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Brexit Talks at Loggerheads

Posted by Joseph Trevisani on Oct 12, 2017 1:30:46 PM

Negotiations over the British exit from the European Union have run aground on the topic of what departure dues the U.K. owes the Europeans.

The EU is demanding that Britain agreed to pay a specific amount before starting talks about the actual terms of the separation.  The government of Prime Minister Theresa May has said it is willing to pay into the EU budget for two years after the break, though the two sides are far apart on the amount, but it wants a two-year transition to ease the adjustment for UK businesses.  

The total charge projected by the EU could reach 60 to 80 billion euros (67 to 89 billion pounds, $71 to $95 billion) which British Foreign Secretary Boris Johnson has said the U.K. will not pay. 

Chief EU negotiator Michel Barnier blamed the UK for the dispute claiming that dissension within the British administration is preventing the talks form moving forward. The British view is that the EU insistence on treating the departure payments separately from the overall negotiations and the huge bill presented are blocking good faith negotiation. 

In addition U.K. negotiators see Mr. Barnier's comments as an attempt to get the 27 EU members to give him more leeway in the negotiations, according to a person familiar with the U.K. team as reported by Bloomberg.

The pound fell to the weakest in a month against the euro touching 0.9033 after Mr. Barnier’s comments. It has lost 2.1 percent against the united currency in the last two weeks. The sterling rose versus the dollar, reaching 1.3264 its best in since October 4th. The euro gained against the dollar moving as high as 1.1880 the strongest since September 25th.

Negotiations on the terms of the British departure are supposed to begin in December giving them less than a year to complete the many complicated and contentious issues to enable the EU to vote on the terms by the scheduled exit in March 2019.

Initially it was hoped that the start of the trade talks would be approved, as required, by the 27 EU members at next week’s summit but the permission is not on the agenda.

It is possible that between now and the summit that opinion may change in other European governments but there are few signs that the attitude in the two most important capitals, Berlin and Paris, has been mollified. Ms May's government will soon know if there are more moderate proposals on the continent.

If Britain left the EU without settling the terms of her economic and political interaction with the continent the damage to both economics would be incalculable. Each is the others largest trading partner and most important political ally.

As Mr. Barnier put it ““No deal will be a very bad deal, huh? And to be clear on our side we will be ready to face any eventualities and all eventualities.”  But there are also voices on the British side who are urging the government to walk away from the talks.  Brexit Secretary David Davis said: "I make no secret of the fact that to provide certainty, we must talk about the future.”

Markets are clearly not anticipating such an eventuality but the current mutual antipathy could soon begin to affect currency and equity valuations.

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: WorldWideMarkets Alpha Trader

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