Brexit – The Mexican Standoff Continues

Bob Mason
·5-min read

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Since Boris Johnson pulled the plug on Brexit negotiations last Friday, we’ve seen the Pound receive plenty of support.

In spite of the British PM’s decision to end talks, the Pound has avoided a meltdown. Leaving the door ajar for the EU was key for the Pound.

Downing Street was clear in its message that there remained a willingness to talk should the EU be “willing” to change its stance.

Things have not advanced since Friday’s decision to end talks. This is in spite of negotiators continuing talks in the early part of this week.

In reality, the EU is also reportedly looking for the UK to soften its stance in spite of Johnson’s decision to walk away.

Access to UK fisheries continues to be the hurdle, one that French President Macron has drawn a line under.

Should Britain and the EU part ways without a deal, many will see Macron as the reason behind such an outcome.

What about trade?

Not all EU member states have such dependency on UK fisheries. Other member states have a far greater reliance on the UK for trade and even tourism.

While France does come in the top 10 countries in terms of exports to the UK, a number of other nations also have a heavy reliance.

These include Germany and the Netherlands, which sit above France in terms of exports to the UK.

Other member states in the top 10 include Ireland, Spain, Belgium, and Italy.

It is really the French and Dutch fishermen that are most aggrieved by the UK’s stance on access to UK waters.

If we then consider the EU member states by economic contribution, Germany, France, Italy, Spain, the Netherlands, and Poland should have the greatest influence on talks.

By GDP alone, Germany should in fact have the greatest influence of all.

Unfortunately for EU member states with little interest in UK fisheries, however, a single member state can torpedo progress towards a deal.

The EU Summit

In spite of the difference in interests amongst the EU member states, the EU did deliver a united message last week.

From the EU Summit, the EU’s conclusions had been as follows:

  • European leaders urged the UK government to take the necessary steps to clinch a UK-EU free trade deal.

  • The EU is eager to reach a fair deal, but not at any price.

  • All 27 member states agreed for Michel Barnier to continue negotiations.

  • In addition to UK fisheries, the EU cited other key areas of focus that included a level playing field and governance.

  • With regards to the Internal Market Bill, the Withdrawal Agreement and its Protocols must be fully and timely implemented.

As we continue to highlight, however, Macron’s stance on Fisheries and a deal remain questionable.

A no-deal Brexit would remove all access to UK fisheries. Macron would need to explain to French and Dutch fishermen that the all or nothing approach was the best approach.

A compromise would give fishermen access rather than no access at all. So, how can the EU take such a stance?

In these troubled times, with COVID-19 and the global economic meltdown, such a no-deal outcome would be even more bad news.

The French economy and Macron are hardly in a position to take such gambles. But, with Macron looking to take over as the voice of Europe, a positive outcome for the French would cement Macron at the helm.

It is a gamble nonetheless.

Member state self-interest over the interests of the EU project will likely be a key takeaway once the dust settles.

For Brussels and the Establishment, there may be more defectors to come and Macron may yet be the one to turn out the lights.

Boris Johnson, Democracy, and the Pound

For the Pound, the lack of progress towards an agreement has failed to ruffle the feathers…

The markets continue to believe that a deal remains possible and that the EU will eventually buckle. If the EU doesn’t, well then perhaps Boris Johnson will make concessions.

In reality, if the news wires are anything to go by, the ongoing Mexican standoff is unlikely to end.

Neither side appears willing to show weakness or even a willingness to yield. It all points to a hard Brexit.

After all, why would Britain want to leave the EU yet be under the influence and continue to give the EU full access to everything British?

Democracy

Those who voted for Britain to leave would certainly be aggrieved in the event of a compromise. For the Tories and those who delivered Johnson with his majority, the grievances would be even greater.

Boris Johnson and the Tories have been tasked with walking Britain out of the EU while protecting Britain’s best interests.

By contrast, the EU simply wants to make it as difficult as possible. The EU does need to deter other member states from also abandoning ship. Ironically, its approach may not be a warning but another reason to reconsider membership to the Establishment.

The Pound

At the time of writing, the Pound was up by 0.19% to $1.29698. A failure to break out from $1.29 levels and support at sub-$1.29 may well continue until the eleventh hour.

Time is running out, however. The question that remains is whether Boris Johnson will let the debacle extend beyond the U.S Presidential Election.

Losing Trump as a staunch ally could prove to be decisive. The last thing that Johnson needs is economic isolation amidst the economic doom and gloom

There is one thing in Boris Johnson’s favor, however. Things can’t get much worse from an economic perspective. So, if there was ever a time to leave the EU without a deal, it would have to be now…

Whatever happens, the Pound is unlikely to hold within its current range. It is still a 50:50 bet that can go either way. Back in 2016, the 50:50 bet left the Pound at sub-$1.20 levels before the recovery began.

This article was originally posted on FX Empire

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