Brexit without a deal? no problem!

A Brexit without proper agreements has been portrayed as a nightmare scenario in recent years. If it does come to that, it's more like a strange dream. That does not alter the fact that the pound could suffer if the European Union and the United Kingdom do not conclude a trade deal.

The Brexit negotiations are over. That was at least the clear message from Prime Minister Boris Johnson last Friday. A day earlier, the deadline passed by which, according to him, there should be a basic agreement with the European Union (EU). It was not really the first time that negotiating delegations missed a Brexit deadline. But it is a first that there is no longer any possibility to extend the talking process. The temporary extension of the UK's EU membership expires on December 31. In the new year, the country will definitely turn its back on Europe: trade agreement or not.

Nightmare Scenario
A no-deal Brexit has been portrayed as a nightmare scenario in recent years. It leads to huge traffic jams at customs posts on both sides of the canal, British planes are no longer allowed to land at European airports and criminals are given free rein because law enforcement agencies no longer exchange information. Fortunately, the chance that it will actually get that far is very small.

Both parties can make all kinds of temporary agreements or choose to enforce the rules less sharply. The European Union already did this, for example, when an American court canceled international agreements on data exchange. Instead of shutting down a large part of internet traffic, European regulators turned a blind eye.

Patches are for later
However, it is still too early to talk openly about this kind of palliative care. That is sending the wrong signal that there is really no point in continuing to negotiate a trade agreement. Moreover, the biggest angels have already been pulled out of the discussion. It has already been agreed that further negotiations will take place in the coming years on the Irish border issue and the divorce fee that Britain will have to pay.

However, there is still a lot at stake. Without proper agreements, trade proceeds according to the basic conditions of the World Trade Organization (WTO). In that case, companies doing business on the other side of the Channel must take import duties and quotas into account.

strange dream
It is even possible that that strange dream does not come true. Britain is about to resume negotiations after a significant concession from European negotiators. For the time being, however, no miracles can be expected from the talks.

Johnson is especially interested in the escalating Covid-19 pandemic. In particular, the strict measures in the north of England have provoked much criticism of his policy. For example, the virus indirectly has a lot of influence on the progress of the Brexit talks. Until Britain gets better control of the second wave, the negotiations will continue to muddle and the risk of a weak pound will remain.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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