OLIVER MANGAN: Brexit jitters likely to weigh on sterling for years to come

The events in Westminster last week mean there is a growing possibility that the UK parliament may yet ratify the withdrawal agreement this month.

OLIVER MANGAN: Brexit jitters likely to weigh on sterling for years to come

The events in Westminster last week mean there is a growing possibility that the UK parliament may yet ratify the withdrawal agreement this month.

The past week has seen opposition to the withdrawal agreement soften within the Conservative Party.

A vote by the UK parliament last week indicating that, if necessary, it would seek an extension to Article 50 to prevent a no-deal hard Brexit at the end of March, combined with the Labour Party now formally backing a second referendum, have given Brexiteers much to ponder.

The withdrawal agreement now looks their only route to ensure that the UK departs from the EU. Thus, they may well decide to back it, especially if some form of legal addendum is agreed indicating that the Irish backstop is intended to be temporary in nature.

If the withdrawal agreement is not ratified, the UK is set to seek and will most likely be granted a short extension to Article 50 to delay its EU departure, possibly to the end of June. An extension beyond this date would complicate the European Parliament elections being held in May.

Sterling has made good ground recently on expectations that a no-deal hard Brexit will be avoided at the end of March, with the euro falling back below the 86p level. However, to quote British MP Ken Clarke, a short extension to Article 50 is simply “giving us a date for a new cliff edge” for Brexit.

A new cliff-edge would be even more serious as it will be very difficult to secure a further extension to Article 50 if the UK parliament is still not minded to ratify the withdrawal agreement. Sterling is likely to come under renewed downward pressure in such circumstances.

Indeed, even if the withdrawal agreement is ratified, there are still choppy waters ahead for sterling.

The withdrawal agreement provides for a transition period after Brexit that is to last until at least the end of 2020.

During this period, the UK will still adhere to EU rules so that trade between the two can continue on as before, with no barriers.

Talks will take place during the transition period on the future relationship between the UK and the EU, with the aim of concluding a broad trade deal.

These are likely to prove difficult negotiations. It is very unclear what the outcome of these talks will be, so uncertainty over the final shape of Brexit will persist during the transition period.

What emerges from these talks may still look like a hard Brexit, if the UK persists with its desire to be out of a Customs Union with the EU, as well as the Single Market. It is hard to see how hard borders with physical checks can be avoided in these circumstances.

Thus, the withdrawal agreement, if ratified, marks only the end of the beginning of the Brexit process. Uncertainty will persist during the transition period and Brexit could still deliver a shock to both the UK and Irish economies, albeit at the end of 2020 rather than now.

The uncertain outlook is likely to weigh on sterling in the next couple of years.

Oliver Mangan is chief economist at AIB.

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