Sterling ends week upbeat at 87.9p

The UK and the EU are inching towards a plan that could help unblock Brexit negotiations and clear the path to a deal, raising hopes of progress after months of stalemate.

While the EU summit in Brussels fell far short of the breakthrough it was long touted to be, a glimmer of hope emerged from the gloom that has descended on the process in recent weeks.

Sterling ended the week in surprisingly good shape--despite the failure of the EU leaders’ summit over Brexit. At 87.99 pence against the euro, the UK currency reflected the “central expectation” that some sort of deal will be worked out, in time, said Philip O’Sullivan, chief economist at Investec Ireland.

UK figures showing that public borrowing was at its lowest level in 11 years also helped the pound this week, he said.

The sterling exchange rate is key for small Irish exporters selling into Britain. They had to endure a 14% slump in sterling after the Brexit referendum in the summer of 2016.

A weak sterling against the euro can wipe out the profit margins of Irish companies selling across the Irish Sea.

The idea that’s breathing new life into the Brexit negotiations is an old one: Take more time to do the deal. But it’s a risky one for Ms May -- members of her Conservative Party have angrily criticised her and UK Foreign Secretary Jeremy Hunt said cabinet ministers have “lots of concerns”.

Both the EU and Britain now think there’s merit in keeping the UK inside the bloc’s full membership rules for longer after it formally leaves, with an option to extend the 21-month transition period that’s due to end in December 2020.

That would give negotiators more time to resolve the biggest obstacle that’s blocking the road to a deal: How to avoid customs checks at the border.

“There will be more difficult moments as we enter the final stages of the talks,” She told reporters in Brussels. “But I am convinced that we will secure a good deal that is in the interests of the UK and of the European Union.” The move is a gamble for Ms May, who doesn’t have a parliamentary majority and has fought off threats to her leadership for more than a year. However, pro-Brexit rebels acknowledge that they do not have the numbers to oust her.

It’s been a bad month for Brexit talks. In September, Ms May was humiliated when leaders rejected her plans at a summit in Salzburg.

And last weekend, talks hit a roadblock when Ms May’s Brexit Secretary Dominic Raab travelled to meet EU chief negotiator Michel Barnier to tell him he could not accept the border solutions proposed by Brussels. That impasse dealt a fatal blow to the long-term goal of using the leaders’ summit to seal the terms of the divorce.

When the leaders gathered in the Belgian capital on Wednesday, they were determined to avoid another diplomatic catastrophe like Salzburg. Ms May’s 15-minute address to her fellow leaders before dinner didn’t impress, and left some of them confused and frustrated. But she showed a willingness to move her position, and the EU has too, according to officials on both sides.

Ms May signalled that she was open to extending the transition period to help solve the problem of the border. In return, the EU has agreed to engage with Ms May’s proposal for the so-called backstop guarantee to avoid customs checks in Ireland--which would involve keeping the whole UK inside the EU’s customs regime.

German Chancellor Angela Merkel said the leaders pledged on Wednesday to do “everything to find a solution.”

If the summit had gone badly, EU officials were weighing up the idea of calling a special summit in November to prepare themselves for a chaotic divorce without a Brexit deal. To the relief of Ms May’s team, that didn’t happen.

- Bloomberg and Irish Examiner staff

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