We are under a week away from the 15th October deadline set by Boris Johnson to reach an agreement on a post-Brexit trade deal with the EU. As it stands, no breakthrough has been made on key issues and if nothing is seen in the coming days, Boris Johnson will be facing a critical decision.
What’s the latest on trade talks?
The EU and UK have been holding informal talks this week, following a call between Boris Johnson and von Der Leyen over the weekend where they both agreed to intensify talks. However, the intensity of talks is not really the issue here. For months, the two sticking points in negotiations have been on fisheries and state aid.
Both sides remain cautiously optimistic that a deal is achievable, but we have not yet seen a breakthrough in either of the sticking points. Reports this week suggest that France are holding on stubbornly to their demands on fisheries, which may be causing internal tensions with the EU. It is a similar scenario to last year when all EU countries apart from France were prepared to give the UK a 12-month extension after Theresa May failed to get her withdrawal agreement through Parliament. It seems that if France are willing to compromise, then a breakthrough on fisheries will not take much work. That would then leave just the issue over state aid. The EU have already shown some compromise on this matter by dropping their demands that the UKs rules on aid be fully aligned with the EU. However, they do want to see an outline of the UKs plans on state aid to ensure EU companies will not be undercut.
In the past few weeks, the tone between the EU and UK has been firm, but much softer than what we have seen in the past two years, indicating that both sides want and need a deal. Both economies have taken significant hits from the coronavirus pandemic this year and realise that a no-deal scenario would result in permanent damage that could take years to repair. Therefore, some sort of agreement remains likely, but it is all about who is going to make concessions first and this is where the 15th October deadline comes into play.
15th October – What’s the fuss about?
Boris Johnson and his government set a 15th October deadline for Brexit trade talks and stated that if they do not think a deal is possible by this date they will walk away from talks. The transition period doesn’t actually end until 31st December, which means that talks can extend into the end of the year, but the UK government want to ensure that businesses have enough time to prepare for a no deal scenario.
The EU do not recognise 15th October as a deadline in any way. Headlines this week indicate they are prepared to walk past this deadline and do not expect the UK to walk away from talks. As such, the EU are not yet willing to make any significant compromises, although sources have suggested that members have internally identified ‘landing’ zones on key issues.
Both sides initially saw October as an approximate deadline to get a deal as that would allow for enough time to pass the necessary legislation through UK and EU Parliaments. However, if the talks were to extend into November or December, it would not be much of an issue. If a deal were agreed, both sides would very likely also agree to temporarily extend the transition period until all the legislation had passed. For now, the focus is on Johnson’s 15th October deadline and what he does at that point.
What are Johnson’s choices?
If no breakthrough is made between now and next week, Boris Johnson will have two choices. The first would be to follow through with his threat, walk away from the talks and tell the British people that the UK will trade with the EU on WTO terms from next year. This scenario would undoubtedly cripple the pound and could drive the UK towards a double-dip recession. The EU would not get off easy either and a number of European businesses would certainly struggle from a no-deal.
Politically, a no-deal Brexit could lead to years of damage for the Conservative party, and Boris Johnson realises this. However, if there was no breakthrough and Johnson continued with negotiations, it would immediately weaken the UKs stance and send a signal that they will not allow a no-deal Brexit. This would probably not go down well with many of the hard-line Brexiteers in Johnson’s party and despite having a solid majority, he could face similar struggles as Theresa May.
Both the UK and EU realise the importance of agreeing to a trade deal, but Boris Johnson may have put himself into a tight spot by enforcing such a deadline. He may have to make concessions between now and next week in order to allow talks to continue without losing face. Alternatively, he could take the very risky gamble of walking away and hoping that the EU will run back with compromises of their own. This option carries a lot of risk for the UK government, but if this were achieved, it would be seen as a massive win for Boris Johnson.
Focus on Brexit talks will likely amplify next week and volatility may also increase for the pound. If talks continue beyond the 15th October deadline, it will be a mild positive for the pound, regardless of whether a breakthrough is made or not. On the other hand, if the UK government follow through with their promise to walk away, we can expect to see substantial weakening in pound pairs.