The European Council president was speaking at a press conference in Luxembourg this afternoon about what the EU’s future relationship with the UK could look like.
Mr Tusk inisted he did not “want to build a wall” with the UK but said the move to leave the single market and customs union meant “it should come as no surprise that the only remaining model is a free trade agreement” along the lines of Canada.
He warned: “This will be the first FTA in history that loosens economic ties instead of strengthening them.
“Our agreement will not make trade between the UK and EU frictionless or smoother.
“It will make it more complicated and costly than today for all of us. This is the essence of Brexit.”
And he added: “We will enter the negotiations with an open, positive and constructive mind but also with realism.”
Mr Tusk also insisted a “pick and mix” approach for a non-member state was out of the question.
He stressed: “No member state is free to pick only those sectors of the single market it likes, nor to accept the rule of the ECJ only when it suits their interests.
“By the same token, a pick and mix approach for a non-member state is out of the question.
“We are not going to sacrifice these principles. It is simply not in our interests.”
Outlining close cooperation on security between the two sides alongside defence and foreign affairs, he also demanded the EU and UK continue to have access to one another’s fishing waters.
Donald Tusk in Luxembourg
He said: “I propose we aim for a trade agreement covering all sectors and with zero tariffs on goods.
“Like other FTAs, it should address services and on fisheries reciprocal access to fishing waters and resources should be maintained.
“This positive approach doesn’t change the simple fact that because of Brexit we will be drifting apart.”
Before his speech, the EU’s guidelines were published, making clear that only a free trade agreement with zero tariffs on goods is acceptable to the bloc at the moment, dashing Theresa May’s vision of a wider-ranging deal.
The document promises a future deal could also cover services but makes no mention of a special arrangement for the City of London.
EU chiefs have repeatedly warned the UK’s insistence on leaving the customs union and single market limit the scope of any deal.
The six-page document rules out the “mutual recognition” of standards between the UK and EU.
The guidelines say: “The European Council has to take into account the repeatedly stated positions of the UK, which limit the depth of such a future partnership. Being outside the customs union and the single market will inevitably lead to frictions.
“Divergence in external tariffs and internal rules as well as absence of common institutions and a shared legal system, necessitates checks and controls to uphold the integrity of the EU Single Market as well as of the UK market. This unfortunately will have negative economic consequences.”
Crucially, the bloc said Britain would be treated like any other third country in respect of financial services – which London had pressed to be included in a future free-trade deal.
The text said Britain’s financial firms would only be allowed to operate in continental Europe “under host state rules” and be treated according to “the fact that the UK will become a third country and the Union and the UK will no longer share a common regulatory, supervisory, enforcement and judiciary framework.”
But they say a different relationship is still up for grabs if Mrs May changes her stance on those red line issues.
Donald Tusk and Theresa May held talks last month
Theresa May and her team wanted UK-based firms to continue to get high levels of market access and secure the capital as a global financial services powerhouse after Brexit.
But Bruno Le Maire, France’s finance and economy minister, will also echo those sentiments in a speech today, saying the best the UK can hope for is an “equivalence regime”.
He was due to say: “Financial services aren’t goods.
“They cannot be traded and supervised in the same way.
“Once a country decides to leave there are consequences: you simply can’t be ‘in’ and ‘out’ at the same time.”
Despite the setback, Chancellor Philip Hammond was insisting today that including financial services in the deal is of “mutual interest” to both the UK and EU.
In a keynote speech in London, the Chancellor was due to reject the arguments of “sceptics” who claim there has never been a free trade agreement which includes financial services.
He will say the “deeply interconnected” nature of the EU and UK economies means businesses and individuals have come to depend on cross-border financial services in their day-to-day lives.
The City of London’s dominance is under threat
Mr Hammond will build on the Prime Minister’s Mansion House address, in which she accepted so-called “passporting” rights for banks could not continue after Brexit as Britain was leaving the single market.
Instead, she argued for an agreement that allows Britain and the EU to access each other’s financial markets based on a commitment to maintaining the same “regulatory outcomes”.
In his speech, the Chancellor will point out the EU had previously sought “ambitious financial services co-operation” in trade negotiations with Canada and the United States.
Mr Hammond will say: “Our markets are already deeply interconnected and we have demonstrated how we can work together over the past decade as we have repaired and defended the financial stability of our continent.
Philip Hammond says the City’s deal is in everyone’s interests
“If it could be done with Canada or the USA, it could be done with the UK – the EU’s closest financial services partner by far.
“So I am clear not only that it is possible to include financial services within a trade deal but that it is very much in our mutual interest to do so.”
He will seek to highlight the way cross-border financial services have become woven into the fabric of daily life.
The Chancellor will insist: ”A trade deal between the UK and the EU must start from the reality of today – that our economies, including in financial services, are interconnected; that our regulatory frameworks are identical; and that our businesses and citizens depend on cross-border financial services trade in their day-to-day lives.”
Mrs May’s speech last week has drawn a lukewarm response from EU chiefs.
A document drawn up by the council of the EU general secretariat, leaked to the Guardian, dismissed her Brexit vision as “a change in tone, but not in substance” and accused her of “double cherry-picking”.