Finally, a breakthrough in Brexit talks that have been painfully stalling over the past couple of weeks! British PM Theresa May has reportedly made a dash to Brussels this morning to deliver the promising news that the Government has reached a deal on outstanding issues that have been holding up trade deal talks.
A lack of agreement on how the Northern Ireland/Republic of Ireland border will work once the UK completes its protracted withdrawal from the EU single market had thrown a huge spanner in the works over the past week. Northern Ireland’s DUP party, which the Conservatives were forced into a coalition with to secure a parliamentary majority after the recent General Election, had torpedoed previous proposals. The unionist party said it would block any Irish border proposal that involved compromising the integrity of Northern Ireland’s economic or political position in relation to the rest of the UK.
While DUP leader Arlene Foster cautioned there was “still more work to be done” in thrashing out details of how the Irish border is to be managed, general agreement has been reached. This involves “substantial changes” to the initial proposal rejected by the DUP early this week. While details are yet to emerge, it is understood the draft agreement will mean no hard border in Ireland nor a ‘red line down the Irish Sea’ that would represent a customs barrier between Northern Ireland and the rest of the UK. The deal fully honours the Good Friday agreement that was integral to bringing an end to the troubles in Ireland.
Agreement has also been reached on the other two big sticky issues. These are the final value of the ‘divorce bill’ the UK will pay to the remainder of the EU on departure as well as the future rights of EU citizens currently living in the UK.
Uncertainty around the details of Brexit and the risk of a fractious ‘no-deal’ divorce should negotiations fail, have been weighing on the UK’s economy for the past several months. Financial markets have also been impacted.
While the FTSE 100 has seen modest gains this year, they have been far less than major peer equities indices in both the U.S.A and in Europe. This has been the case despite the low value of the pound, which encourages foreign capital into the UK by making it comparatively cheaper, and also boosts the revenues of UK-based companies that generate a large portion of their revenues in other currencies.
This morning, in a sign of the positivity with which UK investment markets have reacted to the Brexit breakthrough news, Sterling and the FTSE 100 are both up. The fact that the benchmark index is rising despite a more expensive pound, recently a rare event, demonstrates significant optimism. Investment from in and in UK companies has largely been on hold over the past year in light of the uncertainty magnifying risk levels.
While this morning’s developments are positive, those investing online in UK markets should keep the champagne corked for now. We can expect the UK’s financial markets to react positively to this news but the next big test will be trade talks. The UK has made significant compromises to date and now need any good will generated with EU partners to translate into a favourable trade deal. Any final agreement on a trade deal that is not accepted as strongly positive for the UK will look like a humiliation for the UK and raise concerns over its future as an economic powerhouse.