Copy and Paste

The 21-month transition deal between the United Kingdom and the European Union has been struck, announced, and hailed by Michel Barnier and his UK counterpart, David Davis. The Pound rallied and equity markets spluttered, but make no mistake, no progress has been made.

In fact, the outcome of one year of tense negotiation between the bloc and the United Kingdom has achieved nothing more than a glorified and celebrated extension of 2005’s Lisbon treaty! Substantively, the opt-in-opt-out structures that Theresa May, David Davis, Conservative spin doctors and the town crier will boast about amount to nothing but an extenuation of the 1992 Maastricht treaty.

Consequently, it’s the framework within which the UK has engaged with the EU for over one quarter of a century already! Truthfully, the arrangement is little more than a copy and paste exercise from a document that most likely generated the impetus for a Brexit, alongside the Euro and a single market.

In other words, the brand new, dynamic and innovative transition deal that David Davis compelled European institutions and his EU counterpart to dream up and cooperate with are entirely absent.

The concept that any member state could secede from a Community or Union that made European continental warfare “not only unthinkable, but materially impossible” was just that; unthinkable! Therefore, what resulted, the two-year provision within the Lisbon Treaty (the first European legislature to mention the surrender of membership), is purely arbitrary; how long could one possibly need to achieve a Brexit?!

Whilst this could just be one citizen expressing his dissatisfaction with the result of one entire year of negotiation alongside the expenditure of millions, if not billions, of public sector money, there is something meaningful behind the argument. The significance of the underwhelming agreement suggests that the Pound could be overvalued in the short run.

Over the past few weeks, volatility has increased across the board. Markets have been jittery from the global bond to equity markets, slashing billions of Dollars at every corner. The move in trans-Atlantic FX markets on Monday evening may therefore be more short-lived than one might have expected from the single most important political risk that the Pound has experienced in almost a century.

As investors mull over the agreement, they may come to realise the magnificence of the job that UK negotiators have in front of them. Some may validly argue that the lack of innovation and imagination displayed within the transitional proposal is only consistency, allowing business an extra 21 months to get their head around a magnificent and as yet fictitious post-Brexit arrangement.

You are free to make your mind up on this debate and it is imperative you do so. However, it seems inexcusable to me that some hint of innovation and coalition building has not made its way into the arrangement. After all, how better could one prepare business for a potentially biblical regulatory shift than by phasing it into a transition deal that will deliver us into the next decade?

Rhetoric surrounding the announcement suggested that the public, business and would-be Pound bulls may even want a second transitional arrangement, this time with something substantive in. This discussion, let me tell you now, is futile in light of its inevitable denial within the European Commission and Council alike.

The European Union pays for itself under a Multi-Annual Financial Framework (MFF) that lasts at most seven years, but sets forth member states’ communal spending and funding desires. Inconveniently for the United Kingdom, the present MFF expires shortly after the transitional deal that is currently on the table. This was the very reason for the denial of a two-year transitional period that Theresa May requested during her speech in Italy in late 2017.

Unequivocally, the UK cannot be a meaningful member within this debate and may not remain a half member any longer. Unfortunately, the opt-outs that the 1992 treaty and now this proposal provide will be insufficient to allow a half membership; how can a budgetary debate concerning the UK and a post-Brexit European Union possibly allow another voice to the table?

In short, the appreciation of the Pound Sterling that pervaded across markets on Monday evening could be all too short lived. As I have written since the start of 2018, something needs to happen on Brexit, and fast! Should the leader of the opposition, shadow Brexit secretary and opponents within the Commons in general credibly uncover the insufficiencies of the transitional arrangement, the position of Theresa May, Brexit, and the Pound could once again be on a much weaker footing than the public may appreciate.

The news has propelled the GBPEUR cross up to 1.1470 and around 1.4150 against a Dollar weakened by yesterday’s monetary policy decision from Gerome Powell’s Federal Reserve. The Pound is now valued at the uppermost point within its horizontal crab, has broken through January’s previous high of 1.1510. Following the BoE’s rate decision this afternoon, we saw the Euro trade at a year-to-date high of 1.1530.

Discussion and Analysis by Charles Porter

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