EU open to May's bid for early post-Brexit trade talks

* EU publicly saying divorce terms first, then trade relations

* But some understanding of future relationship needed early on

* Most see two-year time frame for talks as insufficient

By Alastair Macdonald

BRUSSELS, March 30 (Reuters) - The European Union is wary of Prime Minister Theresa May's call for swift negotiations on a post-Brexit free trade deal while Britain is still settling its withdrawal terms, but the bloc is not ruling out early talks.

Responding to May's letter to Brussels on Wednesday which triggered a two-year countdown to leaving the bloc, EU leaders lined up to repeat that London must deal with its divorce before negotiating the comprehensive trading partnership that the prime minister wants.

On Thursday, French President Francois Hollande told her on the phone that "talks must at first be about the terms of withdrawal", notably the rights of expatriate citizens and money Britain owes to cover commitments made as an EU member.

"On the basis of the progress made, we could open discussions on the framework of future relations between the United Kingdom and the European Union," Hollande told May, according to a statement issued by the president's office.

That echoed German Chancellor Angela Merkel on Wednesday. She (Munich: SOQ.MU - news) said Britain must first work out how to unwind its relationship with the EU and pay its debts: "Only then, later, can we talk about our future relationship."

But behind the bald statements, lies a more nuanced approach acknowledging that many of the issues to which the exit treaty must bring legal clarity cannot be resolved without some understanding of how trade and other relations between Britain and the EU will work in the future.

The EU's chief Brexit negotiator, former French minister Michel Barnier, said in a speech last week: "It is not too early to start outlining the contours of our new partnership today, even if it is too early to start negotiating."

In other words, while talks will focus on Barnier's priorities of citizens' rights, budget obligations and border arrangements, notably in Ireland (Other OTC: IRLD - news) , there will have to be some idea of the future relationship to inform how those are settled.

"This issue about negotiating in a sequence or in parallel has got a little theological," said a senior official involved in preparing the Brexit negotiations from another member state. "In fact, we must have some discussion about the future trading relationship from the start, even if it's not negotiation."

One possibility may be to set Britain a goal of showing it is getting on with agreeing the outline divorce before allowing trade talks to start.

FOCUSING BRITISH MINDS

The brief and never-before-used Article 50 of the EU treaty itself asserts that a state leaving the bloc must negotiate "arrangements for its withdrawal, taking account of the framework for its future relationship with the Union".

The hard line on "no trade talks before a divorce deal" is intended in part, diplomats say, to concentrate British minds on the continentals' push for London to pay a leaving bill that they estimate at roughly 60 billion euros, as well as to clarify the legal status of millions of expatriate Europeans.

In the interests of unity among the 27 remaining members, that line will remain a public mantra. British officials will, though, be aware that while money and expatriates are a big issue for some countries, notably in the poorer east, Germany and other rich states are more anxious to keep trading.

A senior EU diplomat likened the insistence on sequencing to the repetition by the 27 since Britain's referendum that there could be "no negotiation before notification" -- a stance they believe forced May to accept the two-year deadline set by Article 50, which she might otherwise have tried to avoid.

But a senior Brexit negotiator from a third member state said there were differences among the 27 and some talk of a trade deal was likely fairly early on: "we would be in the camp that says to start the discussions on the future relationship as quickly as possible."

Given the Union's priorities for settling the withdrawal treaty in outline by the end of this year, a broad framework of the future relationship seems essential -- for example, how to manage with minimal disruption a new EU-U.K. land border in Ireland will require an idea of what kind of trade relationship Britain and the EU will have.

Two years is widely seen as too little time to map out in full a future relationship, meaning transition arrangements will be needed to avoid a cliff-edge departure. But, EU officials say, negotiating a transition will require both sides to have a good outline of what the final relationship will look like. (Reporting by Alastair Macdonald; editing by Richard Lough; @macdonaldrtr)