With everything else going on this year due to COVID-19, it’s been easy to lose track of the latest fallout of the United Kingdom’s (UK) withdrawal from the European Union (EU), also known as Brexit.
The UK is currently in the middle of an 11-month transition period that started on the official Brexit date of January 31, 2020. This period, during which the UK is still following all EU regulations, was designed to give both parties 11 months to finalize the new rules on a host of issues including trade, security, and immigration.
UK-EU negotiations were disrupted by COVID-19 and resumed in July and August, but have not been going well to date. Major sticking points include alignment of workers’ rights and environmental protections, the level of state subsidies allowed (the UK wants to keep the ability to boost tech startups with state aid), and the EU’s access to British fishing waters. Adding to difficulties are current domestic disputes within the UK parliament on the internal trading status of Northern Ireland.
“Given the economic challenges brought about by COVID-19, we think both parties in these negotiations may eventually compromise to avoid any further negative effects,” said LPL Financial Chief Market Strategist Ryan Detrick. “However, no matter the outcome, we expect this be a relatively minor event for global markets as the UK comprises only 4% of global output.”
Two key dates lie ahead:
October 15–16: European Council Meeting
British Prime Minister Boris Johnson has set this EU summit as the unofficial deadline for a free trade agreement to be reached, stating that if both parties cannot come to terms by then, they should “move on” and start to prepare for the end of the transition period with no deal in place.
December 31: End of the Transition Period
The end of the transition period, in theory, is when terms of any new agreement, goes into effect. If there’s no deal, the UK would revert to World Trade Organization rules, including the introduction of trade tariffs, in a potentially economically damaging “hard Brexit.” While the deadline to extend the transition period officially passed on June 30, we believe a further extension, which would take some agreed backtracking from both sides, can’t be completely ruled out given the effects that COVID has had on the UK and EU economies.
As shown in the LPL Chart of the Day, the British pound has been suffering in currency markets in the past week as stalled negotiations has made the prospect of a “hard Brexit” more plausible.
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