Brexit:
The EU will call Boris Johnson’s bluff, according to European Commission sources cited by British tabloid The Sun, saying that it was clear that the new PM’s strategy was to build pressure by running down the clock (which was, of course, former PM Theresa May’s play, though the difference this time is that Johnson is “saying it and meaning it” with regard to the threat to leave the EU without a deal).
Sources cited said that a two-week window between the end of the Tory party conference on October 2 and the October-17 EU summit could be pivotal. One source criticized Boris for not sounding out various EU players “before choosing confrontation,” adding that “it’s unclear how this approach creates space for talks.” The Sun also cited a senior EU source saying that “If we’re really in the deal making business this is not a thing you invent on a small piece of paper on the corner of a table at 3am,” and that “the EU will not agree to any ‘joint actions’ with the UK to soften the impact of No Deal,” firing a shot across the bows of Johnson’s government by signalling that the EU summit on October 17 will be a “no-deal summit” and not the venue to strike a last-minute deal.
Johnson’s position — the Brexiteer position — is that the Irish backstop must be discarded (as it could lock in the UK to the EU customs union), arguing that technology, a trusted trader program, and moving checks away from the border would ensure that the Irish border remains open and free flowing. The Irish government and EU haven’t bought into this argument, however, stating that the border would still unavoidably be a “hard” border, the reimposition of which would break the 1998 Belfast Agreement, which was instrumental in bringing an end to terrorism.
A committee set up in the US to protect the Belfast Agreement has warned that a future US-UK trade deal would be “all but impossible” if the accord is undermined.
So, a game of chicken is ensuing. Boris — who has stated that he would much prefer to have a deal than leaving without one — is clearly hoping that his “we actually mean it” intention to not settle the GBP 39 bln divorcing settlement and leave the EU without a deal will see Brussels cede on the Irish backstop. Brussels, meanwhile, is hoping that the economic and political costs of leaving the EU without a deal will see Boris soften.
Also, as the EU is fully aware, Johnson is in a weak position, lacking the full support of his own party in a parliament where his Tory and DUP minority government has a working majority of just two seats. This means that Parliament has the power to stop a no-deal scenario from happening (via a confidence motion). Given this, Johnson may see that he has no choice but to call a general election, especially as the latest polling suggests he could win, which, if he carried it with a no-deal mandate from the public, would greatly increase the odds for a no-deal eventuality on October 31.
The Pound is currently trading at about a 16-17% discount in trade-weighted terms since the vote to leave the EU in June 2016, with markets anticipating a significant and long-lasting jolt to the UK economy in the event of a no-deal scenario. A no-deal outcome would see the UK leave, overnight, free trade with the EU and from the 40 trade agreements that the EU has with 70 countries.
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Andria Pichidi
Market Analyst
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