assurance that it would approach negotiations "with an open and positive, constructive mind that will allow for a possible evolution of the UK position in the future, allowing ours to evolve as well".
Wrapped up a very useful meeting with @eucopresident Donald Tusk. Thanks again for standing firmly beside Ireland on #Brexit. Always a pleasure to welcome him to @merrionstreet. Next step is @EUCouncil on March 22nd. pic.twitter.com/wIrz3Jdv2z
-- Leo Varadkar (@campaignforleo) March 8, 2018
But on the specific points of contention, Mr Tusk gave little ground to the UK position set out in high-profile speeches by Mrs May and Mr Hammond in recent days.
In response to the Chancellor's call on Wednesday for a bespoke free trade agreement (FTA) including financial services, Mr Tusk said: "In the FTA we can offer trade in goods with the aim of covering all sectors, subject to zero tariffs and no quantitative restrictions.
"But services are not about tariffs. Services are about common rules, common supervision and common enforcement, to ensure a level playing field, to ensure the integrity of the single market and ultimately also to ensure financial stability.
"This is why we cannot offer the same in services as we can offer in goods. It's also why FTAs don't have detailed rules for financial services.
"We should all be clear that, also when it comes to financial services, life will be different after Brexit."
Life will be different after #Brexit, also for financial services.I fully respect UK Chancellor's competence in defining UK's interest. I would ask to allow us define what's in EU's interest.
-- Donald Tusk (@eucopresident) March 8, 2018
Brexit Secretary David Davis has accused the European Commission of "putting the cart before the horse" over Ireland by setting out detailed plans for regulatory alignment north and south of the border. He insisted that the issue can best be dealt with as part of upcoming talks on the future relationship.
But Mr Tusk said: "We know today that the UK Government rejects a customs and regulatory border down the Irish Sea, the EU single market and the customs union.
"While we must respect this position, we also expect the UK to propose a specific and realistic solution to avoid a hard border.
"As long as the UK doesn't present such a solution, it is very difficult to imagine substantive progress in Brexit negotiations. If in London someone assumes that the negotiations can deal with other issues first before the Irish issue, my response would be: Ireland first."
He warned: "We have to be clear that any backsliding on the commitments made so far would create a risk to further progress in Brexit negotiations. This applies also to the question of avoiding a hard border."