The deadline has already passed for any UK-EU Agreement to be reached in time for translation and consideration by the European Parliament before the end of the Parliamentary term on 16th of December.  In a gesture of conciliation, the parliament has indicated it may be prepared to convene on 28 December.

However, as the pressure rises, tempers may be fraying. Yesterday Ursula von der Leyen the European Commission President noted that ‘trust is good but law is better’ in a clear reference to the UK’s Internal Markets Bill that many in the European Union feel has broken promises made by the British government in both the Withdrawal Agreement and the Northern Ireland Protocol signed last December. Michel Barnier the lead negotiator for the EU (who, like the UK PM, has been self-isolating for the last fortnight due to a case of coronavirus in his team) yesterday delivered an ultimatum to the UK government: Either the UK shifts its negotiating stance before Friday or he pulls out of further negotiations.

From the UK side, Lord Frost (the lead negotiator for the UK) argues that the UK must be treated like any other ‘independent’ Third Country in negotiation with the EU and that a level playing field and ECJ jurisdiction are unrealistic in that context.  Members of his negotiating team believe that the EU will, in the end, blink. This has been a running theme in the UK negotiating tactics – a belief that, at the 11th hour, the European Union will give in to the UK’s demands. Whilst the EU – an organization built on compromise – has a history of last minute deal-making and concessions, in this negotiation the UK belief may be a miscalculation since the issues at stake here are fundamental to the European single market.

OBR Assessment

Adding pressure to the UK government to find a compromise was yesterday’s OBR[i] assessment that the effect of a No Deal Brexit would be to add a further 1.5 – 2% overall reduction to GDP by 2025. This would come on the back of an already precipitous 11.3% decline in GDP this year caused by coronavirus. The OBR assessment was given weight earlier this week when the authorities in Calais conducted a nine-hour trial of post-Brexit immigration checks, which resulted in an 8 km tailback of lorries on the roads in Kent.

No Deal could be politically attractive…

A rational assessment of the situation would seem to point to an Agreement being reached this weekend, with both sides compromising on the three final issues (fisheries, level playing- field and dispute resolution jurisdiction). However, this is where UK domestic politics may play a hand. With rebellion already rife in the Conservative party over cuts to foreign aid in yesterday’s Spending Review and frustration over the move from lockdown to local tiered restrictions, Boris Johnson may assess that trying to persuade his increasing restive Party that the compromises he will have to make in order to get an EU Deal are simply a bridge too far. He may calculate that it would be preferable to simply leave the EU without a deal and blame EU intransigence.

The Biden Effect

However, whilst leaving without a deal might be potentially politically attractive to Boris Johnson, the fact would remain that, sooner or later, the UK and the EU will have to agree some form of new trade deal.

And that is where the Biden election victory comes in. The ‘easy deal’ that PM Johnson may have anticipated with a future Trump administration is already much harder with a Biden Administration, reportedly not overly focused on new FTA.  And it becomes even more difficult if the UK leaves the EU without a Deal, since the provisions of the Internal Market Bill and its Ireland Border clauses would come into effect. Yesterday President-elect Joe Biden reiterated his opposition to any political outcome that would see a new border imposed between Northern Ireland and the Republic of Ireland. In those circumstances it is difficult to see how a Trade Deal between the UK and the US could move forward.

That would leave the Johnson government with no path to a Deal with either the EU or the US – its two largest trading partners.

No Deal would have implications for clients across the board as the UK and EU would fall back on WTO trading arrangements.  Although there have been some sectoral agreements (the EU and UK agreeing to equivalence in securities settlements until June next year) in other areas, the indications are of travel in the opposite direction (derivatives and data adequacy).

[i] Office for Budgetary Responsibility