Oliver Mangan: Euro-sterling parity looms if Brexit talks fail

Ireland is stepping up preparations for a hard Brexit, where the UK would move to trading under World Trade Organisation rules from the start of next year
Oliver Mangan: Euro-sterling parity looms if Brexit talks fail

The euro could reach parity with sterling if the UK-EU trade talks fail and a hard Brexit materialises

Brexit has moved right back up the Government’s agenda recently as fears grow that the EU-UK trade talks will end in failure this autumn.

Ireland is stepping up preparations for a hard Brexit, where the UK would move to trading under World Trade Organisation (WTO) rules from the start of next year.

Next month’s budget will be based on this assumption.

WTO rules would involve the imposition of tariffs on some goods and be very disruptive for both exports and imports. Various studies suggest that a hard Brexit could lower the level of GDP in both Ireland and the UK by some 5-6% within a short number of years, compared to if Britain remained within the EU Single Market and Customs Union.

The trade talks have been bogged down for some time around the issue of state aid or subsidies for industries. The EU is insisting that any deal needs to include rules on state aid that are legally enforceable to help ensure a level playing field on trade. The UK, though, wants to have a free hand on setting state aid.

In a bizarre twist, though, the bilateral trade agreement reached earlier this month between the UK and Japan has rules on limiting state aid. Reportedly, the template used for these state aid rules is that contained in the EU-Japan trade deal agreed last year. In other words, the UK is replicating the state aid rules in the EU-Japan trade agreement, in its trade deal with Japan.

However, so far it has not been prepared to contemplate similar rules being included in an EU-UK trade deal. The UK has also introduced an internal market bill in parliament, allowing it to renege on elements of the withdrawal agreement signed off with the EU last year, thereby breaking international law.

The question being asked by virtually everyone is ‘what is going on?’ Whatever the answer, the sterling market has become much more nervous and volatile, with the pound coming under significant downward pressure this month on the growing risk of a no-deal Brexit.

The 93p rate against the euro has become a key support level for sterling. It has held this month, just as it did in autumn last year, when there were real fears that the UK could crash out of the EU without a deal. It can be expected to hold in the next few weeks until we get some clarity on the outcome of the talks.

However, if there is no trade deal agreed and a hard Brexit is indeed on the cards, then the 93p support level will almost certainly crumble. Parity with sterling could well beckon for the euro in these circumstances.

Oliver Mangan is chief economist at AIB

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