By Jan Strupczewski and Alastair Macdonald
BRUSSELS (Reuters) - A 60 billion euro gulf between the European Union and Britain over how much London owes when it quits the bloc may be the biggest obstacle to a deal on an orderly Brexit in March 2019, officials said after talks this week.
There are sharply differing legal interpretations of the "Brexit bill" that Britain will legally be obliged to pay in a divorce settlement with Brussels.
But there are signs too of where compromise may emerge that could allow Prime Minister Theresa May deliver a headline figure more palatable to British voters than the 60 billion euros ($70 billion) widely talked about and without leaving the other 27 leaders staring at a hole in budgets.
The key could be to take account of payments Britain is willing to make after leaving as part of a transition to a new cooperation pact with the bloc, EU officials and diplomats involved in negotiations told Reuters on Friday after tense talks in Brussels.
Brexit Secretary David Davis, asked about that on Friday, said: "It's an idea that's been floated around."
A snag though is that EU chief negotiator Michel Barnier is bound by his 27 national masters not even to discuss any post-Brexit arrangements until "significant progress" is made on agreeing a divorce.
However, Barnier has made clear he does not need to agree any figure before asking EU leaders to launch parallel talks on the future EU-UK relationship -- possibly at a summit with May in October. He would be content with agreeing the "methodology" of calculation before launching Phase Two.
Barnier made clear he disliked the first formal British response on Tuesday to the EU's demands for probably several years-worth of its current annual EU contributions to cover outstanding commitments to such things as EU staff pensions and future EU grants already promised to developing countries.
The confidential legal analysis, which British officials said rejected EU assertions that the bloc's seven-year financing plans are legally binding on member states, meant London was refusing to pay for any commitments after Brexit, Barnier said -- at odds with what May's government has previously said.
However, EU officials' ears pricked up when Davis told the same news conference that, even if Britain found no legal basis for many EU demands, it also recognized "moral obligations" and was prepared to pay for good relations in the future.
"We've a very different legal stance," Davis said. But he then twice quoted from May's formal divorce letter, sent in March: "The settlement should be in accordance with law and in the spirit of the UK's continuing partnership with the EU."
A senior EU official stressed to journalists afterwards that there could be no mixing up of Britain's obligations incurred pre-Brexit with those it might accept post-Brexit in return, say, for participation in EU programmes or access to markets -- similar to payments that non-members like Norway already make.
However, others see flexibility created by a grey zone around what constitutes "sufficient progress" on agreeing the financial settlement in order for Barnier to ask leaders to expand his mandate to talks on the post-Brexit transition.
Davis pressed his case this week for Barnier to show more "flexibility" and merge discussions on the withdrawal treaty with those on the future relationship, arguing that it was impossible to complete the former without the latter.
Barnier rejected that. But EU officials concede that the answer to closing the gap on the Brexit bill may lie there.
"I would understand Davis ... in the following way," one said. "Let’s start talking about Phase Two if you want to clinch a deal on the money."
While Barnier would not publicly stray from his position of refusing to discuss post-Brexit arrangements before some kind of agreement on the money, informal discussions on how much Britain might pay during a transition of several years where it remains in much of the EU's regulatory framework could work.
"A transition period, which is short, has a definite end, ... maybe that is the answer – a bridge between the two expectations," the official said.
Another senior European official involved in the Brexit talks cautioned that there was little mood among the 27 other states to let Britain off lightly on the money -- it will leave a big hole in the Union's budget that no one wants to fill.
However, he said, in the interests of avoiding a chaotic Brexit with no deal, they could be open to a compromise that helped May "sell" the deal at home by spreading British payments across both the final Brexit payment and future contributions.
"There is zero chance of a positive decision on moving to Phase Two if there is no preliminary compromise on this," he said. "The compromise should be linked to agreeing methodology."
Such is the sensitivity of the issue that officials say it may have to be decided at the highest political level, possibly when May attends the Brussels summit in October.
(Editing by Richard Balmforth)