With the UK and eurozone economies battered by the Corvid-19 pandemic, the financial markets have been focused on the precarious economic conditions which have engulfed the world economy.
Understandably, less attention has been given to a topic that would be in the news headlines in normal times. The Brexit negotiations are critical, from both an economic and political perspective, but the sides remain far apart on determining the trade relationship between London and Brussels in the post-Brexit era.
Investors would do well to keep a close eye on the talks, as Brexit has proven to be a significant market-mover for the British pound. The currency plunged after the unexpected “Leave” vote in the referendum, and it’s fair to say that the pound has struggled ever since.
Back in June 2016, GBP/USD was at the heady level of 1.50. However, the currency plunged an astounding eight percent on the day of the referendum and is currently trading around the 1.25 level. A breakthrough in the Brexit talks would be a welcome boost for the pound, but that scenario does not appear very likely.
Ever since the June 2016 referendum, in which the UK shocked Europe by voting to leave the EU, there has been bad blood between the two sides. The UK formally left the EU on January 31, 2020. Currently, a transition agreement is in place until December 31, 2020, under which the UK is bound by EU rules.
What happens then?
Endless negotiations have failed to reach a resolution, a testament to the intricate relationship between the United Kingdom and the European Union, with the UK being an integral part of the EU for over 40 years. The breakup was not expected to be smooth, yet few could have predicted such a tortuous route to the UK departing the club.
There were further negotiations this week, but the talks broke up a day early, underlining the significant differences that exist between the two sides. Two of the main stumbling blocks are the jurisdiction of the European Court of Justice (ECJ), fishing rights.
The EU wants the ECJ to have a role in deciding trade disputes which arise between the EU and the UK. For its part, the UK insists that it not be bound by the ECJ in any way, shape or form, since that would detract from its sovereignty. Another key issue is that of fishing rights. The fishing sector is an important source of employment and income for both parties and is very politically sensitive for the UK.
The EU wants an agreement that sets out the extent that EU boats can fish in British waters before a trade deal is signed. The UK’s position is that its fishing grounds are “first and foremost” for British ships”.
Time is ticking, as the sides remain far apart on a post-Brexit trade agreement. If there is no agreement, the UK and the EU will be bound by World Trade Organization trading rules, which includes tariffs and quotas. Given the animosity between the sides, a nasty trade war between the EU and the UK cannot be ruled out.