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New escalation in brexit negotiations

Dr. Thomas Gitzel, Chief Economist
Reading time: 4 Min
This is the eighth round of negotiations for a post-divorce trade agreement between the EU and the UK. The talks so far have been difficult. Now Boris Johnson is provoking the European mainland with a delicate draft law.

 

Following the conclusion of a withdrawal agreement between the UK and the EU at the end of 2019, future relations are now at stake. For the time being, there is a transitional phase until the end of the year, during which the UK is still part of the EU market. After that, the UK should continue to enjoy largely free access to the domestic market. However, Brussels expects that similar measures will be applied. To do this, London must meet the EU's environmental requirements and social standards. This is a thorn in the side of British Prime Minister Boris Johnson, who interprets that his country is still in the European Union's chains.

As the transition period only runs until the end of the year, time is pressing. This may be the reason why Johnson is now coming up with a controversial draft law. He probably wants to force the other side to give in more quickly. In concrete terms, this concerns the so-called "Internal Market Act", which is as a draft at the British Parliament.

Johnson provokes

The draft law in some places nullifies the UK's exit agreement with the EU. The brexit deal is designed to avoid a hard border on the island of Ireland. Instead, the customs border will be in the Irish Sea, between Northern Ireland and England, Wales and Scotland. Now, however, the head of government wants to use his law to take the sceptre into his hand. How and who controls the transport of goods across the Irish Sea and which customs forms have to be filled in would be determined by London.

The law would be a de facto breach of contract. The withdrawal agreement would therefore also be at stake. However, it is still a draft. For the EU, however, it is a provocation. If the law were to be adopted in this way, it can be assumed that a hard brexit would hardly be averted.

What's next?

Our main scenario still envisages that Great Britain will continue to have access to the European Union for both sides of the English Channel. But we would like to add here that Boris Johnson himself is increasingly making us doubt whether a follow-up agreement with the EU is really desirable.

The Prime Minister's decisions often seem abrupt and uncontrollable. It is not uncommon for him to reverse decisions within a short period - as the recent draft Internal Market Act shows. The EU could lose its patience.

This much is certain: the closer the end of the year approaches, the more heated the mood becomes. Neither side wants to give in prematurely. It is therefore once again a matter of a last-minute decision. In the coming weeks the escalation will therefore increase.

What does that mean for the pound?

If an amicable agreement is reached between the two sides, we expect the pound to appreciate significantly against the US dollar - but also against the euro. In this case, the pound should quickly move towards the 1.40 mark against the greenback.

A hard brexit, on the other hand, would have negative consequences not only for the pound but also for the euro. Both currencies would then have to record significant losses against the dollar. In view of the expected greater economic damage to the UK in relation to the EU, the British currency would weaken more significantly. However, the difficult remaining negotiations, which are to a certain extent pre-programmed, will initially lead to a rise and fall of the pound in the autumn months.

 

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