Theresa May welcomes Jean-Claude Juncker, president of the European Commission, to Downing Street in April © Reuters

Theresa May is backing away from a Brussels showdown over Brexit this week after Angela Merkel warned her that the EU would not start discussing a transition deal with Britain until she put more money on the table.

Mrs May, who held talks with Jean-Claude Juncker, European Commission president, in Brussels on Monday night, has decided not to increase her €20bn offer to the EU ahead of a European Council meeting starting on Thursday.

Instead the scene is set for a haggle over money before the next EU summit in December. “There will probably have to be a crisis in November,” said one senior British official.

Britain has already agreed to pay €20bn in net budget contributions for 2019 and 2020 but the bill could rise further if a another year of transition is negotiated to cover 2021 and past and future liabilities are included: Brussels has talked of a €60bn net settlement.

Mrs May had hoped the EU would respond to her Florence speech last month — widely seen as an olive branch to Brussels — by agreeing to open talks on a post-Brexit transition deal lasting until 2021 at this week’s summit.

But the Ms Merkel, German chancellor, told Mrs May on Sunday that, while Florence marked a step in the right direction, the EU wanted her to explain exactly what she meant when she said Britain would “honour commitments” made while it was a member.

“This is all about money,” said one person briefed on the conversation. “May said she wanted to make a deal on the transition but Merkel said that first she wanted May to make concrete what she said in Florence — to make it part of the negotiation.”

That message was also conveyed to Mrs May on Monday by French President Emmanuel Macron. French officials say that Paris and Berlin were “perfectly aligned” in their approach on Brexit.

Downing Street indicated that Mrs May was not planning to press the issue this week by putting more money on the table but said the prime minister regarded the Florence speech as “a very constructive set of proposals”.

A series of EU leaders had warned the British prime minister against raising expectations ahead of the summit, warning her that a request to open transition negotiations would be rejected outright. “Our line to them is: please don’t engineer a problem for yourselves,” said one senior European diplomat in contact with London.

Michel Barnier, the EU’s chief Brexit negotiator, has been rebuffed in his attempt to open talks with Britain about the transition.

The 27 member states, led by France and Germany, will, however, agree to start discussing among themselves the framework for a transition deal and a future trade agreement if “sufficient progress” is made on a divorce settlement by December: that is seen as a positive step in London.

At the behest of Paris and Berlin, the new draft summit communique makes clear that progress must be achieved “on each of the three” areas relating to divorce: Northern Ireland, citizen rights and a financial settlement.

It also tweaks the language to ensure that there is no hint of an automatic move to trade talks in December if “sufficient progress” is made on divorce — a clarification to emphasise that this is in the hands of member states.

The text also includes a reference to the “role of the European Court of Justice” over citizen rights. While this makes no mention of direct jurisdiction — a red line for the UK — it is designed to stress that the EU still regards this as an important principle.

A French official said: “There are some who are pushing us to send a positive message to May after her speech in Florence. OK, but we [the French and Germans] are the ones reminding everyone that priority is the sequencing of the negotiation.”

Mrs May also spoke on Monday with Leo Varadkar, Ireland’s prime minister, who was left with the impression that the British prime minister was not prepared to move beyond the offer made in her Florence speech.

At Monday night’s Brussels dinner Mr Juncker was accompanied by his chief of staff, Martin Selmayr and Mr Barnier. Mrs May was joined by David Davis, the UK Brexit secretary; and Olly Robbins, her representative at the negotiations.

Additional reporting by Arthur Beesley in Dublin and Jim Brunsden in Brussels

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