Countries have been wargaming strategies, amid concerns both sides are “too entrenched” in their positions to get a deal before the deadline. One senior diplomatic source at an influential member state said the schism of no deal would be painful, but it could concentrate minds on both sides. They told The Telegraph: “We will have a period of chaos, but if we need to see how things evolve and how much it hurts before politicians come to their senses, then so be it.
“There is nothing that says that just because there is a no deal there can never be trade negotiations again.
“We could have a scenario where it will not work out in time, but sometime in the future.”
Another EU source said there would be no resumption of trade negotiations with Brussels in the aftermath of deal.
Instead, Britain would be forced to strike bilateral agreements with individual member countries.
Michel Barnier is expected to avoid getting drawn into the details of potential compromises at the European Council, especially over fishing rights, where the EU has backed down from its initial negotiation position.
The Prime Minister held telephone talks with German Chancellor Angela Merkel as the countdown to a deal deadline loomed.
The two leaders spoke on Sunday, a day after the Prime Minister held similar discussions with French President Emmanuel Macron.
The intensive diplomacy comes with seemingly just days to go for an agreement on a future trade settlement to be struck between Britain and Brussels.
Responding to questions about his call with Mrs Merkel, a Downing Street spokesman said: “He outlined the current situation with respect to negotiations on the future relationship between the UK and the EU, emphasising the UK’s desire to reach an agreement.
“The Prime Minister stressed that while achieving a deal in the coming days would be beneficial for both sides, the UK was also prepared to end the transition period on Australia-style terms if a deal was not possible.
“The Prime Minister emphasised that progress must be made in the coming days to bridge the significant gaps, in particular in the areas of fisheries and the level playing field, through the process of intensive talks between chief negotiators.”
Both sides have said an agreement needs to be struck in October to ensure sufficient time for ratification.
Mr Johnson has previously said he wants agreement on a free-trade deal by the time of next week’s EU summit in the Belgian capital.
A number 10 spokesman added that Mr Johnson “set out the latest state of play” in his phone call with Mr Macron.
The number 10 spokesman said: “He confirmed the UK’s commitment to exploring every avenue to reach an agreement.
“The Prime Minister emphasised that progress must be made in the coming days to bridge the significant gaps, notably in the areas of fisheries and the level playing field, through the process of intensive talks between Chief Negotiators agreed with the President of the European Commission
“The leaders agreed to keep in touch on the issue.”