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Scale of the Covid-19 crisis may make UK government less fearful of a hard Brexit

Lee Evans


Monday insight: As lockdown rules ease, the Brexit process can accelerate

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Tough talks: European Union chief Brexit negotiator Michel Barnier (right) and UK chief Brexit negotiator David Frost. Photo: Oliver Hoslet/Pool via Reuters

Tough talks: European Union chief Brexit negotiator Michel Barnier (right) and UK chief Brexit negotiator David Frost. Photo: Oliver Hoslet/Pool via Reuters

Tough talks: European Union chief Brexit negotiator Michel Barnier (right) and UK chief Brexit negotiator David Frost. Photo: Oliver Hoslet/Pool via Reuters

As Irish businesses adapt to the easing of Covid-19 restrictions, clarity over the path of Brexit could further help reboot the Irish economy. In recent weeks the focus for currency markets in relation to Brexit has centred on two questions; firstly are we seeing progress on the key issues, and secondly, will the UK formally request an extension to the transition period?

We have an answer to the second question as the UK moved its official position on an extension from "we won't request one" to "we won't accept an extension even if the EU offers it". This led to the EU formally acknowledging that the UK won't be seeking to prolong the transition period beyond December. But is there any progress being made on the key sticking points in Brexit negotiations?

Based on the commentary following the last round of negotiations, the answer appears to be 'No'.

The UK chief Brexit negotiator David Frost indicated that "we very much need a change in EU approach" following the fourth round of talks while from the EU side, Michel Barnier was even more blunt, saying "the UK did not engage in a real discussion" on some of the key issues. However, despite this there have been signals of positive progress recently following a video conference call between UK Prime Minister Boris Johnson and Ursula von der Leyen, President of the EU Commission. Mr Johnson said "new momentum was required" and the plan now is to intensify talks in July in an effort to come to an agreement on the key issues.

A big focus remains on the 'level playing field'.

The EU maintains its position that regulatory protection is needed for EU firms to prevent UK firms from gaining a competitive advantage, particularly given how close the UK is to the EU market and the high levels of trade.

For its part, the UK argues that it should not have to agree to these rules since it is only seeking a limited trade agreement similar to the one the EU signed with Canada, which did not include such commitments.

A resolution to this deadlock could see both sides agree that the regulatory alignment for the UK must not regress - and rules remain at least as they are at the moment - with opportunities for both sides to negotiate more trade deals in the future.

As with all negotiations, there'll likely need to be compromise from both sides but there are economic and political incentives to make progress on this issue.

Last year in the UK the Conservatives pledged that 80pc of UK trade would be covered by free trade deals within three years, which would not be possible without a deal with the EU.

Other areas including governance, fisheries and financial services equivalence will all still need to be worked out but a resolution to the 'level playing field' question would be a major step forward.

From an EU perspective, the steadfast rhetoric of "nothing is agreed until everything is agreed" may need to change to allow further progress in the weeks and months ahead.

Will Covid-19 affect the Brexit process? This has been a regular question from Irish customers in recent weeks, and there are essentially two schools of thought on the issue.

Firstly, the idea that with so many challenges for economies across the globe, the extra damage from a no-deal Brexit should be avoided and therefore a deal should be agreed. Boris Johnson and the UK government would be able to say that given the exceptional circumstances, giving some concessions or extending a period for implementation purposes is justifiable, while similarly the EU could justify a softening of its stance on certain issues.

The second argument is that a no-deal scenario actually pales in comparison to the impact of Covid-19, which therefore makes it an easier path to take. Over a 10- to 15-year period, no deal was estimated to knock about 10pc off UK GDP, slightly less for Ireland, and this view would be that these figures seem quite minor compared with some of the recent numbers related to the pandemic.

But Brexit goes beyond just the economic forecasts and a no-deal scenario would have a direct impact on Irish businesses. Despite no extension being agreed before the end of June deadline, the plans to inject fresh momentum into talks - with intensified negotiations set to restart in July - are a positive development.

There is motivation for both sides to iron out a deal in the months ahead to allow time for businesses to adapt and for any required legislation to be passed.

While the chances of resolving all the outstanding issues related to Brexit before the end of the year seem unlikely, progress on the 'level playing field' would be a significant step forward. With lockdown rules here beginning to ease for the summer months, the Brexit process is likely to accelerate. As the clouds begin to part, clarity on the path of Brexit could emerge by the end of the summer.

Lee Evans is head of FX trading & strategy at Bank of Ireland Markets & Treasury

Irish Independent