deal or no deal?

deal or no deal?

 “It’s bazaar tradition, when haggling over the price of a carpet, for each side to try to convince the other they are prepared to walk away”, in the hope “the other side blinks first”, said Patrick Hosking in The Times. On the gigantic scale of UK/EU trade negotiations, “the brinkmanship is tiresome, disconcerting and costly for businesses trying to plan”. But it is, arguably, inevitable. That, at least, still “appears to be the theory of the currency markets”. Sterling dropped when talks failed at the end of last week, “but nothing like the dive expected if traders believed Britain was really going to end up with the ports chaos, tariffs misery and economic disaster of no-deal”. It rallied again on news of “a narrow path” to a deal, settling in at $1.34 on Wednesday. That’s reassuring, if you think financial markets get these things right. “The time to worry is when sterling plunges below $1.20”.

Cabinet ministers, drawing up plans for the sectors hardest hit by tariffs and disruption, are taking no chances, said Reuters. In the event of an emergency, government sources suggest that the Covid job retention scheme could be widened “to support businesses impacted by no deal” – helpfully, the framework is already in place. Another reassuring factor, said Matthew Vincent in the FT, is that financial stability is probably a given. UK banks, as IG analyst Joshua Mahony points out, “are in a very healthy position as they head into what could be a very turbulent few months”. Still, as the Bank of England points out: “financial stability is not the same as market stability” – and we should certainly steel ourselves for volatility if hopes of a deal crash.

“To listen to some of the debates” during this process, “you would imagine that the UK has been poised on a knifeedge between economic disaster on the one hand and immediate passage to Nirvana on the other”, said Roger Bootle in The Daily Telegraph. It’s nonsense. The importance of European relations on Britain’s economic success is grossly exaggerated. “Almost 90% of the UK economy does not consist of exports to the EU.” Forget agonising over a deal. “Getting conditions right for that 90% is the primary matter.” The most important thing for the UK outside the EU is to be ultra-competitive. “The less we diverge on regulation, the more important it becomes that we diverge on tax” – hence the pressing need for a programme of tax cuts, both corporate and individual. Apparently, Angela Merkel and other European leaders are worried that post-Brexit Britain will be “a potent competitor” for continental producers. “We should bend every effort to make sure that, in this respect, they turn out to be right.”

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