Brexit: Five Thoughts As Decision Time Looms

We think a UK-EU trade deal narrowly remains the most likely outcome of talks, but time is not on anyone's side. A deal would unlock some modest upside for sterling, but a lack of risk premium means there is potential for plenty more downside should talks end without an agreement.

European Commission President Ursula von der Leyen

In short

  • The issues: Fishing unlikely to be the issue that derails talks; level playing field, and how to govern the deal, remain thornier issues.
  • The decision: Negotiators themselves probably don’t hold the key to a deal now: the EU is unlikely to meaningfully shift its stance, and the political decision in London hinges on a wide range of factors. We still think a deal is narrowly more likely than not.
  • The choreography: The return of the Internal Markets Bill doesn’t necessarily torpedo talks - there is still time for the controversial clauses to be removed before it is voted into law (likewise for the forthcoming Taxation Bill).
  • The timings: There really isn’t much time left - the European Parliament needs time to read the deal, even if it votes on 28 December. And there is no easy way to extend the transition period in its current form. Talks can't really stretch much beyond this week.
  • The pound: There's currently limited risk premium in the pound, meaning limited upside if there's a deal, but profound downside if there's not.

1 The issues

Is this finally the week where a post-Brexit trade deal gets agreed?

Well, if you compare the latest reports to those back in February when negotiations began, you’d be forgiven for thinking that nothing has really changed. The core issues - fishing, level playing field, and governance - remain the same.

Fishing has been catching a lot of the headlines over the weekend, and there are mixed reports on whether a compromise is near. However we don’t expect this to be the thing that collapses talks. While it is a highly symbolic issue for both the UK and Northern European states (particularly France), both sides need a deal. Britain exports the vast majority of what it catches, while Northern European fleets rely on access to UK waters. Ultimately it appears to be a question of numbers.

All of this masks the deeper issues of level-playing field and governance. The EU wants to ensure the UK maintains its standards on things like the environment and state aid, and that it doesn’t dilute them over time. In the event of a breach, the EU could impose tariffs, but importantly it wants the ability to ‘cross-retaliate’ in one sector if rules are broken in another.

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Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information ...

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