By Elizabeth Piper
LONDON (Reuters) - Prime Minister Theresa May urged the European Union on Friday to show more flexibility in talks on a future relationship after Brexit, saying Britain realized it could not get all it wanted but believed an ambitious trade deal was still possible.
In a much-anticipated speech, May set out ambitions for a tailor-made free trade deal that would include financial services and said Britain would aim for associate membership of EU regulators covering chemicals, medicines and aerospace.
Jettisoning an earlier strident view that Britain could walk away from the talks, May appealed to the EU to work together to solve some of the more difficult Brexit problems, including over Ireland, where some fear the return of a "hard border" with the British province of Northern Ireland after Brexit.
But by proposing that Britain accept some EU rules and regulations and that the European Court of Justice continue to play a role in British law, May also risked alarming some campaigners who fear she will preside over Brexit in name only.
"We all need to face up to some hard facts," May told ambassadors and business leaders in the Mansion House, the 18th century official home of the Lord Mayor of London in the heart of the capital's financial district.
"Neither of us can have exactly what we want ... So we need to strike a new balance."
It was, she added, time to be "straight" with people over what was achievable, some 20 months after Britain voted to leave the EU and her government began to try to unravel more than 40 years of integration. Britain is due to leave on March 29, 2019.
The EU's main negotiator, Michel Barnier, welcomed the "clarity" May offered and her recognition that Britain faces "trade-offs". Big business echoed his words and even some Brexit campaigners praised the prime minister for her pragmatism.
DOUBTS
But some EU officials were more skeptical. Manfred Weber, a close ally of German Chancellor Angela Merkel in the European Parliament, said May had her "head in the sand", while the assembly's Brexit point man Guy Verhofstadt called the speech a "few extra cherries on the cake".
May's speech, entitled "Our Future Partnership", was an attempt to settle doubts over how Britain sees its future outside the EU and its economic architecture and to try to ease frustrations in Brussels over what they say is a lack of detail.
She dismissed the 'off-the-shelf' trading arrangements which the EU already has with countries such as Norway, saying they did not provide "the best way forward" for Britain or the EU.
But her vision was little changed from an earlier proposal for Britain to be able to diverge from some of the EU's rules and regulations while sticking to others which benefit Britain, a plan the bloc has described as "pure illusion".
May, 61, has long kept her cards close to her chest, trying to avoid provoking those in Britain who want a clean break with the EU, or others who fear the world's sixth-largest economy will suffer if barriers are raised against a major trading partner.
One Brexit campaigner welcomed the speech and praised May, who has been under pressure from two warring factions in her Conservative Party.
"The EU must now consider whether they want to put rigid doctrine ahead of the mutual interests of their people and those of the UK," David Jones, a Conservative lawmaker and former junior Brexit minister, told Reuters.
"We must hope that they will be as positive and pragmatic as Theresa May."
A government source said the speech was aimed at showing more pragmatism in the Brexit talks, which are now even struggling over the relatively easier part of agreeing a transition period after Britain leaves in March next year.
It will be very difficult for May to clinch the bespoke trade deal she seeks with the EU within the given time frame while keeping her deeply divided party on side and parliament, where she has only a narrow majority, broadly supportive.
"The City (financial center) needs a deal in place before the end of a transition period... Not something that would take 10 years," said New Financial, a think-tank that promotes capital markets in Europe.
ROWS
May's speech did offer some proposals to solve some of the thorniest problems thrown up by Brexit, especially over Ireland, after the EU set out in a draft withdrawal agreement a backup plan that effectively would see Northern Ireland remain part of the EU's customs union.
She offered a customs partnership, where Britain would implement EU tariffs on its border for goods intended for the bloc, or a streamlined customs arrangement, where jointly implemented measures and the use of technology would minimize friction.
But the government source said the latter approach would need more work to fully solve the border question, and an EU official told Reuters in Brussels it was "fantasy" to suppose the bloc would trust Britain to collect tariffs on its behalf.
It was also unclear whether Britain having access to the EU's financial markets in return for keeping similar standards to those of the bloc would be accepted in Brussels.
But May's overall message was that the EU and Britain must both focus on the benefits of their future trade relationship.
"Yes, there will be ups and downs in the months ahead... We will not be buffeted by the demands to talk tough or threaten a walk-out," she said.
"By following the course I have set out today, I am confident we will get there and deliver the right outcome for Britain and the EU."
(additional reporting by Jan Strupczewski in Brussels, Andrew MacAskill, Kate Holton and others in London, Writing by Elizabeth Piper and Guy Faulconbridge; Editing by Gareth Jones)