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Divorce European Style, Brexit Talks Pummel Sterling

Posted by Joseph Trevisani on Aug 31, 2017 5:46:37 PM

Sterling fell to its lowest level in a week as the negotiations over the British departure from the European Union ended without agreement, raising the possibility that the relationship could end without a defined settlement in 2019.

The pound dropped as far as 1.2853 against the dollar in Europe before recovering almost a figure to 1.2952 in New York afternoon trading.  The round trip in Thursday's market, with the currency ending almost exactly where it started, is probably evidence that traders are becoming inured to confrontational rhetoric from both sides. Sterling was much lower last Fall, reaching 1.2153 in the aftermath of the surprise Brexit vote the prior June. 

Michel Barnier, the EU negotiator, said Britain is refusing to acknowledge its financial obligations and wants a deal that’s impossible to achieve, according to a Bloomberg report.

The current talks are not about the terms of the exit but ostensibly on whether the EU leaders will agree to the departure. Actual negotiations on the future relationship will not start the Union has given its assent. Of course Britain is a sovereign nation, it can leave without European permission but the assumption is since both sides will profit from a continued and regulated relationship that in the end the Europeans and the British will agree to terms. 

Each side is attempting to use these preliminary talks to win points and establish the principles of its own case. 

It is now looking unlikely that there will be an agreement to present to the EU leaders at their summit in October. The next meeting is in December barely a year before the exit is to take place. 

The EU position separating 'transitional arrangements' from the terms of the divorce is essentially artificial as the divorce has been settled by the British vote in which the EU had no say. But the British position that it has no financial obligations after Brexit and extremely limited transitional obligations is equally unrealistic, if only because the Europeans feel strongly otherwise.  

The EU will not, and probably cannot, considering its own internal dissension, grant the simple extension of the current trade and financial interaction status quo that the UK is demanding.  To do so might make the several unhappy EU members wonder aloud why they could not leave and obtain similar deals. 

EU officials have estimated the bill, according to Bloomberg, which includes budget commitments, pensions and previously pledged contingencies, could amount to 60 billion euros ($71 billion),

However, a recent poll in the UK found that 40 percent of voters said a bill of 10 billion pounds was unacceptable, 65 percent said 20 billion pounds was too much and 72 percent that 30 billion pounds was very excessive.

The fact that the two sides  are far apart does not make an agreement easy to reach but the negotiations are not necessairly more fraught than the many others that led to the creation of the European Union and the Eurozone. Even the 2019 deadline is artificial and could be extended as the process matures.  

Markets are learning to ignore the varieties of the negotiating experience.

Joseph Trevisani

Chief Market Strategist


Charts:  Bloomberg


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